Introduction
On 25 April 2016, Deputy Crown Prince Mohammed bin Salman announced Vision 2030, the Kingdom of Saudi Arabia’s vision for life without crude oil. It’s fair to say that the announcement has been positively received, both locally and internationally with the IMF commenting that the vision was “exactly the kind of transformation that an economy as that of Saudi needs.” The question, however, is where next and how will such a root and branch program of economic reform be implemented in a way that achieves the government’s goals and simultaneously attracts local and international investment – all within a relatively short time frame.
The answer seems to lie in the introduction of enabling legislation and the establishment of robust and dynamic governmental and quasi-governmental institutions that will champion the implementation of the vision. Realistic and manageable implementation steps should now be put in place with a view to establishing some early identifiable ‘wins’ and developing momentum that creates real credibility. This article examines what those next steps might be.
Before going into further detail, it is worthwhile summarizing the key economic aspects of Vision 2030.
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Increase non-oil government revenue from SAR 163 Billion to SAR 1 Trillion;
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Increase the private sector’s contribution from 40% to 65% of GDP;
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Raise the share of non-oil exports in non-oil GDP from 16% to 50%;
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Increase foreign direct investment from 3.8% to the international level of 5.7% of GDP;
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Increase the localization of oil and gas sectors from 40% to 75%.
The intention is for some of these objectives to be delivered through a program of public private partnerships (PPPs), i.e., specific partnerships between the government and the private sector whereby:
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the government grants rights to the private sector to deliver a project based on certain output specifications; and
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the private sector finances and constructs such a project, then delivers services over a 20 plus year period based on those output specifications.
So how can these goals be achieved through a PPP program and over what period of time? The following is one path forward:
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the establishment of a PPP Unit within government;
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the introduction of a PPP Law;
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the introduction of Enabling Laws and Sector Regulatory Regimes; and
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the development of Standardized PPP Contracts.
PPP Unit
The establishment of a PPP Unit allows a government to develop and implement long term policy relating to the procurement of infrastructure projects on a PPP basis. Priorities can be centrally established through coordination with key government departments, including the Ministry of Finance. A PPP Unit can play a key role with respect to ensuring that government policy across all government departments is consistent and that such policy is uniformly enforced, for example through the use of standardized contracts. Although a PPP Unit would play a centralized role, individual government departments and governmental agencies would be responsible for procuring and overseeing the implementation of PPP Projects.
Where a government department plans to enter into several PPP Projects over a period of time, that department could have its own PPP Unit to facilitate consistency and guarantee efficiency. The local unit would liaise with the central PPP Unit and be responsible for initiating, procuring and managing PPP projects at a local level.
A centralized PPP Unit could conceivably be developed in Saudi Arabia to play the role described above. Considering the authority given to the Ministry of Economy and Planning, it would seem natural for any PPP Unit to sit within that Ministry. The PPP Unit would be responsible for ensuring that value for money is achieved. This is a particularly important point as it is generally accepted that the overall costs of a PPP project over the course of a project cycle are higher than if a government had procured the project itself on a lump sum turnkey basis. However, the additional cost is typically offset by the innovations and value for money that the private sector brings to the table. The reality is that it should never be taken for granted that the private sector will always deliver innovation and value for money, hence the importance of a PPP Unit with real teeth.
Although a Saudi PPP Unit would be responsible for ensuring that the private sector is held accountable, it is critical that the unit itself is held accountable. This would typically be carried out through the Ministry of Finance scrutinizing the implementation of PPP projects and reporting on a periodic basis on whether value for money is being achieved. Considering the size of the proposed Saudi PPP programme, it might even make sense for there to be a dedicated unit within the Ministry of Finance devoted to performing such a function.
In reality, the current structures within the Saudi government are not far from what is described above. For example, there are teams within the Ministry of Economy and Planning performing the role of a fledgling privatization unit. The key difference is that the current structures have not yet been formalized by law. If that were to happen, with some further refining and robust regulatory support, the reform program would have taken a major step towards winning the full backing of the international business and finance communities.
Introduction Of A PPP Law
Should a PPP Law be introduced in Saudi Arabia? There is no global uniform practice with regards to the adoption of a PPP Law. Some countries, for example Kuwait and Egypt, have introduced such a law whereas others, e.g., the UK, have not.
One of the fundamental issues that runs to the heart of the Saudi PPP debate is the meaning of the phrase “public private partnership.” It is fair to say that there is no common understanding of its meaning. A range of acronyms are commonly used. All have different meanings and quite often used interchangeably with PPP. The following are some examples:
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BOOT – Build Own Operate Transfer
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BOT – Build Own Transfer
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BOO – Build Own Operate
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DBO – Design Build Operate
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DBFO – Design Build Finance Operate
Each of the above shares common features with the PPP model, but each one has its own distinct characteristics. If there is to be a national PPP programme in Saudi Arabia, there must be a common understanding of what is meant by a public private partnership and it would seem advisable to enshrine that common understanding in law.
The proposed reforms for the power sector illustrate the point very well. It has been publicly announced that the Saudi Electricity Company will be unbundled into separate generation, transmission and distribution companies. It is said that the generation element itself will be split into four companies. The private sector will then be invited to take shares in some of these companies. Similar comments have been made with regards to the ports sector. These structures have little to do with PPP Projects and are classically representative of a privatization scheme. A PPP Law, if the Kingdom were to go down that road, would create clarity as to what is meant by a PPP Project, which sectors are included within the PPP programme and which governmental and quasi-governmental entities are allowed to sign PPP Agreements.
The introduction of a PPP Law could also be used to address the application of the Government Procurement Regulations. The regulations currently apply to all government procurement projects. Many, if not all, of these provisions would not be appropriate in the context of a PPP Project nor would they be acceptable to lenders from a bankability perspective. At a minimum, it would seem advisable for all PPP Projects to be carved out from the Public Procurement Regulations so that the regulations apply to all government projects except PPP Projects.
Introduction Of Enabling Laws And Sector Regulations
From a regulatory perspective, the introduction of a PPP Law would not be enough in of itself. A PPP Law would essentially deal with procurement and would not touch on sector regulation. Separate regulations would be required for each of the sectors involved in the PPP program. Healthcare and education are two sectors that come immediately to mind. A threshold question is whether the private sector would be responsible for providing services (e.g., teaching services in the case of an education PPP) or simply facilities management. This is an area that would have to be dealt with in very clear terms.
Developing comprehensive regulatory regimes across multiple sectors will be complex and the amount of time required to complete the task should not be underestimated. Even if an optimistic measure is taken, it could take between two to three years to introduce both the basic regulations and detailed implementation regulations and appoint each of the regulatory bodies.
It seems unlikely that the government would want to delay the launch of the first PPP Project until the regulatory infrastructure has been installed, and the expectation is that the regulations and regulators will follow the launch of the first PPP procurement process. This does not necessarily have to be problematic. A solution would be to introduce fairly concise interim regulations to provide the legal underpinning for the initial PPP Projects until the full regulatory regime, including the appointment of regulators, are put in place. This has been done before in Saudi Arabia and there is no reason why it cannot be done again. If a PPP Project is entered into and the subsequent regulatory regime has a negative impact on the investment of the private sector, the private sector could obtain protection under the PPP Contract on the basis that a “change in law” has occurred entitling it to be compensated.
Development Of A Standardized Contract
A number of jurisdictions have benefited from the standardization of contracts used in PPP Projects. Standardization creates consistency across all sectors and provides efficiency for the government as a whole for its procurement processes. Production of a standard form would typically be the responsibility of the central PPP Unit. It would then be used as a first draft by the relevant governmental agencies involved in procuring PPP Projects. For some sectors, it may be that the standard form would not be appropriate. In other sectors, the standard form may need substantial adjustment. Nonetheless, the general rule would be that the standard form should always be used. Whenever there is a perceived need to depart from the standard form, the relevant governmental agency procuring the project would obtain consent from the central PPP Unit to depart from its terms.
As in other jurisdictions, the PPP Unit could issue guidance notes to the public in relation to the standardized contract. The guidance notes would typically provide information about the main issues arising in PPP Projects and provide clarity on the commercial, legal and financial rationale behind the main clauses in the standardized contract. This would provide private sector companies, including international companies unfamiliar with Saudi Arabia, with clarity and comfort about the risk allocation adopted in PPP Projects in the Kingdom. In turn, this is likely to facilitate the government achieving value for money and the fulfillment of its commercial and financial objectives.
Conclusion
The Saudi government has generally impressed the international community with its Vision 2030. It is a strong first step. In the last few days, it has made further announcements with over 50 Royal Decrees issued on 7 May 2016. The changes represent a major restructuring within the highest echelons of central government. This includes the formation of a new Energy, Industry and Mineral Resources Ministry, the replacement of the central bank governor, the restructuring of the tax department, the reorganization of the Agriculture Ministry (now the Ministry of Environment, Water and Agriculture) and the appointment of Mohammad Al Tuwaijri (the CEO of HSBC Middle East and North Africa) as the new deputy minister of economy and planning. Again – a decisive move by the government and a statement of intent. The focus should now, however, be on project implementation. This is a highly complex area and attention should turn to institutional and regulatory reform at the micro level, whilst simultaneously seeking, to the extent practicable, to launch the first PPP Projects.
