Saudi Council of Ministers approves the issuance of the Privatisation Regulation

The Government of the Kingdom of Saudi Arabia promulgated its "Vision 2030" plan through Council of Ministers Resolution No. (308) dated 18/07/1437 AH (25/04/2016 AD) ("Vision 2030"). Vision 2030 embodies plans and development programs for the transformation of the Kingdom's economy, society and legal system. In April 2018, the Council of Economic and Development Affairs ("CEDA"), chaired by Crown Prince Muhammad Bin Salman, approved the "Privatization Program (Delivery Plan 2020): A Saudi Vision 2030 Realisation Program" (the "VRP"). Regulatory reforms play a key part in their successful delivery.

The National Center for Privatization ("NCP") was established with the responsibility of enabling the privatisation program by providing assistance in formulating regulations, creating a strategic framework for privatisation, and preparation of government assets and services targeted for privatisation. Most recently, the NCP prepared the draft of the Privatisation Regulation (the draft Privatisation Regulation). This was opened for public consultation in July 2018. Since then the market has been anticipating the issuance of the new Privatisation Regulation (the "PR").

The issuance of the new Privatisation Regulation and related resolutions

Council of Ministers Resolution no (436) dated 03/08/1441 AH (17/03/2021 AD) ("Resolution 436") introduced a number of key structural changes in the area of privatisation that have been anticipated in the market. The aim of these changes was to modernise and reform the underlying regulatory structure applicable to privatisation. It also placed the Kingdom's regulatory and strategic plans for privatisation on a clearer footing, repealing a number of older decrees and strategies and reemphasising the plans put in motion under Vision 2030. The key changes introduced by Resolution 436 are:

• Approval of the issuance of the new Privatisation Regulation;
• Repeal of the previous strategic and planning provisions that were historically issued by article 1 of Council of Ministers Resolution no (60) dated 01/04/1418 AH (06/08/1997 AD). These provisions can be viewed as being out of date in terms of market practice and requiring greater modernisation to achieve Vision 2030;
• Repeal of Council of Ministers Resolution no (257) dated 11/11/1421 AH (05/02/2001 AD) which had previously vested the authority to supervise all privatisation matters in the Supreme Economic Council ("SEC"). The SEC itself was dissolved in 2017 and this action clarifies the privatisation mandate of the NCP;
• Repeal of Council of Ministers Resolution no (219) dated 06/09/1423 AH (11/11/2002 AD) which had historically set a list of industries, activities and services that were to be targeted for privatisation. The repeal of this resolution also serves to clarify the regulatory basis of the privatisation targets and strategies set under Vision 2030 and the supervision and direction of NCP;
• Repeal of the decision of the (dissolved) Supreme Economic Council no (23/1) dated 23/03/1423 AH (04/06/2002 AD) which had historically approved the Saudi government's privatisation strategy; and
• Permission to resort to arbitration (in and outside Saudi Arabia) in line with rules to be issued by the NCP Board of Directors.

Collectively, these reforms serve to enhance the regulatory and administrative framework within which the newly promulgated PR will operate.

What you need to know about the Privatisation Regulation

The PR will enter into force 120 days from its publication in the official gazette. Publication occurred on 26 March 2021 and it will enter into force on 24 July 2021.

1. Key concepts and regulatory context

Our analysis of the PR confirms that its provisions are drafted to give the government greater flexibility to enable the offering of internationally competitive and market leading privatisation projects. Such flexibility can be seen in the broad scope of key definitions:

• Infrastructure: meaning public facilities or assets that provide a public service both directly or indirectly;
• Asset: meaning any asset, be that permanent or temporary, fixed or moveable, tangible or intangible and including rights in any of the foregoing;
• Public Service: meaning any service provided by a government entity directly or indirectly, be that a primary service such as the offering of services to the public or commodities, or non-primary such as the provision of support to government activities and mandates;
• Asset Transfer Arrangement: is a contractual arrangement relating to infrastructure or public services that results in the transfer of the ownership of any asset from a government entity to a private party; and
• Direct Procurement: is an offer relating to a privatisation project that was not presented in the context of a request for proposals. 

2. What constitutes a private public partnership ("PPP")

The PR introduces a definition for PPP which applies to any contractual arrangement relating to infrastructure or a public service that results in a relationship between the public and private sectors and contains the following elements:

• A term of five years or more;
• The private sector party performs two or more of: asset design, construction, administration, operation, maintenance or funding, whether such asset is owned by the government, the private sector party or both;
• The presence of a risk matrix allocating types and quantities of risks between the parties; and
• The financial return of the private sector party or the financial obligations under the contract are based primarily on performance levels in relation to their obligations under the contract. 

3. What you need to know about the aims of the PR

As the framework for present and future privatisation projects in Saudi Arabia under Vision 2030, the PR has a number of aims that investors should consider as the foundation for the policies and planning behind these projects. These include:

• Aiding the achievement of the government's strategic goals, obtaining efficiency in public spending, increasing government revenue, enhancing the performance of the national economy and increasing its ability to face the challenges of regional and international competition;
• Raising the overall quality, time and cost of services, and raising the performance of assets related to privatisation projects, improving their administration, and to work on the enhancement and restructuring of the sectors, entities, assets and public services that are targeted for privatisation;
• Incentivising the private sector, both locally and internationally, to engage in effective partnership in the national economy through projects that deliver viable development to the government and viable economics to both the public and private sectors, and to increase the share of the private sector's participation in the Kingdom's gross domestic product in a manner that achieves growth for its economy;
• On a domestic level, expanding the level of participation of Saudi nationals in the ownership of government assets, and increasing opportunities and jobs growth for the national workforce; and
• The inclusion of these aims in the PR is with a view to modernising an area of regulation that was historically less targeted in its strategic objectives. This also serves to complement the provisions of Vision 2030's Vision Realisation Programs for privatisation, enshrining the aims, objectives and strategies of NCP in law. 

4. What is the scope of the PR's application?

The market will likely welcome the clarity the PR introduces on its own application. Crucially, under article 4, it does not apply to contracts that were executed prior to the PR's entry into force, unless they are amended, extended or renewed after its entry into force. Since its establishment the NCP has been actively engaged in a number of current privatisation projects. The PR also clarifies the position of projects that already obtained regulatory approval but which have yet to reach the contract execution stage. In such cases these projects remain subject to their relevant regulatory approvals unless the NCP Board of Directors decides to apply the provisions of the PR.

Beyond such cases the PR's provisions will apply to all contracts entered into by government ministries or government entities, companies established by the government or companies in which the government (directly or indirectly) owns more than 50 percent of its capital and in which the purpose of the government's ownership or establishment of the company is the execution of a privatisation project.

5. Will the PPP regime be developed further?

The issuance of the PR on its own is not the complete picture of the new PPP regulatory regime to be introduced in Saudi Arabia. Much of the detailed provisions on how the PR will function will be found in the implementing regulation of the PR ("Implementing Regulation") which will be issued subsequently. Under article 44, the power to issue the Implementing Regulation is vested in the NCP Board, though the PR does not prescribe a timeline for when this will be issued. When it is issued, the Implementing Regulation will determine the permissible means of privatisation, the provisions relating to asset transfers and the rules and conditions relevant to these means.

The NCP Board will also have the authority to issue tender forms, forms of tender documents and privatisation contract precedents, as well as contractual provisions that are either mandatory or for guidance purposes that will be applicable to privatisation projects.

Article 2 of the PR also introduces the concept of "Organising Rules", which will be published by the Council of Ministers. The Organising Rules will:

• Determine – according to the relevant privatisation project – the government entity (or entities) that has the authority to issue the required approvals for the privatisation project including the power to approve a tender and to award a tender, to execute contracts and to exercise any other powers or mandates under the applicable regulations, as well as guidelines for the exercise of its mandate, and such entity (or entities) will be referred to as the "Authorised Entity";

• Determine – according to the relevant privatisation project – the government entity (or entities) that will be responsible for the study and preparation of privatisation projects, the power to approve a tender and to award a tender, to execute contracts and to exercise any other powers or mandates under the applicable regulations, as well as guidelines for the exercise of its mandate, and such entity (or entities) will be referred to as the "Executing Entity"; and

• Determine the government entities that are related to a privatisation project, according to the needs of the respective project, and the authority and specialised mandate of these government entities.

Together the Organising Rules and the Implementing Regulation will complete the regulatory framework for PPPs in Saudi Arabia.

In relation to competition law, under article 30 of the PR, the NCP Board has the authority to establish policies to limit monopolistic practices in privatisation projects in coordination with the General Authority for Competition and any other relevant government entities. Competition provisions are discussed further later in this briefing.

On a longer timeline, Resolution 436 also places a requirement on the NCP to raise to the Council of Ministers a timetable for the implementation of the PR and any recommendations that the NCP may have after two years of the PR's entry into force. This may further reform the PPP regime at a later date.

Our view is that PPP regulations have taken a significant step forward under the PR, and further refinements can be expected over the next two to three years.

6. The role of the Ministry of Finance

The issuance of the PR on its own is not the complete picture of the new PPP regulatory regime to be introduced in Saudi Arabia. Much of the detailed provisions on how the PR will function will be found in the implementing regulation of the PR ("Implementing Regulation") which will be issued subsequently. Under article 44, the power to issue the Implementing Regulation is vested in the NCP Board, though the PR does not prescribe a timeline for when this will be issued. When it is issued, the Implementing Regulation will determine the permissible means of privatisation, the provisions relating to asset transfers and the rules and conditions relevant to these means.

The NCP Board will also have the authority to issue tender forms, forms of tender documents and privatisation contract precedents, as well as contractual provisions that are either mandatory or for guidance purposes that will be applicable to privatisation projects.

Article 2 of the PR also introduces the concept of "Organising Rules", which will be published by the Council of Ministers. The Organising Rules will:

• Determine – according to the relevant privatisation project – the government entity (or entities) that has the authority to issue the required approvals for the privatisation project including the power to approve a tender and to award a tender, to execute contracts and to exercise any other powers or mandates under the applicable regulations, as well as guidelines for the exercise of its mandate, and such entity (or entities) will be referred to as the "Authorised Entity";
• Determine – according to the relevant privatisation project – the government entity (or entities) that will be responsible for the study and preparation of privatisation projects, the power to approve a tender and to award a tender, to execute contracts and to exercise any other powers or mandates under the applicable regulations, as well as guidelines for the exercise of its mandate, and such entity (or entities) will be referred to as the "Executing Entity"; and
• Determine the government entities that are related to a privatisation project, according to the needs of the respective project, and the authority and specialised mandate of these government entities.

Together the Organising Rules and the Implementing Regulation will complete the regulatory framework for PPPs in Saudi Arabia.

In relation to competition law, under article 30 of the PR, the NCP Board has the authority to establish policies to limit monopolistic practices in privatisation projects in coordination with the General Authority for Competition and any other relevant government entities. Competition provisions are discussed further later in this briefing.

On a longer timeline, Resolution 436 also places a requirement on the NCP to raise to the Council of Ministers a timetable for the implementation of the PR and any recommendations that the NCP may have after two years of the PR's entry into force. This may further reform the PPP regime at a later date.

• Our view is that PPP regulations have taken a significant step forward under the PR, and further refinements can be expected over the next two to three years. 

7. How projects are designated for privatisation

Under article 9 of the PR, the NCP Board may make recommendations to CEDA to determine whether or not to consider the project in question as a privatisation project or an asset transfer project subject to the PR. This will apply whether or not the definition of a private public partner or an Asset Transfer Arrangement are applicable to the project in question. CEDA therefore retains the authority to decide, at the recommendation of NCP, whether to exclude a project from the application of the PR.

8. Credit support for projects 

Article 10 makes it permissible by decision of the Council of Ministers (or any entity authorised by the Council) at the recommendation of the Ministry of Finance to approve the provision of financial and credit support to a privatisation project where such support is not stipulated under the terms of the privatisation contract.

9. Enhancing regulatory approvals and licensing 

A frequent risk factor that affects privatisation projects in Saudi Arabia is the obtaining of applicable licenses and permits. The PR aims to remedy this risk under article 11 by putting in place a mechanism to coordinate and override government licensing and approvals. In instances where the issuance of a license, permit or approval for a privatisation project proves prohibitive, or its issuance is delayed by the government entity that is responsible for its issuance, CEDA shall have the power to make appropriate directives on the basis of a report to be prepared by the Executing Entity in coordination with the relevant government entity. Such report must include a description of the circumstances, the reason for not issuing the required decision or for the delay, the costs resulting from that decision and suggested solutions. This procedure will practically serve to enhance CEDA's function as a cross-ministerial executive government body and will enhance the ability to obtain approvals and licenses for privatisation projects and reduce regulatory risks to investors.

10. Provisions applicable to tenders 

• Under the PR, privatisation projects may be offered through a public tender, a limited tender, direct contracting or any other means of tendering according to the nature of the project. This introduces a degree of flexibility to the Saudi PPP regime. Further detail on the means of tendering privatisation projects will be provided by the NCP Board through the Implementing Regulation;
• The Executing Entity may cancel the tender for a privatisation project at any time prior to contract execution if it determines such action to be in the public interest. In such circumstances, none of the bidders for the tender will be entitled to any compensation unless the NCP Board determines otherwise based on a recommendation from the Executing Entity. The potential permissibility of compensation to bidders for cancelled tenders will likely be seen as a welcome development by investors; and
• After obtaining the approval of the Authorised Entity, the Executing Entity has the authority – subject to the agreed provisions under the privatisation contract – when it considers such action to be required by the public interest to amend the privatisation contract terms in writing and to suspend the performance of the privatisation contract. The precise provisions that will be applicable in such circumstances will be further detailed under the Implementing Regulation, including specifically the consequences of any contractual amendment or suspension and any compensation to which the private sector party may be entitled, in so far as the privatisation contract does not contain dedicated provisions on such matters. 

11. Formation of project companies and the Companies Regulation 

A new development under the PR is the power given to the Executing Entity to require the bidder with the best offer to establish a project company to be the private party under the privatisation contract. Such a requirement is to be included in the tender documents, and the Executing Entity may agree with the bidder with the best offer on the project company's capital, shareholders and related provisions. Approval from the Authorised Entity for the project may also be obtained for any government entity, public authority or government organisation to own shares or an interest in a privatisation project company.

The PR also places a restriction on the right of the private sector party to transfer or pledge shares or an interest in a privatisation project company, and any such action shall be deemed void unless taken in compliance with the terms of the privatisation contract and with the prior approval of the Authorised Entity.

One further area of anticipated development is the interaction between the PR and the Companies Regulation (issued by Royal Decree no (M/3) dated 28/01/1437 AH (10/11/2015 AD) ("Companies Regulation"). Under article 14(4) of the PR, the Implementing Regulation shall determine the provisions that will be applicable to privatisation project companies.

Prior to the issuance of the PR, the provisions of articles 181 (for limited liability companies), 150 (for joint stock companies) and 211(d) of the Companies Regulation had presented a high degree of regulatory risk for privatisation projects. Under these articles a company may be deemed dissolved at law where certain loss thresholds are triggered and penalties would be applicable. Article 15 of the PR addresses this risk, by explicitly stating that if the losses of a privatisation project company reach the applicable regulatory threshold (e.g. 50 percent under articles 150 and 181 of the Companies Regulation) at any time during the contract, this shall not result in a requirement to increase or reduce its capital, dissolution of the company by its shareholders or the company being deemed dissolved by law.

In such circumstances, the Executing Entity will be required to coordinate with the privatisation project company to present a recommendation to CEDA for CEDA to determine if the privatisation project company will continue and remedy its position. If the company fails to successfully turn its position around in compliance with any cure period prescribed by CEDA, the company will be subject to the applicable regulatory provisions.

12. Execution of privatisation contracts

All contracts that are subject to the PR must be executed in the name of the government. The Executing Entity shall be considered an agent of the government in all matters relating to the contract, unless the approval to execute the contract states otherwise. All contracts executed under the PR may only be executed with a private sector party. No entity that is public in nature may contract with the government as if it were a private sector party.

Article 17 of the PR also prohibits any government entity from executing a privatisation contract without obtaining the approval of the Authorised Entity, and any contract executed in contravention of this restriction is deemed void unless it is ratified by the Authorised Entity.

13. Financing, pledging arrangements and guarantees

A development that will be welcomed by investors and lenders under the PR is the provisions of article 18. This article allows the private sector party, with the written approval of the Executing Entity to:

• Enter into agreements to finance the work or services under a privatisation project with any banking or financing entity. Liability for any obligations, or disputes resulting from such finance agreement under such agreements, will be the sole responsibility of the private sector party unless, with the approval of the Ministry of Finance, the Executing Entity and the private sector party agree otherwise; and
• Pledge any asset(s) it owns in a privatisation project for the purpose of financing the work or services under a privatisation project, with the caveat that the private sector party may not sell or pledge an asset that is owned by the government.

Furthermore, under article 18(1), the Ministry of Finance or the Executing Entity, after obtaining the approval of the Authorised Entity may enter into direct agreements with any other entity related to the project to provide guarantees that determine the rights and obligations related to the privatisation project.

14. Provisions on term of privatisation projects

Under article 20 of the PR the period of partnership between the private and public sector may be determined by agreement of the parties. However, the maximum duration of any contract whether its original term, any renewal or extension shall be thirty years from its date of execution or its effective date if it is agreed the effective date will be a date after the date of execution. The Authorised Entity has the power (at the recommendation of the Executing Entity) to approve the offer of an original contract term for a period longer than thirty years or approve the extension or renewal of a contract that would see its cumulative term exceed the thirty year threshold limit.

Crucially, the PR also clarifies the position on contract term limits in relation to retendered projects. If the term of the original PPP contract expires and the project is retendered, and the contract is awarded under the new tender to the same private sector party then it shall not be considered an extension or renewal but a wholly new contract subject to its own thirty year threshold limit.

The PR also prescribes that a privatisation contract may be renewed or extended with the approval of the Authorised Entity in the following circumstances:

• Delays to completion of the privatisation project or disruption to its operation due to circumstances beyond the control of parties;
• Suspension of the privatisation project;
• Where permission is granted to the private sector party to recover additional costs that are borne as a result of additional requirements but it is not anticipated that they will be able to recover such costs within the original term; and
• Where there is an amendment to contractual specifications based on public interest requirements subject to obtaining prior approval for such amendment in accordance with applicable regulations.

15. Revenue Collection

The PR addresses a significant regulatory hurdle that previously restricted the ability of private sector parties to collect revenues owing to the government under the provisions of the State Revenue Law ("SRL") (issued by Royal Decree No. (M/68) dated 18/11/1431 AH (26/11/2010 AD). Under article 24 of the PR, it is now possible with the approval of the Authorised Entity (but without the need for an exemption from compliance with the SRL by the Council of Ministers) to grant the private sector party the right to:

• Collect fees directly to their account for services and works they provide in accordance with the terms and procedures set in the privatisation contract;
• Collect public revenue – including fees and taxes – related to the privatisation contract and which are due to the account of the state treasury. The privatisation contract can now specify the terms and procedures relating to such revenue and their remittance to the state treasury; and
• Collect public revenue or any portion of public revenue in the private sector party's account directly in accordance with terms that can be specified in the privatisation contract.

In all instances there is a prohibition on the private sector party imposing any additional fees on users of their work or services under the privatisation contract unless the contract states otherwise. The introduction of these measures under the PR will allow for greater flexibility and enhanced payment and revenue collection mechanics to be included in privatisation contracts without the need for complex regulatory exemptions and approvals to be obtained.

16. Assignment and subcontracting

Article 25 of the PR places a restriction on the private sector party to assign all or part of the privatisation contract, or any related contracts, to another party without obtaining the prior written approval of the Executing Entity. Assignments are therefore permissible with prior approval. It remains unclear at this point whether further procedural requirements will be set by the Implementing Regulation when it is issued.

The private sector party may also sub-contract works related to the privatisation project subject to such subcontract not breaching the provisions of the PR or the privatisation contract. The private sector party will remain liable to the Executing Entity unless stated otherwise under the contract.

17. Step-in rights and damages

Under article 27 of the PR, the application of damages (e.g. liquidated) as per a formula agreed by the parties in the privatisation contract is clarified and without prejudice to the Executing Entity's rights under the privatisation contract. If stipulated under the contract the Executing Entity may choose itself or through any other party it selects to perform the contract to ensure continued operation of the project where the private sector party is in default of their contractual obligations or unable to achieve the required and agreed performance standards. This right is subject to notice being given to the private sector party and their subsequent failure to remedy the default within the period specified in the notice. The applicable provisions on notice, cure period and matters related to step-in rights and related consequences can be determined under the contract. The introduction of these provisions adds a greater degree of contractual flexibility to Saudi privatisation project contracts.

18. Termination provisions

Under clause 28 of the PR, subject to obtaining the approval of the Authorised Entity, the Executing Entity may terminate the contract and any related contracts unilaterally before the end of its term in the following circumstances:

• Failure of the private sector party to perform its core contractual obligations, or their failure to achieve the required and agreed performance levels after written notice of such default is served and remains unremedied after the period specified in the written notice. The core private sector party's contractual obligations are to be specified under the contract;
• The bankruptcy or dissolution of the private sector party;
• If required in the public interest; or
• Any other circumstances specified under the contract.

The PR allows for the consequences of such termination to be specified under the contract, and allows for limits being placed on the compensation owed to the private sector party as a consequence of termination or a mechanism for calculating such compensation. The most significant development introduced in this area by the PR is the ability to include provisions under the contract that would provide compensation for loss of earnings to the private sector party where the privatisation contract is terminated for a reason relating to the Executing Entity and without default of the private sector party. Claims for loss of revenue, particularly future revenue under a long term contract, were difficult to make under Saudi law. The introduction of this article under the PR represents a significant step forward in mitigating the risk to the private sector for project termination in the public interest.

19. Transfer of existing contracts for privatisation purposes

Another useful regulatory tool introduced by the PR is the power given to the Executing Entity in relation to existing contracts related to the privatisation project. Under article 29 of the PR, if the performance of a privatisation project requires the transfer, amendment or termination of any existing service, construction or procurement contracts entered into between a government entity and any other party to the private sector party the Executing Entity may:

• Transfer such contract(s) as relates to their rights and obligations to the private sector party (subject to their approval) without the need to execute additional agreements or obtain the approval of the other party contracted with the government entity; or
• Divide, amend or terminate such contracts without the need to execute additional agreements or obtain the approval of the other party contracted with the government entity.

In all instances, such action by the Executing Entity will not prejudice the right of the other contracting party to claim compensation for damages or losses incurred as a result of such action. In the context of enhancing the government's ability to realise its privatisation strategies and the attendant need to restructure major economic sectors, this provision of the PR will likely prove to be a powerful regulatory tool.

20. Competition law

Article 30 of the PR explicitly provides that the exercise of any rights granted to a private sector party under a privatisation contract or their adherence to a contractual obligation shall not be deemed a monopolistic practice, even where such action has an impact on market competition or restricts competition in the market. This exclusion applies in so far as there are no less restrictive measures that can be used by the private sector party to exercise that right or fulfil its obligations. In such cases the approval of the Authorised Entity must be obtained and the private sector party must comply with any conditions the Authorised Entity prescribes as part of its approval.

The NCP Board also has the authority to establish policies to limit monopolistic practices in privatisation projects in coordination with the General Authority for Competition and any other relevant government entities. There is presently no indication as to when such policies may be issued.

21. Documents and Records

The NCP is to establish a record for all privatisation projects that includes a comprehensive database encompassing all information relating to privatisation projects. The Executing Entity and the private sector party must provide the NCP with all documents, information and data relating to privatisation projects, updates to any such items previously submitted to the NCP, and disclose any such items at the NCP's request using the method requested by the NCP and at any time requested by the NCP.

Article 31 states that this record shall be made accessible to government entities, government bodies, public authorities, private parties and the public. The NCP Board will determine which data in the record may not be accessed or published. This is coupled with the general restriction under article 31(4) that prohibits the distribution of any documents, information or data relating to privatisation projects, or their disclosure prior to their publication by the NCP through the record, unless such action is taken with the approval of the Executing Entity in coordination with the NCP.

22. Interaction with other regulations

The PR gives consideration to the application of other regulations in force that relate to PPP projects and aims to clarify their interaction as follows:

• The NCP board shall issue the rules applicable to procurement and purchases for all contracts necessary for the execution of privatisation projects (article 33(1));
• The NCP Board shall, in consultation with the State Properties Regulatory Authority, issue the rules applicable to rental and vacating of government property for the purposes of privatisation projects (article 33(2));
• In relation to the application of the Government Tenders and Procurement Law ("GTPL") (issued by Royal Decree no (M/128) dated 13/11/1440 AH corresponding to 16 July 2019 AD), article 32(3) states that the GTPL and the provisions applicable to rental and vacating of government property shall apply to privatisation projects that are subject to the PR, unless a specific exclusion is stated under the rules to be issued by the NCP Board (see the two preceding bullets), or the NCP Board decides such rules will not apply to privatisation projects; and
• In relation to employment matters, the NCP may with the approval of the Minister of Human Resources and Social Development ("MHRSD"), exclude any privatisation project from provisions that regulate employee matters at the request of the Executing Entity and in coordination with the NCP. This provision applies specifically to mandated percentages of employment for Saudi nationals and the rules relating to termination of employment by the employer and duration of employment contracts in a manner that guarantees the rights of an employee being transferred under a privatisation project, and subject to alternative provisions to be issued by MHRSD in consultation with the NCP.

23. Dispute settlement

Considerable developments have also been introduced under the PR in relation to dispute settlement. A long standing concern of private sector investors, particularly foreign investors, was the ability to subject their contractual disputes to arbitration. The first significant reform is the Resolution 436 decision on alternative dispute settlement. Resolution 436 clause 3 makes it permissible for disputes arising out of privatisation contracts, or any related contracts, to be resolve by arbitration, whether in Saudi Arabia or another jurisdiction, in accordance with rules to be issued by the NCP Board.

Resolution 436 also specifically requires such rules to be issued by the NCP Board to determine the applicable law (whether the arbitration is conducted in Saudi Arabia or another jurisdiction). It remains to be seen when such rules will be issued and whether or not they would permit alternative choices of law to be applied. The ability to choose arbitration and a choice of forum is a considerable step that was anticipated by the market and will be welcomed by investors.

In parallel, article 34 of the PR subjects all contracts and any ancillary contracts to the PR and any other provisions of Saudi regulations that do not conflict with the PR, including those regulations that relate to dispute settlement. Article 34 also specifically incorporates the arbitration option, and states that with the approval of the Authorised Entity, the contract may include provisions to subject any dispute to arbitration. The application of this provision contains a carve out for disputes relating to government real estate located in the Kingdom. In addition, the condition or agreement to submit a dispute to arbitration must specify the applicable law to be applied. It remains unclear at this stage whether this would permit the choice of applicable law other than Saudi law. Crucially, investors should also consider the question of enforceability of foreign awards or judgments in Saudi Arabia.

24. Choice of language

The PR introduces provisions on language that address a long-standing requirement that has restricted the Kingdom's ability to attract wider interest from foreign investors. Previously, under applicable Saudi regulations, all contractual documents, notices and disputes were required to be made in the Arabic language, with parallel use of a foreign language subject to the precedence of the Arabic text in the event of a conflict of provisions.

Article 35 of the PR requires that the Arabic language shall be the language used to issue the tender documents and the language for contract execution. However, it now also states that the use of another language is permissible for tender documents and contract execution with the approval of the Authorised Entity. While this is a significant development, it remains to be seen in instances where the privatisation contract is subject to the jurisdiction of the Saudi courts how the requirement to use the Arabic language will be implemented.

25. Provisions for foreign investors

Without prejudice to regulations applicable to foreign investment and any regional or international treaties to which Saudi Arabia is a party, under article 36 of the PR, foreign investors shall be subject to the same standards, rules and procedures applicable to domestic investors as relates to the tendering and award of privatisation projects, and foreign investors shall enjoy the same treatment as domestic investors as regards any procedure, condition, right or obligations resulting from the PR or the privatisation contract. This provision seeks to introduce a non-discriminatory level playing field for domestic and foreign investors.

Foreign investors will also enjoy enhanced rights in relation to real estate under the PR. Article 37 permits the private sector foreign investor with the approval of the Authorised Entity to rent real estate within the city limits of Makkah and Madina for a period equivalent to the contract term and for the purpose of executing the privatisation project in accordance with the following conditions:

• That the use of such real estate is restricted to the purposes of execution of the contract; and
• The private sector party is in compliance with the contract provisions.

If the private sector party breaches any of the above conditions, the Executing Entity must notify them of the breach, and it shall be remedied within a period to be specified by the Executing Entity. If the breach is not remedied within that time period the lease is terminated.

Prior to the introduction of this provisions the rules applicable to foreign investors restricted their ability to use real estate within the cities of Makkah and Madina.

26. Provisions on expropriation

Article 38 introduces another powerful tool that will enhance the government's ability to progress its strategy for privatisation projects. The government has the power to expropriate property (both permanently or temporarily) if such action is required for the purpose of executing a privatisation project in accordance with the regulations applicable to expropriation of real estate for the public benefit. It is also now permissible under article 38 for the privatisation contract to stipulate that the private sector party shall be responsible for the cost of compensation resulting from expropriation of real estate for the purposes of executing a privatisation project.

27. Administrative appeals

The PR gives the NCP Board the power to create one or more committees to consider appeals and grievances made against the procedures and decisions on privatisation projects and their awarding. An appeal must be made to the committee within ten working days of the date of the procedure or claim being objected to, and must be accompanied by an irrevocable and unconditional bank guarantee in favour of the NCP from a licensed Saudi bank, and such guarantee shall not be less than SAR 2 million and no greater than SAR 5 million.

The filing of an appeal and its consideration shall not result in the suspension of the tender or its award, and the Executing Entity must notify the Authorised Entity of the appeal before the tender is awarded. The Authorised Entity may make the appropriate determination in such cases.

If the committee accepts the appeal and its validity prior to the execution of the contract, the Executing Entity must remedy the procedural violation if possible, and if a remedy is not possible the tender process for the privatisation project shall be cancelled. If the appeal is accepted after the contract has been executed then the committee's decision must determine the amount of compensation due to the claimant and the bank guarantee shall be returned.

If the committee decides to reject the claim and determine it is invalid, its decision shall include the claiming of the guarantee provided by the claimant (in whole in in part) and it shall be deposited with the state treasury.

All decisions of the committee are binding on the Executing Entity, and in all instances the decision of the committee is capable of appeal before the court of applicable jurisdiction. Any appeal relating to a contract that has already been executed shall be limited to a claim for compensation and return of the guarantee.

The procedures for the functioning and operation of the committee(s) shall be issued by the NCP Board, including the procedures for claims and appeals, applicable conditions, calculation of the value of the bank guarantee, conditions of eligibility for compensation and any applicable limits.

28. The Implementing Regulation of the PR

While the Implementing Regulation has not been issued, the PR provides an indication of the provisions it will contain. Additional provisions to be included are:

• rules applicable to privatisation project documents and the means of communication with the private sector;
• applicable criteria to determine privatisation project priorities;
• rules for administration and supervision of contract execution;
• rules applicable to emergency circumstances affecting tender processes, the implementation of privatisation projects and the privatisation contract. Emergency circumstances are defined as those which present an unforeseen and imminent threat to public safety, public security or public health, or which present a risk of loss of life or property or disruption to public services and which cannot be addressed by means of a public tender;
• the criteria for considering a project to be a privatisation project and subject to the PR, including the determination of a minimum value for privatisation projects; and
• the procedures applicable to direct procurement.

29. Transitional arrangements and entry into force

The PR will enter into force 120 days from its publication in the official gazette. Publication occurred on 26 March 2021 and it will enter into force on 24 July 2021.

If you would like any further information about any of the issues raised in this briefing, please contact us.

Author:  Hani Zedan, Legal Manager