Saudi Privatisation Law

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Saudi Arabia has adopted a new law governing public private partnerships (PPPs) (the Privatisation Law), which will enter into force 120 days after its publication in the Official Gazette.  It follows a consultation process and the publication of a draft privatisation law in 2018 (the Draft Law), as well as the launch in 2017 of the National Centre for Privatisation & PPP (NCP) to enable privatisation and PPPs under Saudi Arabia's Vision 2030.

As set out in our insight dated 17 March 2021, although Saudi Arabia has long implemented PPPs and privatisation projects, prior to the Privatisation Law, no formal laws specifically governed PPPs. Unless exempted, such projects historically fell under the ambit of the Government Tenders and Procurement Law.

The Privatisation Law aims to increase private sector participation in infrastructure projects; support PPPs; provide public services through private enterprise; privatise public services; reduce government spending; and develop procedures for implementing PPP and privatisation projects. The Privatisation Law also seeks to promote transparency, fairness and integrity in tendering PPP and privatisation contracts.

By facilitating PPPs and private sector participation in PPPs, expanding investor flexibility with respect to dispute resolution and allowing the NCP to issue rules regulating tenders and procurements for contracts, the Privatisation Law will facilitate foreign investment in Saudi Arabia. Moreover, in addition to growing foreign investment, it is likely to encourage additional local participation in projects and is a positive step towards enabling the implementation of Saudi Arabia's ambitious PPP and privatisation programme in the years to come.

Some of the key provisions of the Privatisation Law are set out below. For purposes of this briefing, we have focused on PPPs.

Effectiveness and term

A PPP is defined in the Privatisation Law as "a contractual arrangement relevant to infrastructure or public service, which results in a relationship between the government and the private party containing the following elements…".

The elements required to meet the PPP test are:

  • the private sector party must perform works including two or more of designing, constructing, managing, operating, maintaining or financing assets;
  • there must be a qualitative or quantitative risk distribution between the government and the private sector party must exist;
  • payments must be performance-based;
  • the term of the project must be for more than five years.

In addition to the minimum five-year term, a PPP project term must not exceed 30 years, including any renewal or extension (article 20) unless approval is received to extend the term and any renewals beyond 30 years.

The possibility of the PPP term extending beyond 30 years may be helpful, given the complex nature and size of some of Saudi Arabia's planned PPP projects.

Further, the Board of the NCP may consider any project that relates to the infrastructure, public sector or a transfer of assets project to decide whether to classify it is as a PPP project.

Approval of projects

Any contract entered into without first obtaining the approval of the Competent Agency will be void, unless subsequently approved by the Competent Agency. A private sector party entering into a PPP project will therefore want to confirm that the agency responsible for the project has the requisite powers and authority in accordance with the Privatisation Law and its implementing regulations.

In accordance with article 2, the Council of Ministers will issue regulations to determine the agency (or agencies) that will have the authority to issue the required approvals for PPP projects, known as the Competent Agency, including those required:

  • to offer and award projects;
  • to enter into contracts;
  • to exercise authority or other tasks in accordance with the law; and
  • for the controls of exercising its authorities and tasks.

The Council of Ministers will also issue regulations to determine the agency (or agencies) that performs the tasks of studying and preparation of privatisation projects, with the authority to offer and award projects; enter into contracts; exercise any authority; or other tasks subject to the Privatisation Law. Such agency is referred to as the Executive Agency under the Privatisation Law.

Clarifying an earlier ambiguity under the Draft Law, the Privatisation Law will not apply to contracts entered into prior to the Privatisation Law coming into force and effect, unless the applicable project contract is subsequently amended, extended or renewed. For any PPP project for which regulatory approval was issued before the enforcement of the Privatisation Law, but where the contract is yet to be made, such contract will be subject to applicable regulatory provisions at the time of approval, unless the Board of the NCP decides otherwise. A party to a project with regulatory approval should therefore seek confirmation as to whether the applicable approvals will continue to apply.

Land

The Privatisation Law offers support for the acquisition of land, which is a material requirement for private sector investors and a key bankability issue for lenders. The Board of the NCP will, in coordination with the State Properties General Authority, set the provisions regulating the state leasing and vacating a property for the purposes of PPP projects. In accordance with article 38, properties may be expropriated or compulsorily purchased if this is necessary to accomplish a PPP project. This provision is subject to the laws of expropriation and compulsory purchase for the public benefit. There is already an established process of eminent domain in Saudi Arabia.

Guarantees by the government

Another key bankability issue for lenders in PPP projects is the subject of credit support from the government. Article 8 of the Privatisation Law provides that the Ministry of Finance will approve and provide the financial and credit support required for a PPP project stipulated in the applicable contract, including making any arrangement or agreement that is necessary for such support. In addition, article 10 states that a resolution can be issued by the Council of Ministers, or a delegate, based on a recommendation from the Ministry of Finance, where financial and credit support may be provided for a PPP project if this is not stipulated in the main contract or relevant contracts pursuant to provisions of the law.

Consideration

Subject to the approval of the Competent Agency, the private sector party to the PPP project can be granted the right (under article 24 of the Privatisation Law) to:

  • collect consideration directly from the beneficiaries for the works and services it provides. The PPP contract will determine the relevant requirements;
  • collect public revenues, including fees and taxes, for the account of the public treasury of the state. The PPP contract will determine the relevant requirements and the methods to pass the collected amounts to the public treasury; and
  • collect public revenues or part of such revenues for its account, subject to the PPP contract.

Article 24 prevents the private sector party from collecting any additional financial consideration, unless the PPP contract permits otherwise.

This is a helpful direction for private investors, providing a legal basis for potential sources of revenue. 

Assignment and subcontracting

As is typical in PPP projects, article 25 prohibits the private sector party from totally or partially assigning the PPP contract to a third party without written consent.

The Privatisation Law grants permission for the private sector party to enter into subcontracts to execute any of the works relevant to the project, provided the private sector party will remain responsible. This right may be removed by the applicable contract and therefore will be subject to analysis on a case-by-case basis.  It is typical for the private investors to subcontract EPC works and operation and maintenance/facilities management services.

Failure to perform

Article 27 provides that the relevant contract may include fines for delays and penalties or compensation for the failure of any of its parties in performing their contractual obligations.  

The method of calculation (i.e. whether based on a lump sum, a percentage of the contract price, or otherwise) should be set out and agreed in the relevant contract.

As is often found in regional PPP laws, the contract will grant the Executive Agency the right to step in and perform, by itself or through a third party, the PPP contract, to ensure the continuity of services in the event the private sector party fails to fulfil its obligations under the contract.

Termination

Article 28 of the Privatisation Law sets out the required termination provisions for inclusion in a PPP contract. Termination is a key bankability requirement for lenders and, while most of the grounds are typical provisions for PPPs, it should be noted that there is an express ground of termination for public interest.

Competition

In coordination with the General Authority for Competition (GAC) and other relevant agencies, the Board of the NCP is entitled to set policies to eliminate monopolies in PPP projects. Competition is an increasingly important topic in the region and we understand that the GAC has become more proactive in recent years. The private sector should therefore monitor developments in this area.

Dispute resolution

Article 2 provides that disputes arising from a PPP contract may be settled through arbitration, whether inside or outside Saudi Arabia, according to the rules issued by the Board of the NCP. There is an express provision permitting PPP contracts to include a clause for resolving any dispute arising from the contract through arbitration, following approval of the Competent Agency (article 34.2).

Closing comments

Much of the detail of how the Privatisation Law will be applied will be set out in the implementing regulations, which are yet to be issued and will include a number of the critical provisions necessary for the enforcement of the Privatisation Law. More analysis will therefore be required once the implementing regulations have been issued.

Whilst the implementing regulations are yet to be issued, the issuance of a framework for PPP projects under the Privatisation Law is likely to attract the investment sought by Saudi Arabia and is a positive step forward.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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