Developers have been waiting years for public-private partnerships (PPP) to take off in the GCC’s largest market, Saudi Arabia. The stars have never been better aligned, but numerous questions remain over how the kingdom’s programme will take shape.
On a macro level, Saudi Arabia definitely has to deliver on PPPs, says Antoine Cousin, partner at the US White & Case and a veteran of Saudi PPP projects. On the back of very strong demographics (about 50 per cent of the population is under the age of 20), and lower oil prices, and also political pressure, the kingdom has to, and has signalled its intent to, start delivering on more social infrastructure PPPs.
Saudi Arabia has indicated its intention to move towards PPP in the Vision 2030 and National Transformation Programme. But it is still unclear how this will happen and under what legal framework.
There is already a framework for PPP, although few people know about it, says Cousin. There are privatisation guidelines from the early 2000s, which could provide a basic framework. This law says that if any government entity or line ministry wants to procure a PPP project, they would have to put together project documents and tendering rules, and submit them to the Supreme Economic Council for approval. The council used to be chaired by the king, so once it endorsed the project the king had effectively endorsed it.
This allowed several PPP projects to go ahead, most notably the Prince Mohammed bin Abdulaziz airport (PMBAIA) in Medina. However, recent PPP projects have run into problems due to the governments unwillingness to take on certain risks such as traffic.
For example, the General Authority of Civil Aviation (Gaca) declined to offer a hard guarantee or soft traffic allocation for the Taif airport PPP, resulting in low developer interest. Gaca then tried to include less profitable regional airports in the deal, which is currently being restructured.
Since the Supreme Economic Council was replaced by the Council of Economic & Development Affairs in 2015, it is also unclear how the existing guidelines would function.
As a basic framework, it was good as it provided flexibility and room for manoeuvre, says Cousin, who advised the Saudi government on the PMBAIA project. However, the Supreme Economic Council has now been disbanded, so it is not so clear what the PPP approval process is anymore. Therefore, it probably makes sense for the kingdom to put together a more comprehensive PPP framework.
Lawyers and consultants have been expecting a new PPP framework in the kingdom since mid-2016. Cousin advocates for a simple set-up.
They can enact simple legislation allowing for PPP projects, setting aside the traditional public procurement law, which, as in many countries, is very prescriptive and not suitable for PPP, he explains. The framework would set out the fundamental requirements of PPP projects, the fundamental provisions of contracts, and a transparent, streamlined procurement process.
Establishing PPP frameworks and units is taking neighbours Oman and Qatar about a year, delaying schemes. Saudi Arabia has already experienced nine months of postponements as it realigns its entire economic strategy to low oil prices, restructuring a significant number of government entities.
There is often tension between implementing things quickly (due to the infrastructure and demographic requirements), and putting in place a comprehensive, replicable PPP framework, says Cousin. In fact, you can quite successfully turn to, for example, the housing or health ministries or Gaca and get the relevant stakeholders to implement PPPs quite quickly, without a large, complex, ambitious, all-encompassing institutional overhaul. That said, establishing a multi-sector PPP unit would certainly prove useful in the long run, provided it is adequately staffed (including with senior PPP experts) and is assisted by specialist transaction advisers.
A few small yet bankable projects could get lenders and investors comfortable with the market, despite concerns over transparency and standardisation.
Centralised PPP unit
Based on experience, putting a centralised PPP unit in place is not always the easiest and most optimal route, he explains. Again, getting the right staff in place can take some time, and there may be conflicting prerogatives. A newly established sectorial or multi-sector PPP unit has to find a modus operandi with other government stakeholders, engage with local and international bidders, progressively assert itself and find its place; and then it can be really helpful.
As for projects outside the utilities sectors, a clear pipeline has yet to emerge in Saudi Arabia. Some progress is being made in social infrastructure, light rail and airports.
The requirements for healthcare, housing and education are massive, so in principle the kingdom should procure PPP in these three sectors, says Cousin. Moving from the traditional public procurement mindset and embracing PPPs inevitably means relinquishing some control, but I understand the political will is there.
|Antoine Cousin is a partner at White & Case|