A long-standing feature of the public-private-partnership (PPP) market in the Kingdom of Saudi Arabia (KSA) was that despite its relatively strong record of implementing PPP projects in the utilities sector, KSA did not have a specific PPP law. However, this situation began to change in July 2018 when the Saudi National Centre for Privatisation (NCP) published its consultation draft of the “Private Sector Participation Law” (PSP Law) regulating both PPP projects, and sale-of-asset transactions (privatisations).
The PSP Law follows in the same vein as other recent legislative reforms in KSA, which focus on delivering upon the reform agendas set out in the KSA “Vision 2030” strategy and “National Transformation Plan” (NTP). A central component of these reform agendas is to significantly increase “private sector participation” in the delivery of KSA infrastructure. This is illustrated by the notable target set out in the NTP for five new PPP projects to be implemented by 2020. The PSP Law is a clear attempt to ensure that this target is not only met, but surpassed.
The consultation period for the PSP Law has long-since expired. At the start of this new year, market participants are now eagerly awaiting further news regarding when the final PSP Law will be enacted, and crucially when the PSP Law Implementing Regulations (which will contain much of the additional operational details of the application of the PSP Law) will be published.
The general market reaction to the PSP Law was positive,the consensus being that the draft effectively addressed many of the restrictions and uncertainties that currently dissuade potential foreign entrants to the KSA infrastructure market. We have identified the following ten key reforms contained in the PSP Law, which should interest international investors with long-held aspirations to invest in Saudi infrastructure.
1. Measures to entice international sponsors, private equity investors, strategic infrastructure investors and sovereign wealth funds: the PSP Law is characterised by the multitude of measures specifically aimed at enticing international infrastructure sponsors and investors into the Saudi market. Notably, there is an express provision permitting the international remittance of a project’s financial returns and rights to recover losses from changes in the law, unlawful action or the failure of public authorities to act appropriately. These are attractive facets of the PSP Law, which coupled with the ability of foreign investors to own 100% of the special purpose vehicle delivery the PPP project, will serve to attract foreign direct investment into KSA. PPP contracts can also be drafted in languages other than Arabic and such language is permitted to be the governing language of the contract.
2. Measures to protect foreign investors: in a clear acknowledgement of the concerns expressed by the market, the PSP Law contains a specific requirement for foreign legal entities to be afforded the same treatment as Saudi-entities in respect to any “procedures, conditions, rights and obligations arising from this [the PSP] Law and any Contract”. Additionally, the principle of equal treatment is expanded to the conduct of PSP Law-governed procurement procedures.
3. The Procurement Law no longer applies to PPP projects: the PSP Law reinforces Royal Decree M/101 which exempted PPP projects from the provisions of the Procurement Law[1]. The Procurement Law applied widely to infrastructure projects procured across KSA. However, it was never envisaged to regulate PPP procurements, with its principle focus on the traditional procurement of works, services and goods. As such, the Procurement Law contains a number of provisions which, simply were not compatible with the development of PPP projects. This required procuring authorities to obtain exemptions to the incompatible provisions, which inevitably delayed the procurement of projects with an already lengthy lead-time. Exempting PPP projects from the Procurement Law should remove one of the most significant barriers to the development of such projects in the Kingdom.
4. Liberalisation of the ownership of real estate in Makkah and Madinah: the restrictions imposed by the “Saudi Arabian Law of Real Estate Ownership and Investment” (the Real Estate Law) are well known to interested foreign investors in the KSA market. The Real Estate Law conventionally required development of complicated and often over-engineered solutions to structure the ownership of real estate rights in Makkah and Madinah to achieve regulatory compliance.
The PSP Law now liberalises a core restriction contained in the Real Estate Law (albeit, subject to approval by the Council of Ministers); foreign investors are now permitted to lease real estate within the city boundaries for “real-estate based” PPPs. This is a significant solution to a long-standing barrier to investment and should serve to open previously restricted markets for foreign investors. We look forward to reviewing the Implementing Regulations of the final PSP Law for further details on this exciting development.
5. Liberalisation of investment into the previously restricted healthcare and private education markets: Under the terms of the Private Health Institutions Law issued by Royal Decree No. M/40 dated 6 January 2003, non-Saudis were prohibited from fully owning any form of “Private Health Institution” (as defined therein) apart from a hospital. These restrictions have recently been repealed by the KSA Government, with further liberalising reforms anticipated. Article 57 codifies these recent developments by stating that non-Saudis may now own “health institutions” for a period equal to the relevant PPP contract.
Similarly, in the private education sector, the restrictions on 100% foreign ownership of private schools has been lifted. Non-Saudis are permitted to own private schools for a period aligning the term of the PPP contract. Crucially, this removes the long-held practical requirement for foreign investors in these sectors to enter into a joint venture with a local partner.
6. Potential exemptions from the Labour Law: a principle feature of recent KSA PPP procurements has been the stringent and onerous application of local content requirements, including in relation to the application of the Labour Law (Royal Decree M/51 23 Sha’ban 1426/September 27 2005 (as amended) and Saudisation (the Nitaqat system). Indeed, given that local content requirements have been increasing with every new project to come to market, it will come as a relief to many market participants that the PSP Law countenances the potential for project-specific changes to, or exemptions from, the relevant legislation.
7. Government Financial Support: successfully procured projects in KSA have generally been characterised by a form of credit enhancement (either on a payments arising or termination basis) being provided from Government to the private sector. In the majority of cases, this credit support is provided by the Ministry of Finance, or the procuring government ministry (provided it has sufficient covenant strength). The PSP Law countenances that the Government will continue to make financial support available for PPP projects. Indeed, the notes included in the PSP Law include a suite of options which the Government may examine outside of the conventional Government guarantee. These include loans on preferential terms, revenue guarantees, subsidies, tax breaks, customs duty exemptions and protections against foreign exchange risk. Further details on the financial support measures will be provided in the Implementing Regulations.
This welcome development for investors should be viewed alongside the recent Commercial Pledge Law (introduced by Royal Decree No. M/86 on 24 April 2018) alongside related Implementing Regulations (the CPL). The new law brought about many significant improvements to the way Saudi security is granted, perfected and enforced, including the possibility of perfecting security interests by registration with the forthcoming unified register for commercial pledges or other specialised registers, and the ability of secured creditors to directly enforce their interests against collateral. As commercial pledges are a key component of a conventional PPP financing security package, the CPL was a clear move to bolster the securitisation rights of financiers and should serve to increase the pool of lenders prepared to participate in PPP projects. Overall, these measures are a clear message to foreign investors that the Government is prepared to overcome concerns raised by PPP market stakeholders to facilitate investment into PPP projects.
8. Dispute Resolution Flexibility: subject to the approval of the Council of Economic and Development Affairs, parties are free to agree upon the resolution of disputes by means of arbitration, rather than KSA courts (excluding in relation to real-estate disputes). Whilst the PSP Law does not provide any further details regarding permitted seats or permitted arbitral tribunals, further detail is anticipated to be provided in the forthcoming Implementing Regulations.
9. Potential for broad application: GCC states have each taken differing approaches to the imposition of PPP legislation, and in many cases, excluded the utilities sectors from the jurisdiction of specific PPP laws. However, the draft PSP Law applies across all sectors. Additionally, the statutory definition of PPP is sufficiently comprehensive to encompasses a broad range of potential transactions. The core elements of a “PPP” are a contractual arrangement:
related to infrastructure made between Government and a private party;
with a term of in excess of 5 years;
with the provision of a public service (construction, management, operation or maintenance of assets);
containing an allocation of risks between parties; and
with performance orientated payment mechanisms.
As such, we anticipate that this means that a wide range of proposed projects will fall within the definition of PPP and thus benefit from the provisions of the PSP Law.
10. Unsolicited Proposals: the PSP Law also adopts a similar approach to the Kuwaiti PPP Law by permitting the submission of unsolicited proposals for infrastructure projects. However, provided the proposal is accepted in principle by the Government, it is presently unclear where such an unsolicited proposal must then be subjected to a competitive tender. As such, further clarity is required. The PSP Law requires unsolicited proposals to be “subject to the provisions of this Law, and the Regulations issued thereunder”. However, any party submitting an “accepted” unsolicited proposal is entitled to recover the costs of preparing and submitting such a bid subject to a 5% cap of the interest earned to the Government.
Given the exciting and ambitious infrastructure project pipeline in KSA, we consider that the draft PSP Law provides many reasons for interested observers of the KSA infrastructure market to shortly become active participants. The final draft of the PSP Law and the publication of the Implementation Regulations are awaited with interest.
[1]Government Tenders and Procurement Law 2006, as enacted by Royal Decree No. M/58 dated 27 September 2006 and its Implementing Regulations as enacted by Minister of Finance Resolution No. 362 dated 10 March 2007
