Saudi construction sector gets boost from PPP

Public private partnerships (PPP) and alternative financing methods are transforming Saudi Arabia’s construction landscape as the Kingdom grapples with low oil prices and cutbacks to public spending.

Construction activity had slowed to nearly a standstill last year, following the government’s decision to cut costs to narrow the fiscal deficit. New contract awards were halted and existing ones were being reconsidered.

According to a report by the consultancy Faithful+Gould, in the twelve months to first quarter 2017, construction as a percentage of GDP contracted from 7 percent to 6.2 percent as backlogs continued to fall and awards in late 2016 failed to fill the gaps.

“Overall the market would appear to have reached a low point and we are expecting a reasonable rise in awards by comparisons to last year,” Faithful+Gould’s regional development director David Clifton told Argaam.

As part of wider economic reforms in the wake of low oil prices, the Saudi government is promoting PPPs where a private party finances, constructs and operates the project while also bearing the risk and management responsibility. Under the National Transformation Plan, power, highways, infrastructure, housing, education, healthcare and defense will be opened up to PPP.   

To assist in the privatization move, the government has set up the National Project Management Office, under which government departments are currently setting up their own project management offices to deliver best practices and efficiency.

“The ability to engage alternative funding and implement PMOs [are] the key to a sustained recovery in 2018 onwards,” said Clifton.

There are a variety of financing models around PPP projects. They include build-operate-transfer (BOT), build-own-operate-transfer (BOOT), independent water and power projects (IWPP).

“We’ve seen IWPs, IWPPs and the aviation sector engage in these funding models already and expect this to continue at a reasonable pace,” said Clifton.

According to Terry Smith, chief executive of Nassab Group, a Saudi company based in Riyadh: “The PPP model is fundamental to going forward on the National Transformation Plan 2020.”    

His company is in the process of submitting proposals for six projects in solar, infrastructure and military as BOTs and concessions.

Smith does not see any difficulty in sourcing capital from the marketplace as there is a high level of confidence in the government.

“I have tested the market and I know there are trillions of dollars of funding available for projects in Saudi Arabia. The only challenge is to be able to understand the requirements and the make sure the vocabulary is clear to both parties.”  

Although there is clear interest in foreign investment and PPP, the one major obstacle is that there currently exists no legal or regulatory framework for PPP in Saudi Arabia.

“To date, PPPs undertaken in Saudi Arabia have been on an ad hoc basis and the PPP pipeline in Saudi Arabia is very modest. There is no enabling legislation, nor is there a PPP unit - either as an independent entity or within any of the major ministries,” said Richard Marshall, head of infrastructure research at BMI Research told Argaam.

However, that is set to change in the near future. The Kingdom is expected to publish a legislative framework before the end of 2017 that will be strong enough to encourage investors while at the same time cater to Saudi Arabia’s unique requirements in sourcing and procurement.

Write to Brinda Darasha at brinda.d@argaamplus.com

Jerusha Sequeira contributed to this article.