Saudi Arabia offers promising pipeline of privatization deals

Saudi Arabia will offer a promising pipeline of public-private partnerships (PPPs) deals over the next decade after it awarded privatization contracts worth $3.5 billion in the first quarter of 2019, Mazen Singer, head of infrastructure, KPMG Al Fozan and Partners, told Argaam in an exclusive interview.

“The demand on infrastructure is expected to be in the range of $300 billion to $400 billion over the coming decade. Looking at international benchmarks, PPP opportunity in the Kingdom will range from 10 percent to 30 percent of the total infrastructure market,” he said.

Earlier this month, the Saudi Arabian General Investment Authority (SAGIA) said the Kingdom’s privatization program is targeting 23 privatization initiatives by the end of 2020 and 100 by 2030. It is expected to offer Saudi Airlines Medical Services Privatization by Q2 2019, flour mills privatization by Q3 2019 and educational buildings build-own-operate-transfer (BOOT) projects by Q1 2020, it added.

Saudi Arabia aims to generate SAR 35 billion to SAR 40 billion in non-oil revenues from its privatization program by 2020 and create up to 12,000 jobs, the Saudi Press Agency said in April.

In an interview with Argaam, Mohammed Al-Shaalan, deputy CEO of the National Center for Privatization and PPP said there are plans to privatize the education, health, as well as part of the energy sectors by 2020.

Also read: Here are key targets of Saudi Arabia’s privatization program

Currently, KPMG is advising multiple government agencies on PPP transactions. However, it also supports the private sector in housing, water and other sectors if not involved on the government side.  

The Big Four auditor firm expects the draft PPP law, issued by the National Center for Privatization & PPP last year, to be approved in the “next few months”.

While Saudi Arabia is witnessing healthy growth in infrastructure investment, underpinned by growing GDP, rising population, strong government initiatives in trade and industry, economic diversification as well as transport development, Singer said the major challenge faced by the Kingdom is to establish itself as a clear and credible location for investors into long-term PPP deals.

"The Saudi government needs to be extremely methodical, adhere to international best practices and communicate regularly. Investors need to be careful, with a strong deal flow expected from Saudi as being a new market while the government is pressing hard on driving down prices. The market forces will drive for a sustainable price and value for money level as the market undergoes some adjustments on prices and learning curve," he added.

When asked about the fundamental changes required to encourage foreign international investors to the Kingdom, Singer admitted that Saudi Arabia is competing against a global market for PPP deals and needs to have a clear deal pipeline proceeding continuously to demonstrate a track record of successful transactions, as seen in the UK, Canada or Australia.

Though there has been steady progress in water and power sectors, Singer suggested improvements for more sectors such as clear infrastructure project governance communicated from the top and absolute clarity in terms of the timing, types of deal and support Saudi Arabia wants for the next five to 10 years.

"This will give international investors the confidence to set up dedicated units for investing in Saudi," he stated.

At the national level, KPMG recommended a comprehensive PPP framework with legislation covering rights and obligations of the private sector and international institutions and funds and tackling issues such as labor and insolvency which will enable the privatization environment and encourage investors.

At a sector level, clear regulations and rules relating to tariff setting, technical standards, environmental, health and safety issues among others shall provide comfort to the private sector and contribute to realizing the Kingdom’s Vision 2030 initiatives, it added.

Also read: Saudi Arabia has set privatization targets until Q1 2019, says economy minister

According to the consultancy, water, energy, housing and telecommunications are the most developed sectors, while transport (roads, airports, and ports), education and healthcare sectors are showing good progress.  Other sectors are still under development and require support.

“The operating models of these developing sectors need to be redesigned or corporatized before the involvement of the private sector to maximize benefits from the PPP process,” Singer concluded.