Privatisation framework supports cooperation between the government and investors in Saudi Arabia

While Saudi Arabia’s deep reserves have helped it mitigate the negative effects of the recent lowoil-price environment, the link between fiscal performance and global energy prices has long been acknowledged as a challenge to stability. Ramping up private sector investment, both local and foreign, is therefore a key pillar of the Kingdom’s Vision 2030 development strategy. Under this roadmap, Saudi Arabia aims to establish an environment where domestic and global investors can effectively direct capital towards large-scale development projects. The government also intends to reduce its role in driving economic growth with fiscal spending and sell off some of its key assets in 16 sectors, including in health care, education, aviation, the postal service, agriculture and the oil industry.

In the short term, a number of targets have been established for 2020. These include raising up to SR40bn ($10.7bn) through the sale of government assets, while generating a savings of $1.2bn by reducing public operating expenses. The government’s separate plan to raise another $100bn by selling off a stake in national oil giant Saudi Aramco, meanwhile, has been the subject of global interest for the past two years. Its recent conclusion was a symbolically significant moment for the Kingdom’s broader efforts to increase privatisation.

Record Float

The partial floatation of Saudi Aramco, although a success, highlighted some of the challenges of transferring public sector assets into private hands. In 2018 the Saudi Stock Exchange (Tadawul) was ready to receive what was at the time the world’s largest initial public offering (IPO), but the timing of the deal was thrown into question by an unfavourable economic backdrop. Global trade concerns, regulatory changes and regional politics combined to dampen IPO sentiment across the MENA region: that year around $2.9trn was raised through IPOs in the region, marking a 24.5% decline on the previous year. As such, the government waited until the end of 2019 to stage the flotation.

More than 20 international financial institutions orchestrated the deal, including US companies Goldman Sachs, JPM organ Chase & Co, Morgan Stanley and Citigroup. The final form of the offering saw the sale of less than 2% of Saudi Aramco on the domestic market rather than the previously mooted 5% on global platforms. Nevertheless, the IPO valued the company at $1.7trn and claimed the record for the world’s largest share offering. In February 2020 Saudi Aramco was reported to be making early preparations for an international listing; however, the challenging economic backdrop brought on by the Covid-19 pandemic and falling commodity prices make a float on one of the world’s leading exchanges unlikely in the short term.

Public & Private

The Saudi Aramco deal, while garnering much attention in 2019, marked only part of the Kingdom’s broader privatisation strategy. Over the long term, the reality of private sector involvement on the domestic economy will likely have considerable transformative effects. This effort is being spearheaded by the National Centre for Privatisation and Public-Private Partnerships (NCP), which was established in 2017 with a mandate to coordinate greater private sector involvement, as outlined in the Vision 2030 development plan.

While floating pubic assets on the Tadawul remains an option for the government, the NCP’s initial focus has been on a more cooperative approach between government and investors. Public-private partnerships (PPPs) have become increasingly common globally, as states have sought to reduce capital costs and shift development risk and managerial responsibility onto companies. In other markets they have been applied successfully to a wide array of infrastructure projects, including roads, telecommunications systems, schools and hospitals. In the GCC, however, the role of PPPs has largely been confined to the power and water sectors, despite the attempts of regional governments to deploy the concept in other sectors.

Saudi Arabia has succeeded more than most countries in the GCC in its efforts. The first use of the model in 2011 allowed for the financing, development and operation of the Prince Mohammed bin Abdulaziz International Airport expansion in Medina. The project was widely considered to be a success, and it paved the way for a rapid uptake of the PPP model in the Kingdom. By 2017 Saudi Arabia had emerged as one of the most active PPP arenas in the Gulf, with a total of 18 projects under way or completed using the model, for a total value if $42.9bn, according to a report by real estate company JLL and global law firm DLA Piper.

New Framework

All of these projects were carried out in the absence of a comprehensive legal or regulatory framework for PPPs, and generally utilised simple build-operate-transfer, or BOT, arrangements. Seeking to accelerate the PPP pipeline, the NCP is overseeing the creation of a dedicated PPP framework, beginning with a Privatisation Projects Manual. According to the NCP, the manual will be subject to continuous review, with updates added as needed to ensure that the PPP programme is consistent with international best practices.

The NCP also issued a draft Private Sector Participation Law in July 2018 regulating both PPP projects and sale-of-asset transactions. The proposed legislation, which was being amended in the first half of 2020 in preparation for final approval, offers a number of advantages to PPP participants, including exemption from Saudiisation targets, which aim to increase the employment of Saudi nationals in the private sector. Property regulations are being relaxed, and foreigners may soon be allowed to own real estate in the country, according to the proposals. Permit bidders for PPP contracts will also be granted the right to appeal contract awards – an effort to increase systemic transparency and attract a wider range of investors.

Building Momentum

Until the law is finalised, projects will continue without a dedicated PPP framework. The proposed legislation does not address the challenge of accurately assessing the return on an investment in the absence of demand data. Nevertheless, as the NCP drives the government’s privatisation agenda, PPP opportunities are being generated at a regular pace and being met with high levels of interest. In 2019 the government succeeded in closing seven PPP transactions, including the provision of kidney dialysis centres in multiple regions; phase three of the Shuqaiq Independent Water Project; a wastewater treatment plant in near Dammam; the Jeddah Airport 2 Sewage Treatment Plant project; the Taif Independent Sewage Treatment Plant; Saudia Medical Services Centre in Jeddah; and the construction of container terminals at Jeddah Islamic Port.

Momentum continued into early 2020, starting with the award of a 25-year concession in King Khalid International Airport in Riyadh. According to the terms of the deal, SATS Saudi Arabia Company, a subsidiary of the Singaporean ground-handling and in-flight service provider, will build a new cargo terminal over two phases, with the first phase expected to be completed in 2022. The following month, a consortium comprised of French electric utility company Engie and Mowah Company, one of the largest private water desalination firms in the Kingdom, was awarded a contract for the development, design, financing, construction, commissioning, operation and maintenance of the Yanbu-4 independent water project. The new facility will utilise reverse osmosis seawater desalination technology to produce up to 450,000 cu metres of potable water per day.

Looking Ahead

The significant pipeline of PPP opportunities includes a number of projects that have been approved for activation, and a longer list of those that have been green-lighted for a later stage. In March 2020 the Ministry of Health invited expressions of interest for the Al Ansar Hospital in Medina, the first transaction to be launched under the establishing and operating hospitals PPP initiative in the Vision 2030’s privatisation programme. The new hospital has a planned clinical capacity of 244 beds, with annual visits expected to exceed 400,000. Other projects slated for the expression-of-interest stage in early 2020 included five independent water or sewage treatment plants, a housing project at King Faisal Specialist Hospital and Research Centre, outsourced radiology and medical imaging services, educational buildings in Jeddah and Makkah, and veterinary vaccine centres. The proposed PPP law should help to facilitate the progress of these development by providing a clearer legislative platform. Its eventual success, however, will ultimately depend on its final implementation.