Saudi Arabia’s recently announced plans to privatise several key industries in the Kingdom has once again brought the Kingdom’s privatisation agenda back into the spotlight. The announcements form part of the countries transformational initiatives as part of The 2016-2020 National Transformation Plan (NTP) to improve public sector efficiency and boost non-oil revenues in the region, and will reportedly include airports, municipalities, hospitals and education.
Privatisation covers many types of transactions but typically includes the divestiture, whether by sale or lease, of state-owned assets to private investors. The Kingdom already has an established history of such privatisation through the partial sales of Saudi Telecom Company (2003), Saudi Arabian Mining Company (Ma’aden) (2008) and, most recently, the National Commercial Bank’s privatisation through its US$6 billion IPO (2014).
Although the Kingdom reduced its use of PPPs in recent years (instead procuring the development of such infrastructure projects directly through an engineering-procurement-construction (EPC) arrangements), recent market announcements suggest a comeback with the GACA currently tendering Taif Airport as a PPP – the GACA’s first since 2012.
However, with a larger number of diverse public services to potentially be privatised, each with its own unique capex requirements and strategic importance, we are likely to see a wider range of PPP options coming to the market.
These may include:
- Service Contracts A private sector entity is hired to perform a short term service. The government remains the primary provider of the service and outsources specific elements to the private sector. The private sector entity must perform the service at the agreed cost and typically satisfy key-performance-indicators (KPIs) in return for a fixed fee and incentive payments payable against the KPIs.
- Management Contracts An expansion of a services contract which may include some or all of the management and operation of a public service. Again the government entity remains the primary provider of the service but day-to-day management and authority are assigned to the private sector entity.
- Lease Contracts A private sector entity takes full responsibility (and risk) for the provision of a service. The underlying asset is typically established and financed by the public sector and then transferred to the private sector entity for full management and operation at its expense and risk (including losses and unpaid user fees). The private sector entity typically does not own the underlying asset but directly collects the user fees.
- Concessions A private sector entity takes full responsibility (and risk) for the construction or rehabilitation, financing, management and operation of an asset and the provision of related services. The private sector entity may or may not (depending on the terms of the concession) own the asset but directly collects the user fees (which are established in the concession).
- BOT A private sector entity takes fully responsibility (and risk) for the development, construction, financing, operation and maintenance of a new infrastructure project. There are many variations of a BOT structure (including design-build-finance-operate (DBFO) and build-own-operate (BOO)) but the common and important features of all such variations are that the private sector entity provides the finance for the project and owns the project assets for a set period of time. The distinction from concessions is that BOT arrangements are typically used for large greenfield projects requiring substantial capex.
Fig. 1: Overview of key features of PPP options