Saudi Arabia's draft public-private partnership law could boost economic activity by addressing key investor considerations

 

While firming oil prices have allowed Saudi Arabia to boost state spending, energise the economy and narrow the fiscal deficit in 2018, the Kingdom’s longterm strategy is built on driving growth through private sector activity rather than the public purse. Attracting sufficient levels of investment to bring about this change in economic model, however, is a challenge. According to the “World Investment Report 2018” by the UN Conference on Trade and Development, Saudi Arabia secured $1.4bn in foreign direct investment (FDI) in 2017, down from $7.5bn the year before, and a relatively modest figure even in the context of a global decline in FDI since the 2008-09 financial crisis.

Early Adopter

One way in which the Kingdom intends to encourage greater inflows of FDI is through an enhanced public-private partnership (PPP) framework. These legal arrangements between government entities and private parties have become increasingly common globally, as governments have sought to reduce capital costs and shift development risk and managerial responsibility onto the private sector. Largescale infrastructure projects such as hospitals, schools, roads and telecommunications systems are all common targets for PPP contracting, but in the GCC the power and water sectors have also emerged as popular recipients of funding through the model.

The Kingdom has performed better than some regional peers in terms of the variety of its PPP projects. The first true PPP project was signed in 2011, covering the financing, development and operation of the Prince Mohammad bin Abdulaziz Airport expansion in Medina. The success of that development, which was carried out in the absence of a clear legal framework and using a build-operate-transfer model, led to a raft of similar undertakings. As a result, the Kingdom has emerged as one of the most active PPP arenas in the region: by 2017 Saudi Arabia had a total of 18 projects under way or completed using the model, for a total value of $42.9bn, according to a report by real estate company JLL and law firm DLA Piper titled “Public Private Partnerships: A New Approach to Financing Real Estate Development in KSA”.

New Deal

A range of PPP structures exist and the Kingdom has employed a few different contracts. Early airport developments left ownership with the government’s General Authority of Civil Aviation, while more recent deals in health and education have seen the state retain only a regulatory role. The liberalising nature of the long-term development plan Vision 2030 suggests that the trend will be towards a higher degree of private sector ownership in future PPPs, however, a number of hurdles must be overcome to achieve this.

As well as any country-specific factors, the principal difficulty in PPP arrangements from an investor’s point of view is correctly assessing the return on investment in the absence of demand data. Saudi Arabia’s proposed new PPP law, the draft of which was revealed in July 2018, does not address this concern directly, but it does provide a clear legal framework for PPP projects and details a number of incentives – elements that allow investors to have a more definite idea of the operating environment and various costs. The new law also tackles one of the most problematic facets of the local market by allowing for a possible exemption from Saudiisation targets, by which a certain ratio of employees in every position must be Saudi citizens. Foreigners would also be allowed to own real estate in the country outside of Makkah and Medina, but able to lease real estate in the two holy cities for specified periods. Furthermore, under the draft law bidders for PPP contracts are granted the right to appeal awards by the government in an effort to increase transparency and attract a wider range of investors.

The draft PPP law is intended to establish a clearer legislative platform and help guide the economy to a more private sector footing. As such, the new law is a positive development, but its success will ultimately depend on its final form and effective implementation.

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