To promote economic localization, the Saudi government has introduced several guidelines and policies, including the Nitaqat system for labor, the Regional Headquarters Program for investment, and the Industrial Participation Policy for procurement overseen by the General Authority for Military Industries (GAMI) since 2019. The Economic Participation Program, introduced on 14 December 2023 under the Local Content and Government Procurement Authority (LCGPA), aims to enhance benefits from government procurement in the non-military sector, while the Industrial Participation Policy focuses on military procurement. This commentary mainly analyzes the Economic Participation Program in government procurement, and provides a brief about its application, the calculation of economic participation, related incentives and penalties.
The WTO Agreement on Government Procurement (GPA) is a plurilateral agreement designed to reduce barriers to participation and strengthen governance in public procurement markets among the contracting parties, to achieve international liberalization of government procurement. The GPA restricts or prohibits the use of offsets to encourage local development or improve the balance-of-payments accounts by means of domestic content, licensing of technology, investment requirements, or counter-trade and similar requirements.
For developing countries, taking their development needs into account, the GPA allows them to negotiate the use of offsets upon accession, such as the inclusion of local content requirements. However, such offsets can only be used to qualify for participation in the procurement process and not as criteria for awarding contracts.
Since GPA is a plurilateral rather than a multilateral agreement, WTO members are free to access or not. Although Saudi Arabia is a WTO member, it has not joined the GPA and is therefore not subject to the GPA’s restrictions or prohibitions regarding offsets. Consequently, Saudi Arabia has been introducing and updating its regulations on economic offsets since 1980s, with the Economic Participation Program being one such initiative. Saudi Arabia has been an observer to the plurilateral GPA since December 2007; however, recent policies and the Government Tenders and Procurement Law indicate that the Saudi government tends to favor the protection of local economic development, making the application of the Economic Participation Program indisputable in the near future.
It should be noted that the valuation factors of the qualified activities fluctuate, as there are several sub-projects under each qualified activity, and their importance or contribution to local economic development varies. LCGPA may add to the above valuation factors between +0.5 and +1, but not more than +4 in total.
When carrying out qualified activities under the Economic Participation Policy, investor shall comply with the following rules:
The incentives and penalties related to the Economic Participation Program are somewhat vague as LCGPA has not specified them.
Although the Saudi government has introduced the Economic Participation Program, several ambiguities remain. For instance, it is unclear whether the Economic Participation Program applies to quasi-government entities or state-owned enterprises. It is also unclear whether investors shall submit audited reports when submitting required documentation. Further clarification is needed on the penalties.
Overall, the Economic Participation Program may be unfamiliar to investors. The Abdulaziz Bin Ali Law Firm, as a local Saudi firm with extensive project experience in the engineering sector, can provide guidance to investors.
