Saudi Arabia: New Privatisation Law

In brief

On 26 March 2021 Saudi Arabia’s long awaited Privatisation Law was published, promulgated by Council of Ministers’ Resolution No. 436 dated 3/8/1442H (corresponding to 16 March 2021) and Royal Decree M/63 dated 5/8/1442H (corresponding to 18 March 2021) (the “Privatisation Law”). The Privatisation Law will come into effect 120 days after publication, and will provide a transparent and flexible regulatory framework for the procurement and documentation of Public Private Partnership projects (“PPPs”) and existing asset privatisations (“Asset Privatisations”) in the Kingdom (“Privatisation Projects”).

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Contents

1. Scope and Application of the Privatisation Law
2. Missing Information
3. Familiar Territory – A Flexible Framework
4. Notable Provisions
5. Conclusion

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Scope and Application of the Privatisation Law

The Privatisation Law will apply to all contracts between government entities and private legal entities (“Private Parties”) in connection with Privatisation Projects.

It is also expressed to apply to contracts between government established companies or companies in which the government owns (directly or indirectly) more than 50% of the capital, provided the company was established or the government has an interest, for the purpose of implementing a Privatisation Project. While there is potentially room for interpretation as to whether certain companies were established for the “purpose” of implementing Privatisation Projects, we anticipate future procurement documents (requests for expressions of interest, qualifications and proposals) will specify whether the Privatisation Law applies.

The Privatisation Law will not apply to Privatisation Project contracts concluded prior to the date the Privatisation Law comes into effect, although it will apply to amendments, extensions and renewals to such contracts after that date. Consequently, it is important that all Private Parties are aware of the impact of the law, even if it does not currently apply.  

Privatisation Projects for which ‘legal approval’ was issued prior to the date the Privatisation Law comes into effect, but where the relevant contracts have not yet been concluded, are also exempt. Such projects will be subject to the statutory provisions in effect at the time the project was approved, unless the Board of Directors of the National Centre for Privatisation (“NCP”) determines otherwise. The law does not provide any guidance as to what constitutes ‘legal approval’, and it is not clear whether the Privatisation Law will apply to amendments, extensions and renewals of the contracts.

In the short term at least, Privatisation Project bidders should seek to clarify with the relevant government entity whether the Privatisation Law will apply to their current transaction. The Privatisation Law permits Private Parties to request a certificate from the Implementing Authority confirming that the Competent Authority (each as defined below) has approved the relevant contracts, and that those contracts are subject to the provisions of the Privatisation Law – in practice however, we expect this will only be available to preferred bidders during the post-bid period.

A PPP is defined as a contractual arrangement between the government and a Private Party related to infrastructure or public services, which includes each of the following elements:

1. A duration of 5 years or more.
2. The Private Party will undertake works that include two or more of the following components, whether the assets are owned by the government, the Private Party, or both: (i) design; (ii) construction; (iii) management; (iv) operation; (v) maintenance; or (vi) financing.
3. The existence of a qualitative and quantitative distribution of risks between the government and the Private Party.
4. The financial consideration of the Private Party is based primarily on its level of performance in implementing its contractual obligations.

An Asset Privatisation is defined as a contractual arrangement related to infrastructure or public services where ownership of an asset is transferred from the government to a Private Party.

Missing Information

The Implementing Regulations for the Privatisation Law (the “Regulations”) are yet to be issued. The Regulations will provide important additional detail and clarity. For example, the Regulations will define the different Privatisation methodologies that may be adopted for both PPPs and Asset Privatisations, as well as the conditions and controls which will apply in each instance, and will include criteria for determining whether a Privatisation Project will fall within the scope of the Privatisation Law, including setting minimum value requirements.     

The Privatisation Law also contemplates the issuance of pro-forma tender documents and contract templates, as well as mandatory and discretionary contract clauses. In addition, the Council of Ministers will issue ‘Governing Rules’ identifying (and defining the powers and competencies of) the government entities responsible for issuing approvals for Privatisation Projects (Competent Authorities) and those responsible for implementing Privatisation Projects, including concluding tendering and concluding contracts (Implementing Authorities). To our knowledge, these items have not yet been issued.

In the short term, bidders may need to submit bids without the opportunity to evaluate the Regulations and other outstanding items, depriving them of the chance to price risks or propose appropriate mark-ups. Bidders may wish to engage with government procurers to discuss this issue and confirm what (if any) relief is available (for example, via ‘change in law’ provisions) if the Regulations have a prejudicial impact on the project or project participants.

Familiar Territory – A Flexible Framework

In many respects, the Privatisation Law has simply codified concepts which have been widely used on Privatisation Projects in the Kingdom for many years.  For instance:

1. The Implementing Authority may require a successful bidder to establish a special purpose vehicle to sign the contracts and implement the project, and transfer of shares in a special purpose vehicle may be subject to restrictions.
2. The Implementing Authority may, in accordance with the terms of the relevant contract, step-in and perform the contract itself where the Private Party fails to comply with its obligations or is unable to achieve the required standards. 
3. Government parties may enter into direct agreements with third parties.

The law also details the process and procedure for the government to develop, approve and tender a Privatisation Project, including the interfaces between the relevant government stakeholders. These processes and procedures will be subject to further development via the Regulations and by the Board of the NCP. 

Interestingly, the Privatisation Law includes several specific duties of the Ministry of Finance, including ensuring the availability of financial allocations for projects before tendering, establishing and implementing arrangements to ensure government procurers can meet their financial obligations, and approving and providing (or making arrangements for the provision of) any financial or credit support specified in the relevant contracts. 

In many instances, stakeholders have discretion to disapply provisions or grant exemptions, providing the government with a degree of flexibility in how the law is applied in practice. For example, the Council of Economic and Development Affairs (“CEDA”) may, on the recommendation of the NCP Board, deem that a project does (or does not) fall within the scope of the Privatisation Law, regardless of whether it meets the requirements. This flexibility will be crucial given the law will apply to a wide variety of projects across different industries and sectors, making a ‘one size fits all’ regulatory solution unrealistic.

Notable Provisions

• Duration of PPP contracts: The term of PPP contracts are limited to thirty (30) years. However, the Competent Authority may, on the recommendation of the Implementing Authority, approve a longer initial term, or extensions to the term beyond 30 years. 
• Amendments to the terms of a PPP contract: Subject to the provisions of a PPP contract, the Implementing Authority, with the approval of the Competent Authority, may amend the terms and conditions or suspend the implementation of the contract. The Regulations will provide further detail on the impact of amendments and suspensions, including how compensation to the Private Party will be calculated, which will apply unless the contract includes provisions dealing with these matters. Until the Regulations are issued, bidders should take particular care to ensure contracts contain appropriate controls and compensation mechanics with respect to amendments / variations and suspensions instructed by the Implementing Authority.
• Licenses, Permits and Authorisations: If the issuance of a required license, permit or authorisation proves impossible, or a government entity delays the process, CEDA may intervene and issue instructions based on a report from the Implementing Authority.
• State Property General Authority: The Board of the NCP will coordinate with the State Property General Authority to determine the provisions which will govern the state’s rental (and yielding up) of real estate for the purposes of Privatisation Projects. Perceived ambiguities regarding the ability of procurers to grant Private Parties rights to project sites are frequently a concern for sponsors and lenders in the Kingdom, so any additional clarity and transparency in this area will no doubt be welcomed.
• Access to Property in the holy cities of Makkah and Al-Madinah: Subject to approval of the Competent Authority, foreign Private Parties will be entitled to lease property in the holy cities of Makkah and Al-Madinah to perform obligations under a Privatisation Contract. This is an exception to the general legal position which prohibits non-Saudi entities and individuals from leasing or owning property in Makkah and Al-Madinah.
• Regulatory Exemptions: With the approval of the Ministry of Human Resources and Social Development, Privatisation Projects may be exempted from certain labour laws and local-content and Saudisation requirements. We expect such exemptions will be granted in limited circumstances and only in the context of projects where compliance with relevant laws and requirements is considered unduly costly or burdensome. In addition, the Privatisation Law contemplates that the exercise by a Private Party of its rights under the Privatisation Law or complying with its contractual obligations, shall not be construed to constitute a monopolistic practice even if it impacts or restricts competition, unless there exist other appropriate means to exercise such right, or satisfy said obligation without impacting or restricting competition. This provision appears to conflict with the Competition Law supremacy clause giving the General Authority for Competition (“GAC”) jurisdiction to apply the Competition Law to entities operating in a field regulated by another governmental body. The Implementing Regulations of the Competition Law also vest the GAC with inherent jurisdiction in cases of conflict or overlapping competencies. Therefore, the GAC would remain competent to hear of any complaints or to investigate any competition-related matter arising out of the Privatisation Law’s implementation. That being said, the Privatisation Law contemplates that policies shall be put in place in coordination with the GAC, and the scope and content of such policies may clarify the situation regarding restrictive practices.
• Language of Tender Documentation: Unless the relevant Competent Authority approves otherwise, tender documents are to be issued, and contracts concluded, in Arabic. We expect tender documentation and draft contracts for large scale complex projects will continue to be issued in English for convenience for foreign bidders. However, smaller projects may well conform to this rule, and even on larger projects the translation of certain documents may still be required, particularly execution versions. Bidders will need to keep this in mind going forward, as translating complex legal documents is often a costly and time-consuming exercise.

Conclusion 

The Privatisation Law is a clear statement of intention by the Saudi Government, demonstrating its desire for greater private sector involvement in the development of the Kingdom’s infrastructure and public services. It provides a clear but necessarily flexible framework for the Kingdom’s procurement of Privatisation Projects, enshrining concepts that have been market standard for years, while laying the groundwork for exciting new developments in a number of areas.

We eagerly await the issuance of the Regulations and will provide further updates in due course.