Economic Participation Program Required for Saudi Government Procurement

Saudi Economic Participation Program

1. What Is Economic Participation Program : What Is Economic Participation Program The Economic Participation Program originates from the pre-existing Economic Offset Program, which was initiated in 1984 by Economic Offset Committee, making Saudi Arabia the first Gulf state to establish an offset program, followed by the United Arab Emirates in 1991 and Kuwait in 1994, with the aim of promoting local economic development, achieving self-sufficiency in key industries, and diversifying the economy. The Economic Offset Program specialized in both military and non-military sectors.In 2019, the Local Content and Government Procurement Authority (LCGPA) was established in Saudi Arabia. In the same year, the General Authority for Military Industries (GAMI) introduced the Industrial Participation Policy to regulate offsets in government procurement related to military sectors. In 2023, LCGPA introduced the Economic Participation Program to regulate government procurement in non-military sectors. Thus, the Economic Offset Program is now divided into the Industrial Participation Policy supervised by GAMI and the Economic Participation Program overseen by LCGPA. The Economic Participation Program stipulates that foreign investor bidding for government procurements worth SAR 100 million or more shall commit to promoting local economic development when signing the procurement contract. The amount of the economic participation commitment is 35% or more of the contract value.It is important to note that the Economic Participation Program involves two contracts: the Government Procurement Contract between the foreign investor and the relevant government entities, and the Economic Participation Commitment Contract, which details the investor’s commitment to promote local economic development. In the p Government Procurement Contract, the government pays the agreed price to the investor, while in the Economic Participation Commitment Contract, the investor shall make a commitment to promote local economic development, which shall deliver added value and new contributions that go beyond the specified tender requirements and not result in any additional costs for the tender.
2. The Scope of Application : The Economic Participation Program is applied to (1) government procurements on the imported services, and (2) the procurements equals or exceeds SAR 100 million, and (3) the party to the Government Procurement Contract is a foreign investor, or a local entity with the products or services ultimately provided by a foreign investor. Should the government procurements meet the minimum level specified in the Economic Participation Program, the foreign investor shall fulfill an economic participation obligation equivalent to 35% of the value of the imported goods and services. Although the documents issued by the LCGPA do not specify that the Economic Participation Program applies to quasi-government entities or state-owned enterprises, the applicability is not ruled out, especially in light of Cabinet Resolution No. 658/1443, which provides that entities wholly owned by the government or more than 50% owned shall prioritize local content and small and medium-sized enterprises in procurement to promote local economic development.
3. Qualified Activities : The economic participation commitments made by foreign investors shall meet the following conditions: The value of the economic participation commitment contract shall equal or exceed 35% of the Government Procurement Contract (referred to as the Economic Participation Amount). This amount is negotiated between the foreign investor and the government, but shall not be less than 35% in general.The calculation method: Economic Participation Amount = Value of qualified activities * valuation factor. Qualified activities refer to:
   • Technology Transfer :Valuation factor 0.5-3. Transfer of technology from an obligor (namely the foreign investor) to the local beneficiary. The transfer of technology includes the transfer of technical tools and techniques as well as training and technical assistance related to the technology to the local beneficiary by the obligor. The technology transfer can also include the implementation of the technology to make it accessible by the local beneficiary.
   • Knowledge transfer :Valuation factor 0.5-2. Knowledge transfer refers to the transfer of technical know-how from an obligor to the local beneficiary. Knowledge transfer is a dynamic process that refers to all activities and mechanisms of interaction that promote the dissemination, adoption, and implementation of the new skill by the local beneficiary. It includes the transfer of drawings or documents associated with specific knowledge and providing training either within or outside Saudi Arabia.
   • Export promotion :Valuation factor 0.5-3. Purchasing local goods and services by foreign companies for export and launching new markets for national products to enter global supply chains.
   • Investment :Valuation factor 1-3. Through capital injection dedicated to establishing, expanding, or upgrading a manufacturing or service facility, Joint venture or an entity in Saudi Arabia. It includes two aspects: either fulfilling investment commitments under the Government Procurement Contract or making investments outside of that contract, or promoting the export of products related to that investment.
   • Research and Development :Valuation factor 3. Conducting applied research according to a structured framework to find a solution to a specific problem or to develop a new product, which is carried out within the Saudi Arabia to meet the needs of national strategic sectors.
   • Localization : Valuation factor 0.5-2. Supporting local beneficiaries to establish new services or manufacturing capabilities within their service portfolio. This can be achieved through transfer of manuals, tools and document, training or establishment of dedicated programs which focus on performance improvement and optimization of operations of local services or manufacturing capabilities.
   • Subcontracting : Valuation factor 1. Purchasing local products and services from a local company as part of a commercial agreement between the local beneficiary and the obligor.