Paving the road for privatisation: Saudi Arabia's Draft Private Sector Participation Law
In July 2018, Saudi Arabia published a draft of the much anticipated Private Sector Participation Law. It was hoped that the law would address some of the key issues affecting the growth of the PSP sector in the Kingdom. The draft law holds significant promise.
In April 2016, Saudi Arabia announced its Saudi Arabian Vision 2030, a comprehensive economic reform plan that aims to reshape and diversify the Kingdom's economy away from dependence on oil. Private sector participation (PSP) is a cornerstone of Vision 2030, having the dual aim of reducing government spending and improving the quality of public services for citizens as well as strengthening the private sector in the process.
Even before the importance accorded to it under Vision 2030, PSP has been on the government agenda for some time. Although there have been some notable privatisations over the last two decades (through corporatisations and the initial public offerings of Saudi Telecom Company and the Saudi Electricity Company), the process has been unable to gain momentum in a manner that it was hoped it would. There are several reasons for this besides soaring oil prices. For example, the absence of an overarching regulatory framework to facilitate the PSP process; the directional and structural ambivalence of the relevant government ministries and authorities in pursuing PSP for their respective assets; lack of alignment among government authorities whose cooperation would be vital in implementing a PSP project (leading to delays in issuing permits or supplying utilities).
These issues are being addressed in earnest by the government under Vision 2030 through a multi-pronged approach. On the one hand, the government is setting up new bodies and empowering existing ones to oversee and resolve any hurdles to swift action on PSP projects. On the other, it is putting in place a multi-faceted legislative framework to facilitate the smooth implementation of the PSP projects, of which the PSP law will be a key pillar, the bankruptcy law and the commercial pledge law being two of the other legal pillars.
A draft PSP law was published in July 2018 for public consultation (the Draft PSP Law). The draft law goes a long way towards addressing a number of points that may have had the effect of stymying PSP growth in the past. If the enacted law is in fact along the lines of the draft, it will augur well for PSP projects in Saudi Arabia.
Key Implementers
To fully appreciate the application of the PSP law, familiarity with the key players who will be implementing the various aspects of the privatisation process will be useful.
Council of Ministers: This is the cabinet, Saudi Arabia's main legislative body after the King, consisting of key ministers and headed by the Prime Minister, who is the King himself.
Council of Economic and Development Affairs (CEDA): This is the main sub-cabinet overseeing all the economic and developmental affairs of Saudi Arabia, and is headed by the Crown Prince.
National Centre for Privatization & PPP (NCP): The NCP's role is to be an "enabler" of the PSP programme, by educating the ministries/authorities in the key target sectors, formulating regulations, creating frameworks and preparing government assets and services identified for PSP. The draft PSP Law was prepared and issued by the NCP.
Key Features of the Draft PSP Law
Scope
The Draft PSP Law applies to public institutions and bodies with independent juristic personality, all ministries and departments, and any company with more than fifty-one per cent of their capital being owned by the Government and already set up for implementation of PSP projects. For example, Saudi Aviation Holding Company has been set up to own Saudi airport assets and facilitate the PSP projects in the aviation sector.
The Draft PSP Law applies to PSP projects, and defines a PSP as any infrastructure-related contractual arrangement that results in sale of assets (SOA) (any transfer of ownership of assets, shares, or rights from a governmental entity through a contract or grant) or a public private partnership (PPP). PPP is defined as a contractual arrangement relating to infrastructure between a governmental entity (including government-owned companies) and a private party that contains the following elements (among others):
(a) the arrangement is for five years or more;
(b) the private party provides a public service which includes the construction, management, operation or maintenance of assets;
(c) there is a qualitative distribution of risks between the government entity and the private party (the implementing regulations specify the cases in which the qualitative distribution of risks is achieved); and
(d) the monetary amounts owed by or to the private party under this arrangement shall principally be calculated on the basis of and adjusted for the performance of its obligations.
A PPP contract may not have a term longer than 30 years without CEDA's approval.
The Draft PSP Law defines public service to mean any service provided, directly or indirectly, by a government entity through a contract or grant; and that such services may be internal (ie to support government operations), or external (ie to provide goods or services to the public), or both.
The Draft PSP Law contemplates a Joint Committee of PSP Projects (consisting of the NCP and two other governmental bodies to be determined by the Council of Ministers) (the Joint Committee), which shall have the power to review any project or contractual arrangement and include it within the scope of the PSP law, even if such project or contractual arrangement did not fall within the definition of the PSP projects to which the PSP law applies. However, the Joint Committee may not review projects or arrangements that were signed prior to the formation of the committee. At the same time, the Draft PSP Law grants NCP's board of directors the power to exclude any project or arrangement that would otherwise constitute a PSP project. In addition, NCP's board of directors shall have the power to set a minimum value for projects that may be considered PSP projects.
Key Issues resolved
The Draft PSP Law aims to resolve a number of issues that could be viewed as impeding the implementation of PSP projects in the past.
| Issue | description | proposed resolution |
|---|---|---|
| Government Tender and Procurement Law |
Historically, there has been some ambiguity as to whether PSP-type projects were subject to the Government Tender and Procurement law. The law was intended for direct government procurement arrangements, but was actually stated to apply to all contracts with the government. However, due to the incompatibility of the requirements of that law with the workings of PSP projects approved by the relevant authorities, a view was taken in the legal community that the Government Tender and Procurement law did not apply to PSP and privatisation transactions. Nonetheless, the ambiguity persisted owing to the expansive text of the law itself, and did pose a risk for the procuring authority and the investors if the matter was brought before a court of law. |
The Draft PSP Law makes it clear that Government Tender and Procurement law shall not apply to PSP contracts. In fact, in recognition of the persisting ambiguity, a recent Royal Decree M/101 dated 4 July 2018 has confirmed that the Government Tender and Procurement law does not apply to contracts that are necessary to execute privatisation transactions. |
| Tender process |
Other than under the Government Tender and Procurement law, there are no uniform legal rules governing the tender process. In practice, individual procurement authorities have been devising their own rules based on market practice. This led to variations and inconsistencies in which the different tender processes relating to PSP projects were run, leaving more risk for disputes and challenges on account of grounds of fairness and transparency. |
The Draft PSP Law provides that the implementing regulations of the law (the Saudi equivalent of secondary legislation) will contain detailed rules that will govern tender processes in PSP projects. In addition, the law also contemplates establishing a PSP Appeals Committee, with jurisdiction to hear complaints and objections to the PSP selection process. |
| Government support |
As with the tender process, there are no uniform rules governing credit support from the government. For example, what forms of government support would be available, in which sectors, on what kind of projects. As expected, credit support is a hotly debated subject in Saudi PSP projects from a bankability perspective. |
The Draft PSP Law provides that the implementing regulations will include provisions specifying types of support, procedures, principles and conditions, of such support. |
| Real Estate | Previously, non-Saudi entities (including any Saudi entities with an element of direct or indirect foreign shareholding) were only able to own real estate in very limited circumstances. This hampered the SOA-type PSPs in the past. Furthermore, non-Saudis could not lease (let alone own) any real estate within the boundaries of the cities of Makkah and Madinah. This obviously stymied growth of real estate-related PSPs in the two cities. |
Subject to the Council of Ministers approval, non-Saudi private parties may take ownership of real estate for the purpose of PSP projects, except within the boundaries of the cities of Makkah and Madinah. In Makkah and Madinah, non-Saudi private parties may lease property for a period equal to the term of any PPP contract for the purpose of implementing the PPP contract. |
| Healthcare and schools | The existing laws restrict non-Saudis from owning healthcare institutions and private schools. | These restrictions will be waived for a PPP contract for the duration of such contract. |
| Permits | Naturally, a PSP project entails obtaining permits and support from multiple government authorities. For example, the Ministry of Labour's permit for recruiting employees, the Ministry of Transport's building the necessary road infrastructure linking the PSP project, Saudi Arabian General Investment Authority's licence to allow non-GCC investors to make any investment in the Kingdom. Historically, often the relevant authorities were not fully aligned, causing protracted delays and cost burdens on projects. | The Draft PSP Law also gives CEDA the powers to grant any licences, permits or approvals required for implementation of the PSP projects, including those that are normally granted by other governmental bodies. |
| Saudisation | The Ministry of Labour imposes minimum Saudisation requirements for workforces in most businesses in Saudi Arabia (requiring workforces to be filled with Saudi nationals up to a certain level). Consequently, some businesses requiring specialist expertise can find that a challenge. | The Draft PSP Law empowers the NCP to coordinate with the Ministry of Labour for exemptions from the Labour Law, including Saudisation thresholds. |
| Competition law | Historically, it has been unclear how the Saudi General Competition Authority, in the absence of a comprehensive competition regime, would view a private party taking over a government asset pursuant to a PSP contract, particularly for pilot projects where no other private party was providing competition. |
Subject to approval from CEDA or the Council of Ministers, PPP contracts may be exempted from the application of the competition law. |
| Contracts Assignment | Given the Saudi law requirement for an express consent by a contract counterparty to be able to assign that contract, counterparties often see a request for consenting to an assignment as an opportunity to renegotiate the contract terms. |
Existing contracts entered into by the public sector may be transferred to the private party undertaking the PSP project by operation of law, without the counterparty's consent. |
| Nationalisation/ Change in Law |
Historically in PSP projects, the right of the investor to recover compensation for the nationalisation of assets and losses arising from a change in law was largely contractual. |
The Draft PSP Law expressly affords protection to the investor's property from nationalisation and other similar measures. Furthermore, it expressly enshrines the investor's right to be compensated for losses arising from changes in law, unlawful action or failure of public authorities, subject to the terms of the PSP contract. |
| Dispute resolution |
The default position under Saudi law is that most legal proceedings involving government departments and entities fall within the exclusive jurisdiction of the Board of Grievances, the Saudi administrative court. The Board of Grievances is generally known to take a more conservative view when applying Sharia principles (the overarching principles of Islamic law governing all laws), including on commercial matters. Furthermore, government ministries, departments and wholly owned government entities are not allowed to submit to any arbitration proceedings (international or local) without the approval of the Prime Minister (being the King himself), which was rarely sought. This meant that the international and local investors in PSP projects have been left without the option to arbitrate disputes relating to complex PSP contracts, and instead have had to accept the possibility of arguing these complex contracts before the Board of Grievances. |
The Draft PSP Law provides that PSP contracts will not fall within the jurisdiction of the Board of Grievances. In addition, the Draft PSP Law provides that CEDA may allow contracting parties to agree arbitration as a dispute resolution mechanism, except for contracts relating to real estate in the Kingdom. It is worth mentioning that the Council of Ministers Resolution No. 28004 and dated 28/01/2019 has approved that any government department or state owned company may, subject to their internal approvals, in contracts involving foreign investors, agree arbitration in Saudi Arabia or in any international tribunal approved by the Council as a dispute resolution mechanism. Currently, it is possible to have arbitration in Saudi Arabia conducted under international rules such as ICC or UNCITRAL. This should come as a welcome development for foreign investors looking to participate in PSP projects in Saudi Arabia, who would be more familiar with these rules than with the Board of Grievances or local courts. However, we note that this resolution does not apply to PSP contracts between a government authority and local investors. This means that if they were unable to obtain CEDA approval for arbitration, the local investors' primary dispute resolution mechanism would be to bring proceedings before the Commercial Courts in Saudi Arabia. The Draft PSP Law is silent on whether the parties to a PSP contract can choose a non-Saudi governing law. |
As discussed above, the Draft PSP Law goes a long way towards addressing some of the key issues that have been of concern to prospective local and international investors looking at PSP opportunities in Saudi Arabia. A law enacted on these lines will provide significant support to the PSP sector in the country.
With special thanks to Iman Linjawi, Associate, for her contribution to this article.
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