Transforming Saudi Arabia's real estate sector through private sector involvement

Saudi Arabia is experiencing an unprecedented scale and pace of real estate development. To meet the ambitious targets outlined in Vision 2030, various delivery models and collaboration between public and private sector resources are essential. PPPs have proven to be an effective way to enhance the private sector's role in helping governments achieve objectives.

PPP is a long-term contractual agreement in which private sector institutions are typically involved in financing, designing, constructing, and sometimes operating public assets.

While the PPP model in Saudi Arabia is not new, its application has mainly focused on infrastructure projects such as roads, bridges, ports, and airports. In recent years, however, PPPs have gained traction in real estate project delivery. This trend initially began with schools, hospitals, and other projects traditionally managed by the state, but it is now expanding to various real estate market sectors. A number of different PPP formats are being utilised, including Design-Build (DB), Design-Build-Finance-Maintain (DBFM), Design-Build-Finance-Operate-Maintain (DBFOM) Operation and Maintenance Contracts (O&M), Build-Own-Operate (BOO), Build-Own-Operate-Transfer (BOOT), Buy-Build-Operate (BBO), Build-Lease-Operate-Transfer (BLOT), Operation License, and Finance Only.

Benefits of PPP

PPPs are increasingly applied in Saudi Arabia, offering numerous benefits through government and private sector collaborations. Key advantages include attracting higher levels of foreign investment, improving public services, and diversifying the economy beyond its heavy reliance on oil.

Capital efficiency: One of the most immediate benefits to the Kingdom is capital efficiency. By leveraging private sector investment, the government can undertake large-scale projects without immediately straining its budget. Not only is the CAPEX model more refined, but more focus is certainly placed on OPEX models and the overall whole life-cycle costs. This is particularly important as Saudi Arabia seeks to modernise its infrastructure and real estate in line with Vision 2030's broader economic transformation goals.

Accelerated project delivery: Another significant advantage is the speed at which projects can be delivered. With access to capital, higher risk tolerance, focus on innovation, and profit-driven incentives structure, the private sector can deliver projects more quickly and efficiently. Earlier contractor involvement is a must in assisting and finalising the expected outcome of delivery. A key aspect of PPP is that change in design during construction is often less likely to happen, and therefore, the end dates are more certain to be achieved. In short, increased private sector participation is essential for meeting the tight and ambitious timelines outlined in Vision 2030.

Enhancing quality and innovation: Greater private involvement has the potential to shorten, if not be more certain, on delivery timelines and typically leads to better quality and more innovative projects. Competition among private companies drives the adoption of advanced technologies and best practices, ensuring that the completed projects are functional and state-of-the-art.

Job creation: The private sector has historically taken a backseat in delivering major infrastructure and real estate projects in Saudi Arabia. However, as it begins to assume a more prominent role, there will be an increase in private-sector job opportunities in areas such as finance, legal, construction, operations, and management. This shift supports two key objectives of Vision 2030: economic diversification and employment growth in the non-government sector.

Risk sharing: Another attractive aspect of PPPs is their ability to share financial and operational risks associated with large-scale public projects between the public and private sectors. This means the government doesn't bear the entire burden of unforeseen costs or delays. Such risk-sharing safeguards public funds and encourages private investors to be more efficient, knowing that risks are shared and mitigated.

Early contractor engagement: PPPs also allow for earlier engagement of contractors in the project design phase, providing them with greater flexibility to innovate and influence decisions. It enables contractors to make more informed choices on delivery timelines and construction methods, increasing the likelihood of projects being completed on time and within budget.

Challenges and lessons

While Saudi Arabia has made significant strides in adopting the PPP model in recent years, there are still lessons to learn from more mature markets globally where PPPs are well-established.

Recent changes, such as the introduction of the PSP Law, are significant steps forward, but a more solid foundation of laws, regulations, and best practices is essential to attract sustained private sector interest. Investors need clear, reliable rules to reduce risk and enhance their returns.

Saudi Arabia is also in the early stages of building capacity within its government and local private sector institutions to effectively manage and oversee PPP projects. While private companies bring technical expertise and efficiency, the public sector must be equipped with the knowledge and tools to manage these partnerships. This includes the ability to negotiate contracts, monitor progress, and ensure accountability and transparency. As the country develops these competencies, it will improve the effectiveness of its PPP framework and increase the success rates of this required private sector investment.

Future of PPPs in the Kingdom

Looking forward, Saudi Arabia's commitment to expanding the use of PPPs is clear. The government has announced its intention to roll out more than 200 structured projects worth $50 billion through the National Center for Privatization and PPP (NCP). These projects span healthcare, education, transportation, and renewable energy sectors. More ambitious investments, characterised by joint ventures with different companies controlled by the Public Investment Fund (PIF), are also included.

Giga projects like the $500 billion Neom Megacity, Red Sea Global, Qiddiya, ROSHN, King Salman Park, and Diriyah would all greatly benefit from private sector participation in their development and operational phases. As the country continues to refine its regulatory environment, expand private sector participation, and encourage international collaboration, the scale and sophistication of its PPP projects will grow.

The upcoming FIFA World Cup in 2034 could act as a catalyst for the greater use of PPP arrangements in the Kingdom. Maximising the potential benefits of this single event will require the creation of not just football stadiums but also supporting facilities, infrastructure, and mixed-use developments surrounding multi-purpose arenas. These projects would be an ideal opportunity to create PPP structures to attract the experience and expertise (as well as financial investment) from Asia, as well as the Middle East, Europe and the Americas.

As Riyadh prepares to host the World Expo 2030, numerous opportunities will emerge across sectors, including infrastructure, accommodation, renewable energy, tourism, and technology, encouraging private sector participation in large-scale, sustainable initiatives. Supporting the Expo's implementation and its supporting elements, such as hospitality, may also drive forward Vision 2030 initiatives, particularly as the government reviews and adjusts current investments in response to both success and growing demands.

In conclusion, while Saudi Arabia is still developing the necessary legal framework, the case for a greater need for private sector investment through the use of PPPs is compelling, and the potential benefits are immense. With more efficient use of government capital, faster delivery times, increased job creation, and greater risk-sharing, PPPs offer a strategic way to deliver the range and scale of real estate development required to support the Kingdom's future economic growth. In doing so, Saudi Arabia has the potential to become a global leader in PPPs, unlocking new opportunities for economic growth and social advancement that the public or private sector would be unable to achieve alone.