A New Approach To Financing KSA Real Estate Developments
Public Private Partnerships (PPPs) are being increasingly used as a means of attracting more private investment into areas of the Saudi Arabian economy that have traditionally been financed by the public sector. While government spending on healthcare is increasing across the region, constraints imposed on this spending will increase the need for private sector involvement in the sector, particularly through the creation of further PPPs.
• The primary attraction of PPP agreements is that they allow high levels of service to be maintained without a correspondingly high level of government expenditure, allowing the government to focus its increasingly scarce revenues on other priorities.
• Saudi Arabia is the most active PPP market in MENA, with a total of 18 projects announced to date with a combined value of USD 42.9 billion.
• PPPs form a key component of Saudi’s National Transformation Program, which aims to increase the percentage of private sector investment from 40% of GDP in 2016 to 65% by 2030.
• Most PPP agreements to date have been in the housing (54%) and transport sectors (37%), with limited investment (4%) into social infrastructure.
• This situation is expected to change, with increased use of PPPs in the education and healthcare sectors over the next five years.
• The most significant constraint to the further development of the PPP market is the absence of a clear legal framework, that may deter some potential investors.
• Despite these constraints, PPPs provide the opportunity for private sector investors and developers to access areas of the Saudi real estate market that was previously only available to the public sector. We expect to see the announcement of further PPP agreements over the coming years, particularly in the housing, healthcare and education sectors of the real estate market.
With the increasing need and tangible demand for both social and core infrastructure across KSA, there is a strong incentive to attract more private sector involvement. In an environment of lower oil prices and fiscal budget constraints, private sector funding can play a pivotal role to alleviate the need for public spending and promote a more efficient use of both public and private capital. While challenges remain, the PPP model provides an important vehicle for both international and regional investors and developers to take advantage of the currently untapped potential, especially in the housing, education and healthcare sectors of the Saudi market.