Doing Business in Saudi Arabia: Public Bidding on Lucrative Government Contracts

Saudi Arabia Wassem Amin Business

By Wassem M. Amin, Esq., MBA

The record FY2013 and FY2014 budgets announced by the government of the Kingdom of Saudi Arabia have received much media attention. The FY2014 budget of Saudi Arabia, for example, sets a record U.S. $228 Billion (SAR 855 Billion) in government expenditures. Foreign companies and businesses who do business with the Saudi Government quickly discover a very rewarding and lucrative market.

Overview

Key expenditures, as announced in a press release by the Saudi Government, will focus on “infrastructure, education, health, social services, security services, municipal services, water and water treatment services, and roads and highways. Moreover, the budget gives particular emphasis to science and technology projects and e-government.”

Specifically, key expenditures have been allocated in the budget for the following major sectors:

  • Education: US $56 Billion – approximately 25% of the budget. This will be used to finance the construction of 539 new schools and 1,900 existing school-construction projects as well the refurbishment of thousands of present educational facilities.
  • Health and Social Affairs: US $28.8 Billion.       This will be used to finance the construction of dozens of new hospitals throughout the Kingdom.
  • Infrastructure and Transportation: US $17.8 Billion – Key planned projects in this sector include finishing work on existing projects, completing construction on highly publicized economic cities, and construction of new sea ports and a cross-country railway service.

U.S. and foreign based companies who are unfamiliar with doing business in Saudi Arabia generally are advised to seek the assistance of a legal advisor who is familiar with the region’s unique laws and culture. Moreover, companies wishing to do business with the Saudi Government should be aware that, as with any national government, it may be a complicated and time-consuming process.   However, with the right guidance, those willing to invest the time and effort will find that there are no shortage of very financially rewarding opportunities – in both the public and private sector.

Rules and Regulations Governing Saudi Public Contracts

Generally speaking, public or government contracts in Saudi Arabia are governed by the Government Tenders and Procurement Law and its implementing regulations (the “Law”). With few exceptions, the Law requires Saudi government entities to procure products and services through a public bidding process. A government agency is required to prepare and advertise a Request for Tenders (“RFT”) and advertise it in the Saudi Official Gazette and in at least two local newspapers for a minimum period of either 30 or 60 days–depending on the value of the project.

The exceptions to the public requirement are relatively few. Exempt from the public bidding requirement, direct procurement applies to the following sectors: military and defense equipment; consultancy services; unique products or services; and urgent medical supplies in a response to an epidemic.

To be eligible to enter the public bidding process, the bidder must post a bank guarantee equal to 1% of the project’s value. Within ten days of being awarded the project, the winning contractor must provide the respective government agency with an unconditional performance bond equal to 5% of the contract’s value. Usually, the performance is issued by a Saudi bank and must be valid for the duration of the project.

Who is Eligible to Submit Bids?

The Law indicates that any bidder licensed to do business in Saudi Arabia is eligible to participate in the process. At first glance, it may appear that a foreign company that has undergone the licensing process in Saudi Arabia (discussed in previous posts) is technically eligible to bid on public projects. However, a thorough reading of the Law and its implementing regulations proves otherwise. The Law and its implementing regulations require the bidder to hold a variety of certificates that can only be held by a Saudi business – such as, but not limited to, a commercial registration certificate, a classification certificate, a tax certificate, a Saudization certificate, and a foreign investment license if the bidder has any foreign capital. Many of those required licenses and certificates can only be obtained if the bidder is at least partially-owned by a Saudi national.

Selecting a Local Agent or Partner

Therefore, the most common, and effective, way for a foreign company to bid on public projects is by establishing a partnership or agency agreement with a local business. A key issue for foreign companies then becomes how to identify a local business partner that, not only adds value, but meets the various requirements of the Government Tenders and Procurement Law. In our experience, identifying the right partner is oftentimes detrimental to a foreign company’s success or failure in Saudi Arabia. Substantial due diligence and vetting is a critical component of this process. Generally speaking, a local partner should have prior experience and a successful track record working with the government agency that is awarding the contract.

The challenge is that public information on private businesses in Saudi Arabia is rare, if not impossible, to find. Therefore, utilizing a legal or advisory firm that has first-hand experience in the region is oftentimes critical. An experienced advisor would be able to identify, and vet, potential partners in the region and assist the foreign company with negotiations and legal registration requirements.

Saudi Arabia has pursued an open and liberal investment policy by welcoming and encouraging both domestic and foreign investment. The objective of Saudi Arabia’s policy is to achieve diversification by gradually reducing dependence on one source of income. The massive infrastructure and expenditure projects announced by the Saudi government present opportunities for foreign companies in virtually every major sector. However, the cultural, political, and legal landscape is complex and varies dramatically from that of countries such as the USA or in Europe. Unaccustomed foreign companies or investors should seek out advisory or legal firms who are proficient and have expertise in Saudi Arabia.

______________________________________________________________________

Disclaimer: These materials have been prepared by Wassem M. Amin, Esq. for informational purposes only and are not legal advice. The material posted on this web site is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel.

Wassem M. Amin, Esq., MBA is an Associate Attorney at Dhar Law LLP in Boston, MA and is the Vice Chairman of the Middle East Committee as well as the Islamic Finance Committee of the American Bar Association’s International Law Section. Wassem has extensive experience in the Middle East region, having worked as a consultant in the area for over 10 years. Wassem currently focuses his practice on International Business Transactions and Business Immigration (EB-5 Regional Center and Investor Representation). For more information, please visit the About Us page or http://www.dharlawllp.com.

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Doing Business in Saudi Arabia: Public Bidding on Lucrative Government Contracts

wassem.amin.saudi.arabia.business

By Wassem M. Amin, Esq., MBA

The record FY2013 and FY2014 budgets announced by the government of the Kingdom of Saudi Arabia have received much media attention. The FY2014 budget of Saudi Arabia, for example, sets a record U.S. $228 Billion (SAR 855 Billion) in government expenditures. Foreign companies and businesses who do business with the Saudi Government quickly discover a very rewarding and lucrative market.

Overview

Key expenditures, as announced in a press release by the Saudi Government, will focus on “infrastructure, education, health, social services, security services, municipal services, water and water treatment services, and roads and highways. Moreover, the budget gives particular emphasis to science and technology projects and e-government.”

Specifically, key expenditures have been allocated in the budget for the following major sectors:

  • Education: US $56 Billion – approximately 25% of the budget. This will be used to finance the construction of 539 new schools and 1,900 existing school-construction projects as well the refurbishment of thousands of present educational facilities.
  • Health and Social Affairs: US $28.8 Billion.       This will be used to finance the construction of dozens of new hospitals throughout the Kingdom.
  • Infrastructure and Transportation: US $17.8 Billion – Key planned projects in this sector include finishing work on existing projects, completing construction on highly publicized economic cities, and construction of new sea ports and a cross-country railway service.

U.S. and foreign based companies who are unfamiliar with doing business in Saudi Arabia generally are advised to seek the assistance of a legal advisor who is familiar with the region’s unique laws and culture. Moreover, companies wishing to do business with the Saudi Government should be aware that, as with any national government, it may be a complicated and time-consuming process.   However, with the right guidance, those willing to invest the time and effort will find that there are no shortage of very financially rewarding opportunities – in both the public and private sector.

Rules and Regulations Governing Saudi Public Contracts

Generally speaking, public or government contracts in Saudi Arabia are governed by the Government Tenders and Procurement Law and its implementing regulations (the “Law”). With few exceptions, the Law requires Saudi government entities to procure products and services through a public bidding process. A government agency is required to prepare and advertise a Request for Tenders (“RFT”) and advertise it in the Saudi Official Gazette and in at least two local newspapers for a minimum period of either 30 or 60 days–depending on the value of the project.

The exceptions to the public requirement are relatively few. Exempt from the public bidding requirement, direct procurement applies to the following sectors: military and defense equipment; consultancy services; unique products or services; and urgent medical supplies in a response to an epidemic.

To be eligible to enter the public bidding process, the bidder must post a bank guarantee equal to 1% of the project’s value. Within ten days of being awarded the project, the winning contractor must provide the respective government agency with an unconditional performance bond equal to 5% of the contract’s value. Usually, the performance is issued by a Saudi bank and must be valid for the duration of the project.

Who is Eligible to Submit Bids?

The Law indicates that any bidder licensed to do business in Saudi Arabia is eligible to participate in the process. At first glance, it may appear that a foreign company that has undergone the licensing process in Saudi Arabia (discussed in previous posts) is technically eligible to bid on public projects. However, a thorough reading of the Law and its implementing regulations proves otherwise. The Law and its implementing regulations require the bidder to hold a variety of certificates that can only be held by a Saudi business – such as, but not limited to, a commercial registration certificate, a classification certificate, a tax certificate, a Saudization certificate, and a foreign investment license if the bidder has any foreign capital. Many of those required licenses and certificates can only be obtained if the bidder is at least partially-owned by a Saudi national.

Selecting a Local Agent or Partner

Therefore, the most common, and effective, way for a foreign company to bid on public projects is by establishing a partnership or agency agreement with a local business. A key issue for foreign companies then becomes how to identify a local business partner that, not only adds value, but meets the various requirements of the Government Tenders and Procurement Law. In our experience, identifying the right partner is oftentimes detrimental to a foreign company’s success or failure in Saudi Arabia. Substantial due diligence and vetting is a critical component of this process. Generally speaking, a local partner should have prior experience and a successful track record working with the government agency that is awarding the contract.

The challenge is that public information on private businesses in Saudi Arabia is rare, if not impossible, to find. Therefore, utilizing a legal or advisory firm that has first-hand experience in the region is oftentimes critical. An experienced advisor would be able to identify, and vet, potential partners in the region and assist the foreign company with negotiations and legal registration requirements.

Saudi Arabia has pursued an open and liberal investment policy by welcoming and encouraging both domestic and foreign investment. The objective of Saudi Arabia’s policy is to achieve diversification by gradually reducing dependence on one source of income. The massive infrastructure and expenditure projects announced by the Saudi government present opportunities for foreign companies in virtually every major sector. However, the cultural, political, and legal landscape is complex and varies dramatically from that of countries such as the USA or in Europe. Unaccustomed foreign companies or investors should seek out advisory or legal firms who are proficient and have expertise in Saudi Arabia.

______________________________________________________________________

Disclaimer: These materials have been prepared by Wassem M. Amin, Esq. for informational purposes only and are not legal advice. The material posted on this web site is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel.

Wassem M. Amin, Esq., MBA is an Associate Attorney at Dhar Law LLP in Boston, MA and is the Vice Chairman of the Middle East Committee as well as the Islamic Finance Committee of the American Bar Association’s International Law Section. Wassem has extensive experience in the Middle East region, having worked as a consultant in the area for over 10 years. Wassem currently focuses his practice on International Business Transactions and Business Immigration (EB-5 Regional Center and Investor Representation). For more information, please visit the About Us page or http://www.dharlawllp.com.

Doing Business in Saudi Arabia: Establishing Commercial Agency and Distribution Agreements

Amin - Doing Business in Saudi ArabiaBy Wassem M. Amin, Esq., MBA

Saudi Arabia is one of the largest importer of goods in the Middle East region and is, in fact, one of the largest per capita importers of goods in the world.  Saudi Arabia imports virtually all consumer and industrial goods that it uses.  It imports roughly triple the amount of goods that it exports.  For example, according to the Kingdom’s Central Department of Statistics and Information (Link in Arabic), in 2012, total imports were approximately 584 Billion Saudi Riyals (US $156 Billion) compared to non-petroleum related exports of 190 Billion Saudi Riyals (US $50 Billion).

With the recently-announced record 2014 national budget, demand for imported goods is expected to exponentially rise.  Most foreign companies seeking to establish a long-term presence in Saudi Arabia choose to do so via a commercial agency agreement with a local partner.  Commercial agency agreements in the Kingdom are governed by the Commercial Agency Act and associated regulations (the “Act”).  The law does not differentiate between a distributor or an agent and, therefore, the Act is applicable to both types of contractual relationships.  These two terms are used interchangeably in this Article.

The Act defines a commercial agency relationship as a contractual relationship between a Saudi company or individual and a foreign producer or their representative for the purpose of undertaking trading and commercial activities in the Kingdom.

Who Can Act as Agent/Distributor in Saudi Arabia?

The Act requires that the local agent or distributor be either a Saudi national (or 100% Saudi-owned company) or a citizen of the Gulf Cooperation Council (GCC).  The GCC’s members include the countries of: Bahrain, Kuwait, Qatar, Oman, Saudi Arabia, and the United Arab Emirates.  In addition, the entity or individual must register with the Ministry of Commerce and the chamber of commerce in the region where the majority of trading activities will be undertaken.

Legal Obligations of Agents & Distributors

The Act imposes stringent legal obligations that function as a “warranty” for any goods distributed by the local agent .  Among the most significant are the requirements that an agent provide spare parts at ‘reasonable prices’ as well provide maintenance and repair services.  This requirement is imposed for a period of one year even after the termination of the agency agreement with the producer or until the appointment of a new agent.  The agent is also required to maintain extensive documentation disclosing all customs/duties information and the country of origin of the product.

The Commercial Agency Agreement

In order to impose uniform rights and obligations on all local agents and their foreign principals, the Ministry of Commerce has a standardized model contract which serves as a guide for both parties.   Although the agent and principal are not required to use the model contract, the use of a contract with terms that substantially differ from the model will prevent that agency relationship from being registered with the Ministry of Commerce–essentially invalidating the contract.

The mandatory terms in a commercial agency agreement, as set out by the Ministry of Commerce, are the following:

  • Parties to the Agreement;
  • Territory covered by Agency;
  • Exclusivity, if any;
  • Duration of Agency;
  • Conditions for termination and renewal;
  • Rights and responsibilities of each party towards each other and the consumer–specifically who is responsible for the cost of maintenance and provision of spare parts;
  • The products and services that are covered by the Agreement;
  • Capacity of the local agent, i.e., whether the agent is a direct representative of the principal or is an independent distributor; and
  • The terms of payment or formula for remuneration.

Saudi Arabia is a lucrative market for foreign companies and investors. At a time when the market in the United Arab Emirates is beginning to get stagnant and saturated, Saudi Arabia remains ripe with opportunities. However, the cultural, political, and legal landscape is complex and varies dramatically from that of countries such as the USA or in Europe. Unaccustomed foreign companies or investors should seek out advisory or legal firms who are proficient and have expertise in Saudi Arabia.

_________________________________________________________________________________________________

Disclaimer: These materials have been prepared by Wassem M. Amin, Esq. for informational purposes only and are not legal advice. The material posted on this web site is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel.

Wassem M. Amin, Esq., MBA is an Associate Attorney at Dhar Law LLP in Boston, MA and is the Vice Chairman of the Middle East Committee as well as the Islamic Finance Committee of the American Bar Association’s International Law Section. Wassem has extensive experience in the Middle East region, having worked as a consultant in the area for over 9 years. Wassem currently focuses his practice on Business Immigration (EB-5 Regional Center and Investor Representation) and International Business Transactions. For more information, please visit the About Us page or http://www.dharlawllp.com.

4 Ways that EB-5 Regional Centers will Benefit From SEC’s Lifting of the General Solicitation Ban

120904-The-JOBS-Act-with-SEC-logo

By Wassem M. Amin, Esq. MBA

On July 10, 2013, the Securities and Exchange Commission (“SEC”) adopted a new rule that lifts the ban on general solicitation of private offerings.  The rule was adopted as a part of the commission’s decision to implement Section 201(a) of the Jumpstart Our Business Startups Act (the JOBS ACT”).     Prior to July 10, Companies who wanted raise capital through a private offering had two options: (1) Register the securities offering with the SEC; or (2) rely on an exemption from registration.  In a separate release, in order to implement Section 926 of the Dodd-Frank Act, the SEC adopted amendments to Rule 506 which disqualified issuers from utilizing Rule 506 if “felons and other bad actors” are participating in the offering.

While the SEC lifted the ban on advertising, they issued a rule proposal for Regulation D that requires issuers to provide a greater amount of information regarding the offerings in order to allow the SEC to regulate the market.  The proposal is aimed to protect victims from fraudsters trying to solicit stocks to inexperienced investors.  The proposed rule would require one who wishes to solicit a private offering to file a Form D before they engage in the advertising.

General Solicitation will Increase Demand for EB-5 Investments

Lifting the ban on general solicitation will allow startups, venture captilists, EB-5 Regional Centers, the EB-5 Program and hedge funds to openly advertise that they are raising money in private offerings.  That should make it significantly easier for companies to raise financing and/or expand operations — the Rule still limits solicitation from accredited investors (for now, until the remaining part of the JOBS Act is implemented)

EB-5 Regional Centers Can Advertise in Publications That Are Read By Potential Investors

Regional Centers now have the ability to advertise in national and international newspapers and media.  In fact, an EB-5 Regional Center from Florida recently placed an Ad in the Wall Street Journal.  The Wall Street Journal and similar publications target the demographic EB-5 Regional Centers are seeking.

EB-5 Regional Centers Can Target the International Student Demographic in the U.S.

There are millions of international students in the United States – many of whom are very wealthy and are looking for options to stay in the country post-graduation.  Advertising to these students through targeted marketing can be very profitable.

The Lift on the Ban Will Create New Service Providers

The lift on the Ban will undoubtedly create a significantly new and large pool of investors.  Additionally, I predict that there will be a new industry which caters specifically to connecting investors with companies looking for capital, a type of investor match-maker of sorts.

Investment is still limited to a requirement that all purchasers in the offering are “accredited investors”.  An “accredited investor” is defined as:

  • An individual with net worth (or joint net worth with a spouse) that exceeds $1million at the time of the purchase, excluding the value (and any related indebtedness) of a primary residence; or
  • An individual with an annual income that exceeded $200,000 in each of the two most recent years or a joint annual income with a spouse exceeding $300,000 for those years, and a reasonable expectation of the same income level in the current year.

Moreover, EB-5 Regional Centers engaging in general solicitation activities will be required to verify through “reasonable steps” that EB-5 investors are accredited.  The SEC has not yet issued guidance on the steps necessary to satisfy the reasonableness requirement, however EB-5 Regional Centers engaging in general solicitation activities should be prepared to obtain guarantees of income requirements for all investors.

ncluding a requirement that all purchasers in the offering are “accredited investors”.  An “accredited investor” is defined as:

  • An individual with net worth (or joint net worth with a spouse) that exceeds $1million at the time of the purchase, excluding the value (and any related indebtedness) of a primary residence; or
  • An individual with an annual income that exceeded $200,000 in each of the two most recent years or a joint annual income with a spouse exceeding $300,000 for those years, and a reasonable expectation of the same income level in the current year.

Moreover, EB-5 Regional Centers engaging in general solicitation activities will be required to verify through “reasonable steps” that EB-5 investors are accredited.  The SEC has not yet issued guidance on the steps necessary to satisfy the reasonableness requirement, however EB-5 Regional Centers engaging in general solicitation activities should be prepared to obtain guarantees of income requirements for all investors.

– See more at: http://connect.wolfsdorf.com/?p=1638#sthash.PJRkxOgN.dpuf

To help the SEC collect data on how investment will change, fundraisers have to file a Form D with the SEC at least 15 days before they begin general solicitation, and amend that Form D to state that they’re done soliciting within 30 days of finishing.

I have previously authored an Article predicting the impact of the JOBS Act on the EB-5 Program, here.

For more information, including access to the Final Rule and Proposal, please visit the SEC’s website which can be found here.

Wassem M. Amin, Esq., MBA is an Attorney at Dhar Law, LLP in Boston, MA and is the Vice Chairman of the Middle East Division as well as the Islamic Finance Committee of the American Bar Association’s International Law Section.. Wassem has extensive experience as a business advisor and consultant, domestically and abroad (in the Middle East region), having worked as a consultant for over 9 years. Wassem currently focuses his practice on Corporate Law, Business Immigration Law, and International Business Transactions; where he works with Firm Partners Vilas S. Dhar and Vikas Dhar to advise Regional Centers and individual investors on EB-5 Visa matters. For more information, please visit http://www.dharlawllp.com and email Wassem at wassem@dharlawllp.com.

Disclaimer: These materials have been prepared by Dhar Law, LLP for informational purposes only and do not constitute legal advice. This article is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel. This material may be considered advertising according to the rules of the Supreme Judicial Court in the Commonwealth of Massachusetts. Reproduction or distribution without prior consent of the author is prohibited.

Doing Business in Saudi Arabia: Establishing Commercial Agency and Distribution Agreements

agencyBy Wassem M. Amin, Esq., MBA

Saudi Arabia is one of the largest importer of goods in the Middle East region and is, in fact, one of the largest per capita importers of goods in the world.  Saudi Arabia imports virtually all consumer and industrial goods that it uses.  It imports roughly triple the amount of goods that it exports.  For example, according to the Kingdom’s Central Department of Statistics and Information (Link in Arabic), in 2012, total imports were approximately 584 Billion Saudi Riyals (US $156 Billion) compared to non-petroleum related exports of 190 Billion Saudi Riyals (US $50 Billion).

With the recently-announced record 2013 national budget, demand for imported goods is expected to exponentially rise.  Most foreign companies seeking to establish a long-term presence in Saudi Arabia choose to do so via a commercial agency agreement with a local partner.  Commercial agency agreements in the Kingdom are governed by the Commercial Agency Act and associated regulations (the “Act”).  The law does not differentiate between a distributor or an agent and, therefore, the Act is applicable to both types of contractual relationships.  These two terms are used interchangeably in this Article.

The Act defines a commercial agency relationship as a contractual relationship between a Saudi company or individual and a foreign producer or their representative for the purpose of undertaking trading and commercial activities in the Kingdom.

Who Can Act as Agent/Distributor in Saudi Arabia?

The Act requires that the local agent or distributor be either a Saudi national (or 100% Saudi-owned company) or a citizen of the Gulf Cooperation Council (GCC).  The GCC’s members include the countries of: Bahrain, Kuwait, Qatar, Oman, Saudi Arabia, and the United Arab Emirates.  In addition, the entity or individual must register with the Ministry of Commerce and the chamber of commerce in the region where the majority of trading activities will be undertaken.

Legal Obligations of Agents & Distributors

The Act imposes stringent legal obligations that function as a “warranty” for any goods distributed by the local agent .  Among the most significant are the requirements that an agent provide spare parts at ‘reasonable prices’ as well provide maintenance and repair services.  This requirement is imposed for a period of one year even after the termination of the agency agreement with the producer or until the appointment of a new agent.  The agent is also required to maintain extensive documentation disclosing all customs/duties information and the country of origin of the product.

The Commercial Agency Agreement

In order to impose uniform rights and obligations on all local agents and their foreign principals, the Ministry of Commerce has a standardized model contract which serves as a guide for both parties.   Although the agent and principal are not required to use the model contract, the use of a contract with terms that substantially differ from the model will prevent that agency relationship from being registered with the Ministry of Commerce–essentially invalidating the contract.

The mandatory terms in a commercial agency agreement, as set out by the Ministry of Commerce, are the following:

  • Parties to the Agreement;
  • Territory covered by Agency;
  • Duration of Agency;
  • Conditions for termination and renewal;
  • Rights and responsibilities of each party towards each other and the consumer–specifically who is responsible for the cost of maintenance and provision of spare parts;
  • The products and services that are covered by the Agreement;
  • Capacity of the local agent, i.e., whether the agent is a direct representative of the principal or is an independent distributor; and
  • The terms of payment or formula for remuneration.

Disclaimer: These materials have been prepared by Wassem M. Amin, Esq. for informational purposes only and are not legal advice.  The material posted on this web site is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel.

Wassem M. Amin, Esq., MBA is an Associate Attorney at Dhar Law LLP in Boston, MA and is the Vice Chairman of the Middle East Division as well as the Islamic Finance Committee of the American Bar Association’s International Law Section.  Wassem has extensive experience in the Middle East region, having worked as a consultant in the area for over 9 years.  Wassem currently focuses his practice on Corporate Law and International Business Transactions.  For more information, please visit the About Us page or request more information on our Contact Us page.