The Potential Of Public Private Partnership In KSA

The release of the National Transformation Program (NTP) in 2016 has generated a surge of interest in public private partnership Saudi.  The NTP is the product of ambitious economic reforms aimed at diversifying Saudi’s economic base away from oil. With oil prices lingering around USD 50 per barrel, the government has recognised the urgent need to create alternative sources of funding.

The NTP sets individual targets for 24 ministries and public agencies to attract private sector investment by 2020, with this short timeframe acknowledging the vital role of the private sector in achieving the Kingdom’s ambitious plans. The government also hopes this will also achieve higher efficiencies, materialisation and innovation in delivering basic infrastructure such as health, education and housing, all of which are currently under pressure as a result of heightened demand.  

Privatisation

The government has made a number of announcements that will  provide the private sector with an unprecedented stake in sectors and projects previously dominated by the government, including options to privatise existing facilities in the healthcare, education  and aviation sectors by the end of 2017.

The involvement of the private sector in government owned projects is not a new phenomenon in Saudi. However, involvement has so far been limited to short-term service contracts within the infrastructure and energy sectors. The Prince Mohammad bin Abdulaziz Airport (PMAA) was the first  full PPP projects completed in Saudi (in 2015). The release of the NTP has changed the landscape and opened up a wide range of new opportunities in new sectors, with a resulting change in the nature of PPP models used.

While PPP models offer attractive opportunities for both sides, there are also risks to consider. PPP procurements can take longer than traditional ones, the private sector would be taking on a significant share of risk, which will affect pricing negotiations. The potential risks are heightened by the current lack of legislation governing PPPs.   

Improved regulation

MEED projects estimates the value of PPPs in the pipeline in Saudi amounts to approximately USD 42.9 billion (SAR 160.9 billion), the highest in the MENA region. With an expanding pipeline spanning many sectors of the economy, clear regulations need to be in place to provide the level of certainty and returns required by private investors.

The Saudi Government has taken measures to improve the regulatory environment by establishing the National Center for Privatisation to oversee the process. Additionally, the Saudi Arabian General Investment Authority (SAGIA) has changed the regulations to permit 100% foreign ownership of companies in sectors such as retail and wholesale, engineering, health and education.

While challenges lay ahead, 2017 represents a turning point for PPP’s in Saudi. The combination of political will and the improving regulatory environment, have set the scene for more investment. The speed with which this potential can be realised will be dependent upon detailed financial negotiations but we expect to see a rise in the level of investment attracted over the next 12 months.     

This article is a summary of a new report that JLL is currently preparing on the growth of the PPP sector in Saudi, which is scheduled for release in November.