Although there is clearly senior policy appetite for foreign investment, PPPs and privatisation, the framework for large-scale PPP projects in the Kingdom is yet to be developed. Save for the Madinah Airport PPP project which reached financial close in 2012, to date, Saudi Arabia has almost exclusively relied on traditional procurement when procuring large infrastructure projects.
To fully implement PPP-style procurement will require careful consideration of some key bankability issues, such as the legislative and regulatory framework (including in relation to foreign investment) and the creditworthiness of the procuring authority.
PPP procurement would, however, allow Saudi Arabia to benefit from access to private sector finance while maintaining control of project cost, quality and standards. Public sector control is expected to be a critical feature of the developing PPP model in the Kingdom, as it is (to a greater or lesser extent) in all regional models. As in other emerging PPP markets, international sponsors may experience frustration with issues such as inflexible specification requirements (typically driven by traditional procurement methodology) and stringent oversight of construction, testing and operational issues.
It is also expected that Shari'ah-compliant PPP structures, such as a design, finance, build, lease and transfer model will be a key requirement. International sponsors and lenders will need to develop quickly a comprehensive understanding of these models (which are unusual in most developed markets) and their strengths and weaknesses. Moreover, in sectors like airports which are considered strategic national assets, traditional Islamic finance structure models (such as the ‘procurement model’) may not be appropriate due to issues related to ownership of strategic national assets and innovative models will need to be developed and tested.
All PPP projects in Saudi Arabia will need to be financed, constructed and operated pursuant to the principles of Saudi law. Many international sponsors and lenders have become comfortable with such laws. However, an expanded PPP program will necessarily involve sponsors, contractors and lenders who may not have prior experience with the Saudi legal and judicial framework.
Obtaining and maintaining government approvals, and compliance with licensing, employment, tender and procurement laws have historically been a costly and time consuming part of doing business in the Kingdom. These issues together with issues concerning enforceability of key protections will have to be addressed in order to develop a scalable and robust PPP structure. Experience suggests that, in the absence of an empowered PPP unit to facilitate and manage the different processes, these issues are capable of causing frustrating delays in the procurement, financing and development of PPP projects in Saudi Arabia.
Finally, while adopting a legal PPP framework would be consistent with Saudi’s bold objectives, no plans to implement legislative reform have yet been announced. New laws and regulations dealing specifically with PPP procurement are not essential. However, sponsors and lenders may, in light of some of the challenges referred to above, consider the introduction such legal infrastructure as a welcome and positive step.