The Kingdom of Saudi Arabia’s Local Content & Government Procurement Authority (“LCGPA”) recently published its Economic Participation Policy (“EPP”). The policy applies to government contracts in which the value of imported goods and services equals or exceeds SAR 100 million (approx. EUR 24.5 million). Under the policy, companies wishing to bid on respective government contracts must demonstrate that their value of local economic participation will equal at least 35 % of the value of imports of goods or services. Following the publication of the policy, companies with an interest in large government contracts in the Kingdom are well advised to timely familiarize themselves with the details of the EPP to fully understand the new compliance obligations and to future-proof their eligibility to bid on such contracts.
1. What is the reason for the publication of the EPP?
According to LCGPA, the broader objective of the EPP is to foster national economic growth in Saudi Arabia by way of generating investment opportunities, enhancing local capabilities in strategic sectors and further developing industrial capabilities.
The EPP is part of a broader strategy to increase investment and to expand local content requirements in Saudi Arabia. Another prominent part of this strategy is, for example, the Kingdom’s Regional Headquarters (RHQ) Program which requires certain companies to establish regional headquarters in Saudi Arabia to remain eligible for government procurement. The RHQ Program offers an attractive incentive scheme for RHQs set up in the Kingdom (e.g. tax incentives).
An English language overview on the EPP and an Arabic language version of the policy can be accessed on the LCGPA’s official website.
2. What is the EPP’s scope of applica tion?
The EPP applies to government procurements on imported goods and services in which the value of imported goods and services equals or exceeds the minimum amount set out in the EPP. The current minimum amount is SAR 100 million (ca. EUR 24.5 million). To bid for such large contracts, companies must demonstrate an economic participation in Saudi Arabia equivalent to 35 % of the value of imported goods and services.
3. What are the EPP’s key principles?
The EPP includes several key principles. Activities conducted in the context of the EPP must comply with these key principles, including:
- Additionality: Any economic participation activity must create new added value for the Kingdom incremental to what is needed for a contract.
- Causality: Any economic participation activity must be directly linked to a Saudi government procurement contract (meaning, the economic participation activity was not planned regardless of the contract).
- Sustainability: Any economic participation activity must be economically and operationally sustainable (also beyond contract completion).
- Responsibility: The company required to meet economic participation requirements is solely responsible for the fulfilment of such obligations.
- Mutual Benefit: Economic participation activities should prove beneficial for both the Saudi government and the company required to meet economic participation requirements and should not result in any additional cost in the contract.
- Direct Economic Participation: Priority is given to direct economic participation projects within the same sector as the tender.
4. What are the categories of eco nomic participation?
The EPP sets out different categories of economic participation. Companies required to meet the requirements of the EPP can make qualitative investments in such economic activities. To facilitate compliance with the EPP, the EPP contains comprehensive explanations for each economic participation category and specifies a valuation factor (multiplier value) for each category and various sub-categories.
The following activities are considered eligible economic participation activities in the context of the EPP and as per LGCPA:
- Investment in Saudi Arabia: Capital injection dedicated to establishing, expanding, or upgrading an industrial or service facility, joint venture or an entity in the Kingdom.
- Localization of Industry or Services: Helping local beneficiaries to introduce new services or establish industrial capabilities within their service portfolio or area of activity (e.g., by way of transfer of manuals, tools and documents, training).
- Subcontracting: Sourcing local products or services from a Saudi entity as part of a commercial agreement.
- Export Promotion: Purchasing Saudi goods and services by foreign companies for export and opening new markets for Saudi products to access global supply chains.
- Research and Development: Carrying out applied research in accordance with a structured framework to solve a specific problem or to develop a new product; to be conducted within Saudi Arabia to meet the needs of the Kingdom’s strategic sectors.
- Technology Transfer: Technology transfer from the company to the local beneficiary (including transfer of technical tools and techniques, training and technical assistance on the technology by the company to the local beneficiary, or technology implementation).
- Knowledge Transfer: Transferring technical know-how from a company to a local beneficiary; covers all activities and mechanisms of interaction that foster the dissemination, adoption, and implementation of the new know-how by a local beneficiary (dynamic process).
According to LCGPA, to maximize value creation in Saudi Arabia, companies are encouraged to assess several economic participation activities to fulfil their economic participation obligations.
Under the EPP, as part of their tender bid, companies must submit a so-called Economic Participation Proposal along with their pricing proposal. Such proposal must, amongst others, explain how the respective company intends to satisfy the economic participation requirements and associated timelines.
5. Conclusion & Outlook
The EPP sets out rather extensive requirements for companies interested in larger government contracts in Saudi Arabia. Timely compliance with the EPP might prove challenging for some companies given the complexity of the requirements and the extent of additional investment potentially needed for EPP compliance. Companies interested in larger government contracts in the Kingdom are therefore well advised to start preparing for compliance with the EPP and upcoming large tenders as soon as possible.
Companies should first familiarize themselves with the exact scope of the policy to gain a clear understanding of the EPP’s exact content and scope and to properly assess the company’s (potential) exposure to the EPP requirements.
Companies that based on such assessment consider themselves affected by the policy should subsequently evaluate their existing investments in Saudi Arabia and compare the volume of these investments against the additional criteria laid out in the EPP. Based on this assessment and the company’s broader mid-term to long-term strategy for doing business in the Kingdom, companies should identify potential additional investment options and opportunities in Saudi Arabia to meet the economic participation standards set out in the EPP.
As part of this process, companies should not shy away from liaising with LCGPA. This will not only enable them to get a correct understanding of the exact policy requirements and enforcement standards prior to preparing the Economic Participation Proposal, but will also help to avoid investment mistakes in the context of the EPP which is critical from a risk management perspective.
Dr. Constantin Frank-Fahle, LL.M.
Founding Partner
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