Contemporary Models of PPP Projects in the Kingdom of Saudi Arabia: Limitless Opportunities With New Risks
Karim Fawaz and Mark Rocca of AX Law discuss the evolution of the PPP in Saudi Arabia.
Mark Rocca
Since it was first announced in 2016, the Kingdom of Saudi Arabia’s Vision 2030 has become the backbone of the Kingdom’s accelerated transformation.
The government led the economic revolution strategically in line with its Vision 2030, which undoubtedly required a lot of hard work and commitment to deviate massive businesses from conventional models and sectors to contemporary partnerships.
It is our view that, in the early days of such economic transformation, government funds and support were the main drivers and boosters of the various ideas and projects.
"The Kingdom of Saudi Arabia’s Vision 2030 has become the backbone of the Kingdom’s accelerated transformation."
Rapidly, the Kingdom managed to evolve the structures of public-private partnerships (PPPs) by energising the private sector to take initiative in paving the way for contemporary PPP models in multiple sectors (including technological innovation, tourism, entertainment, transport, logistics, education, healthcare, water and energy). These new models inevitably foster a different risk matrix when assessing the viability of a PPP project in a given sector.
Data Centres: Constructing the Digital Future
Concisely, data centres serve the purpose of storing, managing and processing an almost endless stream of data. Constant technological developments (such as the recent boom in all things Artificial Intelligence) have led to a significant increase in demand for reliable computational power and storage. Recognising the importance of the digital economy, the Kingdom anticipated the nation’s needs and executed – and is executing – sophisticated projects in that space.
By 2030, it is expected that the Kingdom will increase its data centre capacity to +1,000 MW, with investments of more than USD11 billion. One of the key underlying risks in data centre PPPs pertains to the structural reliance on the private sector being in charge of designing, building, financing and operating the data centre. In the earlier days, the anticipated risks were pretty conventional, which is no longer in line with the direction of the leadership.
Developers now have to deliver data centres that are adaptable to future needs, have iconic designs and are operated in a manner that aims to achieve enhanced customer experience.
Tourism, Entertainment and Foreign Investments: Visit and Stay in Saudi Arabia
Tourism and entertainment anchor a transformative vision for the Kingdom, aiming to captivate global audiences and rejuvenate local landscapes. Entertainment plays a vital role in the quality of life and attraction of expatriates, to “visit Saudi” and also to stay in the Kingdom. The HQ 2024 initiative had to be supplemented by enriching tourism to attract various cultures to interact and transact with the residents of the Kingdom, and entertainment directly contributes to the satisfaction of people residing in the Kingdom and others who are considering a move to the Kingdom.
As such, PPPs that relate to construction have been increasingly involving iconic designs, greenery and other elements of attraction. The success of these projects is therefore linked to the experience that the Kingdom’s residents and visitors are having, which is not easily measurable as opposed to the standard performance indicators and service levels. However, requests for proposals for projects do require bidders to submit such success indicators with their technical proposals.
Transport and Logistics: Connected Smart Cities
Another core area for the Kingdom’s 2030 objectives is to create a robust and modern transport infrastructure. Developing state-of-the-art airports, railways, ports and efficient road networks will facilitate the efficient movement of goods, services and people, which is essential for all other industries.
Under the National Transport and Logistic Strategy announced in 2021, the Kingdom pledged that the transport and logistics sector’s annual contribution would increase to USD12 billion by 2030. The measures have included approving the PPP implementation of four international airports (Abha, Taif, Hail and Prince Naif), handling 20.8 million travellers per annum. The Kingdom’s Ministry of Transport has also launched projects for developing (or repurposing) highways and roads (namely, Jeddah–Makkah, Jeddah–Jazan, Yanbu–Jubail and Asir–Jazan), which may include PPP models of Operation & Maintenance (O&M) and Design-Build-Finance-Operate-Maintain (DBFOM).
"Developing state-of-the-art airports, railways, ports and efficient road networks will facilitate the efficient movement of goods, services and people."
Similarly, as part of consolidating the Kingdom as a global logistics hub, the Saudi Arabian authorities project to invest USD7.7 billion in the sector. With the private sector as partner, the Kingdom intends to launch approximately 59 logistics zones by 2030.
As the Kingdom becomes an epicentre for trade and connectivity, investments will surely continue to grow as the Vision 2030 milestones fast approach. However, projects such as air taxis, hyperloop and other innovative means of transportation also come with new risks, liabilities and concerns relating to delivering a good experience for their users.
The Takeaways
Opportunities are numerous as PPPs continue to speed up the Kingdom’s exponential growth. We are now seeing the private sector aligning with the government’s vision. To a certain extent, the private sector is expected to take initiative in planning, designing and operating PPP projects, and in finding more feasible ways to fund these projects. As a result, new risks emerge, including the following:
- IP, liabilities and insurable risks: iconic designs generate intellectual property that ought to be capitalised on. However, the maintenance and renovation of such iconic designs are costly and the insurance would cost more than regular designs. It is our view that the risks are not limited to the property delivered in a PPP project itself, as there may also be a potential impact in the interruption of the public’s experience when using or viewing such facilities.
- Catering for the future: PPP projects seem to be increasingly sophisticated, so as to adapt to growth and expansion, and accommodate changing and increasing needs in the future. This also impacts the liabilities under the PPP model as it creates a level of uncertainty as to the future obligations under the PPP arrangement, thus requiring the parties to design terms and conditions that enable the accommodation of future needs while maintaining the balance of the agreement.
- New measures of success: service level agreements (SLAs) and key performance indicators (KPIs) are the conventional measures for components of a PPP project – eg, for O&M scope. However, the target now is to deliver a better experience to the beneficiaries of the PPP projects. It is our view that there is a growing necessity to devise terms and conditions that serve as experience level agreements (XLAs) that seem to be more effective in multiple sectors, including but not limited to technology and digital transformation, healthcare, education, tourism and entertainment.
As the economic transformation continues, we believe that PPPs will continue to grow, providing agility to devise models to deliver enhanced outcomes and with less reliance on government funding as the private sector plays a bigger role in taking the initiative in PPP projects.
AX Law
