Public Private Partnerships and the New Economy: the changing face of the Saudi infrastructure market

The infrastructure market in Saudi Arabia is in the throes of a major transition. The government is increasingly seeking to deliver much-needed world class infrastructure to its people, but at the same time to limit its upfront capital expenditure. As a result, the government has been reconsidering its approach to project delivery, actively seeking to involve the private sector in ways which it previously had not been able to do. The buzz in Saudi Arabia (and the GCC region generally) around the anticipated flood of Public Private Partnership ("PPP") projects centres on the efforts of the Saudi government to ensure that it meets the ever-growing needs of its people, while not dipping further into its sovereign wealth reserves – reserves which took a severe battering following the oil price crash in 2014. This article explores in more detail the evolution of the Saudi projects market since the oil price crash of 2014 as well as exploring the various opportunities on a sector-by-sector basis.

The need for change 

Since 1970 the population of the Kingdom of Saudi Arabia ("KSA" or "Saudi" or the "Kingdom") has grown sixfold – a rate faster than China. As a result, the overwhelming majority of the Saudi population is young, requiring healthcare, education and employment which, in most cases, the country's infrastructure is incapable of delivering to the required level. This has created a huge challenge for the Saudi government: there is a pressing need to upgrade schools, hospitals, parks, airports, roads and railways precisely at the time when the fiscal squeeze is making this harder to do. 

As a result of recent upsurges in their populations, some key themes have risen to the top of the agendas of many of the region's governments, and in particular, that of the Saudi government. These include reform of government institutions and legal frameworks as well as a move towards accessing private sector intellectual and financial capital through partnership programmes.  In KSA, for example, this has now manifested itself in government policy.  The youthful new leadership in KSA has publically embraced an agenda not just of public sector reform but also of massive infrastructure development. The government acknowledges that a failure to meet these challenges would be disastrous for the Saudi people.  But the question remains: how can the government commit to funding and delivering such projects when traditional sovereign wealth funding for projects is no longer an option?

Opportunities – Vision 2030 

It was in response to this challenge that "Vision 2030" was announced in June 2016. In launching Vision 2030, deputy Crown Prince Mohammed Bin Salman (who has taken on a hugely high-profile and important role in Saudi politics in recent years) has effectively set the agenda for a 15-year privatisation of Saudi Arabia's government-driven economy.  Vision 2030 includes a key strategic objective of utilising private sector finance to pay for, and to deliver, public services, as well as to use concession-based procurement models, such as PPP contracts, to deliver major infrastructure projects. This enables off-balance-sheet funding for such projects, but it also involves private companies charging Saudis for public services, something which is unfamiliar in a country where the population has historically relied on the state to deliver social benefits without charge.  Ultimately, it is hoped that the upside in terms of employment opportunities (especially in light of the overwhelmingly young Saudi population) will counter-balance any cost of living increases and associated negative publicity which such a shift in procurement strategy may bring.

In terms of infrastructure, the plan is to create, among other things, a regional logistics hub within KSA with linked domestic and cross-border infrastructure. As an example, the plan aims to increase the private sector cost contribution for the development and operation of both port projects (increasing from 30 per cent to 70 per cent), and rail projects (increasing from 5 per cent to 50 per cent).¹ As part of this drive, the Saudi government has allocated an additional 5.5 per cent of spending to infrastructure in its 2018 budget, when compared to the previous year's budget. 

As part of Vision 2030, the National Transformation Program (the "NTP") exemplifies KSA's commitment to financial diversification. Strategic goal number 6 of the NTP aims to expand the privatisation of governmental services in order to create an environment in which local and international investors are attracted to Saudi investment opportunities. This ties in with the efforts of the National Centre for Privitisation and PPP (the "NCP") which was established by the Ministry of Economy and Planning. The aim of this shift in focus is to move investment away from the public purse and to invite more private sector participation. It is recognised that such participation will only come if the right framework is in place, and by demonstrating the government's commitment to shifting towards a more internationally accepted risk allocation profile in public sector procurement.

The changing face of Saudi procurement – the National Centre for Privatisation and PPP and the new legislative framework

The NCP was specifically established by the Saudi government to advance the role of privatisation and PPPs in KSA. The royal decree establishing the NCP empowered it to begin developing a PPP framework which will apply across sectors and throughout the Kingdom. While still in its infancy, many consider the establishment of the NCP to be the first step towards developing a solid institutional framework, with a centralised approach to documentation and risk, which will aid the successful and expeditious delivery of PPP projects across the Kingdom. 

A key and immediate challenge for the NCP is the existing regulatory framework for the procurement of "mega-projects" in Saudi Arabia. Having the right regulatory framework in place is essential to providing a sound foundation for regulating a PPP market, ensuring that projects are developed in an appropriate manner and enabling the market to mature in a more structured way. Generally speaking, however, current Saudi procurement laws are outdated and really only appropriate for small-scale procurements. Despite this, at the moment these procurement laws have to be applied to large scale projects, so that the same law applies to procuring a short-term low value services contract as it does to buying a twenty billion dollar metro system. 

In addition, the existing procurement regulatory framework contains a number of obscure risk allocation provisions which the international private sector market sometimes has difficulty accepting, including such matters as private sector limitations on termination rights. This can prove to be a major hurdle for private financing, particularly as industry experts have not yet reached a consensus on how the laws should be applied. 

There is now a new focus on addressing this. As PPP is seen as the procurement model of the future, steps are currently being taken to introduce PPP-specific legislation in the Kingdom to enable PPP projects to be delivered outside the existing procurement framework – a vital step if the NCP mandate is to be achieved. It is worth noting that, to date, a number of other GCC markets have been successful in implementing new PPP laws, which has led to a more stable and successful PPP market. For example, Dubai and Kuwait introduced new PPP laws in 2015 and projects are currently in the process of being procured under both of these legal frameworks. These laws create more certainty for the private sector and have instilled greater market confidence than in those GCC markets which have yet to implement such laws.

Is PPP the future of greenfield procurement in Saudi?

With the establishment of the NCP, the Saudi government has sent a clear message to the private sector: it sees the future of its infrastructure development sitting with private sector investors and will readily look to the privatisation of assets and industries. Despite not having a track record in the development of privatisation models, the NTP makes clear that this is the preferred procurement model for the future, especially for large and complex projects. Consideration will be given principally to PPP structuring, but Export Credit Agency-backed financing and capital raising through bond issues are also on the rise and are likely to increase in prominence in the future.

The attractiveness of PPP structures to the Saudi government is straightforward: the initial capex to create the asset is funded by the private sector, thus reducing the fiscal strain on already stretched budgets by keeping the cost of the asset "off the government's books" for accounting purposes. In addition, PPP allows governments to reduce their technical and operational risk exposure by transferring these risks to the private sector, which is generally considered more adept at delivering major infrastructure on time and on budget.

However, governments (especially regional governments new to the procurement model) often fail to realise that the PPP model of project delivery is not all "upside". The asset is not "free", and the financing arrangements will require the government to guarantee debt pay-out should the project collapse. Also, given the difference in the cost of funds between the public and private sectors, a government will generally pay more over the life of the asset (on a non-risk-adjusted basis) and may also need to provide financial security to lenders in relation to its capacity to pay when it comes to the operational phase. The eventual realisation that the government will be required to make such payments – usually in the form of an availability or performance fee – has been the stumbling block for many regional PPPs and it remains to be seen how these issues will be addressed in the upcoming Saudi programme.

Getting the detail right in terms of risk allocation and payment streams is vital to attracting market interest.  For example, the original Saudi Landbridge project was envisioned as a PPP but its term and revenue risk profile meant that it was not attractive to the market and the project was unable to get off the ground. However, the market has evolved considerably since then and, with the right risk profile, the project could be relaunched as a PPP. The NCP will hopefully take into account the "lessons learned" from this exercise in the development of its approach to project risks. 

Opportunities in the Saudi infrastructure market

It has been reported that the longer term pipeline of planned projects in the GCC region as a whole totals approximately US$2.4 trillion, with Saudi Arabia acting as a market leader.² The KSA is estimated to account for between US$800 billion and US$1 trillion in pipeline projects, the UAE for US$600 billion, Qatar for US$200 billion and Kuwait for US$175 billion. The opportunities presented by such a pipeline of spending are very significant; the forecast for project awards is strong, and 2018 is likely to be seen as the start of a true recovery from the oil crash.

In terms of PPP projects specifically, it is reported that there is a total of US$100 billion in planned PPP projects across the GCC, with Saudi Arabia accounting for approximately US$43 billion of this.³ However, to date, the delivery of PPP projects in the Saudi infrastructure market – other than in ports and airports – has been patchy. It is understood that KSA is likely to rely on PPP to build its major new metro and train projects, including the Makkah Metro and Saudi Landbridge project,⁴ and programmes are also being developed in housing, healthcare and education, as outlined below.

Forthcoming opportunities – sector-by-sector summary

Housing

With Vision 2030 now well under way, the Saudi government is placing a key focus on improving its housing sector. It aims to increase the level of ownership by Saudi families from 47 per cent to 52 per cent by 2020.⁵ Currently, it is reported that there are over 1.5 million Saudis on the waiting list for affordable housing,⁶ a level which is deemed unacceptable by the Saudi government. One way in which the NTP is seeking to address this is through the involvement of the private sector in the financing of housing projects. Despite the fact that, as yet, the PPP model is still very much in its infancy in the housing sector, in the last few years a number of memoranda of understanding (MoUs) have been entered into with developers from Turkey, South Korea and China, as well as with a number of regional developers,⁷ with a mandate to build privately-funded housing. These MoUs are being used as pathfinders for the private sector delivery of Saudi's pressing housing needs.  

In 2017, the Ministry of Housing announced a US$70 million housing project to be located in the eastern district of Riyadh.⁸ Also in 2017, Saudi Aramco announced plans to develop a housing PPP project for workers on the East-West Corridor programme.⁹ Saudi Arabia has also recently committed itself, alongside a Chinese and South Korean consortium, to developing a US$100 billion scheme of one million low cost homes over the next few years.¹⁰

Healthcare

In relation to healthcare, it is estimated that Saudi Arabia will require almost 16,000 hospital beds in 2018 (almost half of all beds in the GCC region) as demand continues to increase. To cope with this increased demand, Saudi Arabia's Health Ministry recently announced the launch of the healthcare privatisation programme, which aims to privatise 290 hospitals and 2,300 primary health centres by 2030.¹¹  

One recent healthcare PPP project in KSA is the US$350 million joint venture between Saudi Trans Sadara Company and China International Development and Investment Corporation Limited to build four hospitals in Dammam, Jubail, Riyadh and Jizan.¹² Another PPP has been agreed between King Saud University and InterHealthCanada for the development of a SAR500 million hospital with 120 beds.¹³ The hospital, which will cover all areas of specialisation, will see King Saud University earn a percentage of the hospital's revenues, regardless of whether the hospital is running at a profit or a loss.¹⁴ In addition, there are plans in development for a new hospital, the King Faisal Hospital, with early indications that it will be procured by way of private sector funding.

Education

Private sector involvement in education is another key item on Vision 2030's agenda, most notably through the "Action Programme" launched by the Minister of Education.¹⁵ It is envisaged that this will shift the government's role from one of providing education services to regulating and monitoring those services.¹⁶ Strategic objectives 7 and 8 of the NTP are particularly relevant to private sector participants, namely: "Develop creative financing methods and improve the educational system's financial efficiency" and "Increase Private Sector Participation in the Education Sector".¹⁷ 

In order to push these objectives forward, in early 2018 Saudi Arabia's Tatweer Buildings Company invited firms to express interest in a contract to design, build, finance, maintain and transfer 60 schools, to be located in Jeddah and Makkah. This request comprises the first wave of KSA's national schools PPP programme, under which it plans to procure a total of 300 schools across the country.¹⁸

Transport

The transport sector in Saudi Arabia is regarded as one of the most significant markets for PPPs in the region. The NCP is currently in the market for advisers to develop a programme of PPP procurements for new metros in each of Jeddah, Makkah, Madinah and Dammam – a multi-billion dollar programme.  In addition,  the development of the King Hamad Causeway (a new road/rail causeway between Saudi Arabia and Bahrain, to be procured by way of PPP) is currently under way¹⁹ with advisers initially anticipated to be appointed in the first quarter of 2018 and for pre-qualification requests to be issued in the second quarter of 2018. However, this initial appointment is not yet in the market so we anticipate that these timelines will slip somewhat.²⁰ In addition, it is understood that the previously ill-fated Saudi Landbridge project is likely to make a reappearance, suitably restructured in order to make it more palatable to the market.²¹

Saudi Arabia has also gained traction in the aviation sector and, following the successful US$1.2 billion Medina Airport PPP project some years ago, the government is aiming to privatise all of its airports by 2020. As a result, the process is currently under way to transfer ownership of these assets from the General Authority of Civil Aviation to the General Aviation Holding Company, which is wholly owned by Saudi's Public Investment Fund, all in an effort to facilitate such privatisation. Turkey's TAV and the local Al-Rajhi Holding Group have been awarded three airport PPP projects at Hail, Qassim and Yanbu.²² Lebanon's CCC, Munich Airport and local contractor Asyad Holding won a fourth PPP bid for Taif International Airport, and local contractor Almabani General Contractors has been awarded the contract for the upgrading of Al-Wajh domestic airport.²³ More opportunities are expected to come to market shortly, with plans to renovate Jouf, Ahsa, Najran, Qaisumah, Turaif and Rafha airports, although the latest information is that these will be pure EPC-type ("Engineer, Procure and Construct") procurements rather than any form of PPP.  There is also talk of the development of a sixth terminal at King Khalid International Airport.²⁴ In addition, Saudi Arabia's Royal Commission for Jubail and Yanbu is expected to issue a request for prequalification in 2018 for a new airport PPP project in Jubail, following a feasibility study conducted by KPMG.²⁵

Renewables

The NTP sets ambitious targets for Saudi Arabia's production of renewable energy: 9.5 GW by 2030 and, in the interim, 3.45 GW by 2020.  Renewable energy is expected to require investments of between US$30 billion and US$50 billion by 2023.²⁶ The government is currently tendering a number of projects, including a 400 MW wind power plant in Dumat Al Jandal.²⁷ This wind plant is part of the first round of the country's renewables programme. It is envisaged that such renewables projects will provide many interesting PPP opportunities for investors in the future.²⁸ 

The Saline Water Conversion Corporation, a state desalination provider, has recently signed a US$422 million contract with South Korea's Doosan Heavy Industries & Construction for the engineering, procurement and construction of an independent desalination project. This project, one of eight planned in the Kingdom, is required to meet the rising demand for clean water, which needs to be increased by 2.2 million cm/d by 2020.²⁹ The project is to be delivered as a PPP.

The future of infrastructure in Saudi Arabia

The announcement of Vision 2030 was a clear and decisive move by the Saudi government signalling its expectation that private sector participation in the future development of its much-needed "mega" infrastructure projects is set to increase significantly. The renewed focus on PPP as the favoured delivery model for private sector participation undoubtedly increases opportunities for the private sector in the Kingdom. However, in order to make the Saudi market a genuinely attractive one for international investors, the Saudi government will need to ensure that the structures it adopts for PPP projects (in terms of risk allocation, payment streams, etc.) reflect international market norms, so that potential investors are encouraged to focus on the Saudi market rather than on other global opportunities.

Co-Author: Aneesa Khan

1.    Jonathan Reardon, "Saudi Vision 2030: What Does It Mean for Your Industry?", (September 2016).
2.    Oscar Rousseau, "GCC construction pipeline worth over $2tn" (February 2018).
3.    Arabian Business, "Total value of PPPs in Saudi Arabia nears $43bn" (November 2017).
4.    The NCP is currently procuring professional support services in order to develop a pipeline of rail and transport projects through PPP, projects with a combined value in excess of US$50 billion.
5.    Source: Vision 2030, English translation, p28.
6.    Ministry of Housing, "Housing Ministry plans 462-unit project for Riyadh" (March 2017).
7.    Jamal Hassan Ghaznawi, "PPP can help solve Saudi housing shortage" (March 2017).
8.    Ministry of Housing, "Housing Ministry plans 462-unit project for Riyadh" (March 2017).
9.    Andrew Roscoe, "Saudi Aramco plans housing PPP project" (December 2017).
10.  Katie Paul, Marwa Rashad, "Saudi Arabia says close to major deals in $100 billion housing scheme" (May 2017).
11.  IMTJ "Saudi Arabia launches healthcare privatisation programme" (February 2018).
12.  Gulf Business "Healthcare in Saudi Arabia – where are the opportunities" (May 2017).
13.  Arabian Business, "Saudi-Canadian PPP to build $133m hospital" (May 2016).
14.  InterHealth Saudi Arabia, "King Saud University Endowment" (2017).
15.  Mena Herald, "Saudi Minister of Education launches Action Program to strengthen Public-Private Partnership in line with Vision 2030" (January 2017).
16.  Francis Patalong, "Vision 2030 and the Transformation of Education in Saudi Arabia" (August 2016).
17.  National Transformation Program 2020 (pages 60 and 61).
18.  Reuters "Saudi government announces tender to build 60 schools" (January 2017).
19.  Reuters, "Saudi and Bahrain planning new road and rail causeway" (June 2017).
20.  Reuters, "Saudi and Bahrain planning new road and rail causeway" (June 2017).
21.  Jennifer Aguinaldo, "Team nears completion of Saudi Landbridge design" (March 2017).
22.  Michael Fahy, "TAV and Al Rajhi land two Saudi airport deals" (April 2017).
23.  Jennifer Aguinaldo, "Contractor wins Saudi Arabia airport package", meed.com (May 2017). 
24.  Jennifer Aguinaldo, "Saudi Arabia Announces new airport terminal", meed.com (July 2016). 
25.  Jordan Bintcliffe, "King & Spalding advises on Jubail airport expansion PPP", ijglobal.com (July 2017).
26.  Fortune Editors and Reuters, "Saudi Arabia Will Invite Bids for Renewable Energy Projects in April" (February 2017).
27.   IJ Global, "Dumat Al Jandal Wind Farm (400MW)PPP" (March 2018).
28.  JD Supra, "Saudi Arabia PPP Update – Vision 2030" (April 2017).
29.  Steel Mills, "S. Korean contractor wins Jeddah desalination EPC contract worth USD422 min" (April 2017).