Executive Summary THE ROUTE TO PROSPERITY IN THE KINGDOM: SUMMARY OF KEY NEWS AND INSIGHTS FROM MARSH’S INFRASTRUCTURE RISK MANAGEMENT FORUM IN SAUDI ARABIA
FOREWORD
Now in its sixth year, the Infrastructure Risk Management Forum took place in Riyadh, Saudi Arabia, on April 30, 2018. Our last Infrastructure Risk Management Forum took place in Dubai, United Arab Emirates in February 2017 to a backdrop of global uncertainty and political change. Fast-forward 15 months and the outlook is very different.
A global economic recovery with healthy growth is well underway; the oil price is back at a level that provides greater regional stability, and the Gulf Cooperation Countries (GCC) are implementing plans for broader economic growth.
If we consider the pace of change being witnessed in the Kingdom of Saudi Arabia, it is evident that they are embracing their future and embarking on an ambitious journey of transformation towards a more diverse economy. The development of key infrastructure is playing a critical role in the country’s success and will be used as a catalyst for economic growth in the future.
The theme of this year’s Infrastructure Risk Management Forum was “The Route to Prosperity in the Kingdom: Reimaging Risk and Rewards” and our speakers and panelists, all experts in their respective fields, shared their insights and thoughts on a broad range of topics that addressed the opportunities and challenges of Risk-Reward in the Kingdom.
The speeches, panel discussions and workshops addressed the risks and rewards associated with the investment, development and operationalisation of infrastructure projects, as well as a myriad other topics from risk allocation to renewables to investment transformation.
The result has been a forum of over 180 attendees who enjoyed an event full of thought-provoking speakers and engaging workshops and innovative ideas from across the country and industry.
We would also like to take the opportunity to thank our sponsors, speakers, panelists, for their collaboration and input in creating such a rich and varied line up.
Bassam Al Bader Chief Executive Officer, Marsh Saudi Arabia
CONTENTS
• RISK ALLOCATION WITHIN A PRIVATE PUBLIC PARTNERSHIP (PPP) TRANSACTION
• THE ROUTE TO PROSPERITY IN THE KINGDOM: DEVELOPING A WORLD CLASS RAILWAY NETWORK
• BRIDGING THE INFRASTRUCTURE GAP: ENGAGING THE PUBLIC SECTOR IN CRITICAL NATIONAL DEVELOPMENT
• PRIVATE PUBLIC PARTNERSHIP (PPP): A CATALYST FOR PRIVATE INVESTMENT IN A WIDE ARRAY OF INFRASTRUCTURE PROJECTS IN THE KINGDOM
• POWERING UP TO RENEWABLES: LEADING THE ENERGY MIX TRANSITION IN KSA
• A NEW ECONOMIC DYNAMISM: THE CHALLENGES AND OPPORTUNITIES FOR INVESTMENT TRANSFORMATION
• THE EVOLVING DYNAMICS OF THE INSURANCE MARKETS IN KSA AND GLOBALLY: ENSURING THE CERTAINTY OF OUTCOMES SECTION 1
RISK ALLOCATION WITHIN A PRIVATE PUBLIC PARTNERSHIP (PPP) TRANSACTION
With significant investment needed in Saudi Arabia to achieve the country’s Vision 2030, the government will be looking toward project investors to help see it come to fruition.
As the government reassesses its approach to the delivery of these projects, the Public Private Partnership (PPP) model provides an already tested framework for developers, investors and lenders to participate in projects across a wide range of sectors – from water to healthcare to transportation.
In the PPP workshop, Synergy’s Director Shashank Rath provided the audience with an introduction to the PPP model and the various types of frameworks available, as outlined below:
ITEM DESCRIPTION •• Private developer shall finance, construct, own and operate the asset for the BOOT concession period (generally 20 – 30 years). (Build Operate Own Transfer) •• Ownership of the asset shall be transferred to Off-taker at the end of concession period. •• Private developer shall finance, construct, own and operate the asset for the BOO concession period (generally 20 – 30 years). (Build Operate Own) •• Ownership of the asset shall remain with private developer at the end of concession period. BOT •• Same as BOOT, except that ownership of the asset remains with the Off-taker/ (Build Operate Transfer) concession grantor.
•• Private developer purchases an operational asset and owns & refurbishes/ TOT operates it for concession period. (Transfer Own Transfer) •• Ownership of the asset is transferred to the Off-taker at the end of concession period.
TOO •• Same as TOT, except that ownership of the asset remains with private developer (Transfer Operate Own) at the end of concession period
4 • The Route to Prosperity in the Kingdom - Executive Summary SECTION 1 RISK ALLOCATION WITHIN A PRIVATE PUBLIC PARTNERSHIP (PPP) TRANSACTION
The major component of structuring documents which need to be reviewed early on and a successful PPP deal is the correct understood by all of the project parties. allocation of risk. Risks need to identified early and passed on to the party who is Mr. Bhatti touched upon the risks relating to the physical loss or damage to the project, which can best placed to handle the risk. to an extent be transferred to the insurance market Typically, under a PPP model the private sector would in exchange for an insurance premium. Other risks take on the majority share of the risks involved with the which are not generally insurable – for example project delivery and operation, with the public sector non-damage risks such as supply-chain issues, man retaining only force majeure risks (political and natural power shortage and denial of access, to name but catastrophe). a few – need to be managed and passed, under contract, to the party best placed to handle the risk Dal Bhatti of Marsh’s Construction Practice in MENA i.e. contractors, engineers, designers and the like. discussed the involvement an insurance adviser has in the delivery of a successful PPP deal. The risk allocation and insurance sections of the various project
Marsh • 5 SECTION 2
THE ROUTE TO PROSPERITY IN THE KINGDOM: DEVELOPING A WORLD CLASS RAILWAY NETWORK
One of the keynote speakers was Amer Al Ghamdi of Government services, will optimise the efficiency and who is the Director Corporate Control of Saudi Rail economy of the sector. Company (SAR). Mr. Al Ghamdi briefed the audience about the journey SAR has undertaken since its Mr. Al Ghamdi highlighted the historic achievements of formation in 2006 and the contribution it has made Saudi Rail industry since 1947 with the introduction of so far in shaping the future of the rail network in the the Northern Railway Network from Riyadh to Qurayyat Kingdom of Saudi Arabia. He discussed in detail the and Haramain High Speed Rail linking Jeddah, Makkah pride SAR takes in its role in realising Vision 2030 & Madinah, which provides a glimpse of the bright & through its participation in the development of a prosperous future of Rail Infrastructure in Saudi Arabia. vibrant society, by promoting culture, talent, and It will be a vital component in the logistic, economic & entertainment; achieving environmental sustainability social development of the Kingdom and aligns SARs and most importantly building a thriving economy. efforts toward achieving Vision 2030.
Being a catalyst in the transformation of the Kingdom’s Mr. Al Ghamdi also commented that SAR’s workforce economy, SAR focuses its contribution via the National is made up of over 60% Saudi nationals, who manage Industrial Development and Logistic Program and the current railway infrastructure comprising of 3 major the strategic initiatives related to Public Investment networks (Riyadh-Dammam, Hurmain Project between Funding (PIF) investments and the development of Mecca and Madina for pilgrims, North/South Project) national companies. and by Q4 of 2018 the operational track length would be 5,590 km. The current rail network is linked to 2 In line with Vision 2030, SAR is building unique logistic mines and 2 ports in Saudi Arabia. rail hubs in the region. This, along with the privatisation
6 • The Route to Prosperity in the Kingdom - Executive Summary SECTION 2 THE ROUTE TO PROSPERITY IN THE KINGDOM: DEVELOPING A WORLD CLASS RAILWAY NETWORK
Currently, freight operations cater mainly for the transportation of minerals and cargo via trains up to the length of 3.2 km, and weighing approximately 20,000 tons, equal to 400 trucks. Presently, the network caters for two mineral sites and two ports in Saudi Arabia.
SAR’s passenger operation serves 14 passenger stations and serves the following geographic area as categorized below:
North - South Project (NSR): Riyadh – Almajma’ah – Qassim – Hail – Al-Jouf - Qurayyat
Riyadh-Dammam: Dammam – Abqaiq – Al-Hafouf – Riyadh
Haramain High Speed Railway (HHR): Makkah – Jeddah central – King Abdulaziz Airport – KAEC – Madinah HHR operation caters total length of 449Km with 35 modern state of the art modern trains.
Operational Challenges
Mr. Al Ghamdi also said that, as with any rewarding activity, risk is inevitable and rail operation in Saudi Arabia is no exception. Rail operations in Saudi Arabia are challenged by extreme weather conditions where temperatures can reach 55 degrees centigrade in the desert. Moreover, operations in the desert multiply maintenance costs due to higher wear and tear rates of train wheels and other spare parts. Land slips and subsidence also pose a major risk to the rail network.
In his concluding remarks, Mr. Al Ghamdi envisioned the future of SAR as being very bright and promising, and he highlighted that the SAR team were excited to play a pivotal role in achieving the Kingdom’s Vision 2030.
Marsh • 7 SECTION 3
BRIDGING THE INFRASTRUCTURE GAP: ENGAGING THE PUBLIC SECTOR IN CRITICAL NATIONAL DEVELOPMENT
The delivery of sound and reliable infrastructure – from roads and bridges to public utilities – is a fundamental driver of economic growth, and the demand for such services is expected to surge over the coming years. Unfortunately, the allocation of funds for infrastructure projects is insufficient to cope with this projected increase in demand.
1An annual figure of almost US$2.7 trillion is being invested worldwide into infrastructure, which corresponds to just under 4% of global GDP. Despite this, the global funding gap is widening. An estimated annual spend of US$3.7 trillion would be needed to meet the growth in infrastructure demand. 2The US$1 trillion gap1 represents a 27% shortfall in global infrastructure investments, highlighting an urgent need for new investment sources to be identified.
A possible solution, with significant potential, is to boost private-sector engagement in infrastructure development. Over the past few decades, the contribution of the private sector to infrastructure investments has increased. While the involvement of private investors and operators in infrastructure comes with clear benefits, some obstacles still need to be overcome to ensure the success of a public-private collaboration.
1Source: Oliver Wyman (2017) - “Bridging the Infrastructure Gap: Engaging the Private Sector in Critical National Development” 2Source: WEF (2014) – “Strategic Infrastructure, Steps to Operate and Maintain Infrastructure Efficiently and Effectively”
8 • The Route to Prosperity in the Kingdom - Executive Summary SECTION 3 BRIDGING THE INFRASTRUCTURE GAP: ENGAGING THE PUBLIC SECTOR IN CRITICAL NATIONAL DEVELOPMENT
Some of the key success factors of privatisations, and public- private partnerships (PPPs) in general, are:
•• Having a sound sector strategy and policy mix to serve as a basis for the collaboration.
•• Having a robust governance model and methodology to select the best-fit private enterprise.
•• Selecting a qualified private party that can deliver on its promises.
•• Establishing an effective regulator and regulations to safeguard both the interests of the private investor and the general public.
•• Adopting a transparent approach to build support with key stakeholders.
Jeff Youssef, Partner Public Sector at Oliver Wyman, outlined the main benefits of private sector participation in infrastructure development, and presented the main factors that would ensure the success of collaborations between the public and private sectors.
Read more about the session in Oliver Wyman’s white paper titled Engaging the Private Sector in Infrastructure Development
Marsh • 9 SECTION 4
PRIVATE PUBLIC PARTNERSHIP (PPP): A CATALYST FOR PRIVATE INVESTMENT IN A WIDE ARRAY OF INFRASTRUCTURE PROJECTS IN THE KINGDOM
Before this session started, Marsh’s Specialty Leader for MENA, Gaurav Bhatnagar set the scene by touching on the PPP theme during his opening address. Oliver Wyman’s Partner for Public Sector Jeff Youssef, also mentioned PPP. Mr. Youssef also stated that an increase in infrastructure is linked with an increase in GDP. Shashank Rath, Director at Synergy Consulting, steered the session by outlining Synergy’s experience across various PPP projects in the Kingdom and they shared metrics on how to successfully work with developers and regulators to satisfy the needs of all stakeholders. Masic Logistics Chief Executive, Assim Alsuhaibani shared his view that while the private sector is willing to invest more, there are certain aspects that are evolving and need to be addressed from a risk mitigation perspective. He ascertained positively that after initial challenges of working within a PPP framework, progressing from core infrastructure to social infrastructure sectors, the results have been an overall a success with both parties working in a collaborative manner.
A question from the audience spurned a debate on who owned the risk. The audience member believed it sat more with the developers, whereas the panel, drawing on their own experiences, stated that there were ways
10 • The Route to Prosperity in the Kingdom - Executive Summary SECTION 4 PRIVATE PUBLIC PARTNERSHIP (PPP): A DOORWAY TO PRIVATE INVESTMENT IN A WIDE ARRAY OF INFRASTRUCTURE PROJECTS IN THE KINGDOM
to have adequate provisions to create a more equal balance of risk allocation. Panelist Shaun Johnson, General Counsel at ACWA Holding, elaborated further stating that although there were initial hurdles, ultimately all parties have to reach a common agreement because the need for PPP is recognised by the Government and public sector.
Mr. Bhatnagar sought opinions from the panel on the amount of investment required in order for the Kingdom to meet its vision. Both Mr. Bhatnagar and Mr. Youssef mentioned in their earlier sessions that the Kingdom required US$500 billion investment by 2040 (Oxford Economics) and US$940 billion, as per Oliver Wyman’s Bridging the Infrastructure Gap white paper. Currently KSA spends 2% of it GDP i.e. 3$350 billion on infrastructure. This gap of nearly $600 billion has to be filled by the private sector and PPP is the route to bridge this gap. The key challenge is how to attract the private sector to invest. Mr. Alsuhaibani’s view was that the rate of return is an important consideration besides having a robust regulatory framework to boost private sector confidence.
Processes and governance are also key areas to consider for successful PPP, according to Banque Saudi Fransi’s Head of Structured Debt, Aamir Syedain, as are finding qualified private sector organisations that are capable of fulfilling the work along with effective regulations and transparency. He further states that these are essential enablers to ensure that PPP fills the gap.
There were many questions from the audience – representing both private and public sector interests. The overall resounding conclusion was that PPP is a more than viable option, that will be able to support the development and delivery of both infrastructure and social infrastructure projects in line with the Kingdom’s Vision 2030 and further in the future.
3Source: Oliver Wyman (2017) - “Bridging the Infrastructure Gap: Engaging the Private Sector in Critical National Development”
Marsh • 11 SECTION 5
POWERING UP TO RENEWABLES: LEADING THE ENERGY MIX TRANSITION
The Kingdom is looking to diversify its economy research and development, manufacturing, and supply. and move away from its dependency on oil towards Once localisation and mobilisation have been achieved, renewable energy. As part of Vision 2030, a push for KSA’s domestic use for renewables will increase, a growing renewables sector is fundamental for KSA allowing for oil exports to increase, thus increasing to reach their goals. Between 2018 and 2030, it is GDP. estimated that KSA’s local energy consumption will increase by 300%, showing the requirement to meet Currently there are three main renewable projects in that demand with sustainable and natural energy KSA that have got the market talking. First is the Sakaka sources. The costs of producing renewable energy has 300 MW solar PV project and the second being the continued to decline in recent years and what’s more is Dumat Al Jandal 400 MW wind farm. The third, and by that in 2016 net additions of solar and wind surpassed far the most ambitious development is the staggering coal and gas, giving further incentive to switch to clean 200 GW solar PV development as part of the ‘Neom’ energy sources. KSA has targeted the implementation project, which if built to plan will almost triple the of 9.5 GW of solar and wind energy on an Independent entirety of KSA’s electricity generation capacity as of Power Producer (IPP) basis by 2023, which equates 2016. to 10% of their current power demand. It is estimated that approximately 40% of their energy sector will be A shift from conventional energy reliance to the attributable to renewable energy by 2030. increase in renewables production and consumption is of course, multi-faceted. It is not just about reducing As part of the Vision 2030, KSA is looking to localise a KSA’s carbon footprint, nor is it solely about diversifying significant portion of the renewables space, including the energy sector and economy from oil and gas. The
12 • The Route to Prosperity in the Kingdom - Executive Summary SECTION 5 POWERING UP TO RENEWABLES: LEADING THE ENERGY MIX TRANSITION IN KSA
plans will create a waterfall effect that will increase foreign and domestic investment, as expressed by the Kingdom’s desire to utilise the PPP model, job creation for thousands of citizens (Neom is estimated to create 100,000 jobs alone) and an increase in GDP and overall household wealth. Clearly this is an exciting time to be watching the Kingdom and its involvement in the renewables space.
LocalLOCAL Content: CONTENT: PotentialPOTENTIAL OPPORTUNITIES Opportunities FOR LOCALIZATION for Localization
Achieving the Vision 2030 Targets for Localization in Renewable Energy is a Function of AchievingEconomies the Vision of 2030 Scale Targets – Long-term, for Localization Sustainabl in Renewablee and CompetitiveEnergy is a Function Business of Economies Pipeline of Scale – Long-term, Sustainable and Competitive Business Pipeline Source: REPDO, SAGIA 17 May 2018 9 Source: REPDO, SAGIA
Marsh • 13 SECTION 6
THE NEW ECONOMIC DYNAMISM: THE CHALLENGES AND OPPORTUNITIES FOR INVESTMENT TRANSFORMATION
With an expected
•• Increase in Foreign Direct Investment (FDI) from 3.8% of GDP to a broader international level of 5.7%, •• Increase in the private sector’s contribution to the national GDP from 40% to 65%, •• Generation of US$9 billion to US$11 billion in non-oil revenues, •• Creation of thousands of jobs, •• Privatisation of almost everything from energy, water, transportation, telecommunications, petrochemicals, healthcare and financial sector
Source: Vision2030
Saudi Arabia’s privatisation program is being billed as the “sale of the century” and the cornerstone of Crown Prince Mohammed bin Salman’s Vision 2030 – a vision being mooted to bring in fresh revenue by motivating the private sector, diversifying the economy, improving the labour market, reforming the capital markets, and increasing the level of efficiency and productivity of the sectors identified – and this formed the basis of our panel discussion.
Diversification and privatisation are covering major sectors of the economy, and are viewed as two important and effective responses to a traditional state-led approach – they are key to the Kingdom’s transformation. The panel identified that an essential success factor for this transformation process is the provision of complete clarity and transparency to private investors of what is on offer, along with timings and equitable allocation of risks. Additionally, a point to note is that power, water (sewage), and other larger projects have had a good track record of garnering private sector interest, and lessons learned from these sectors are to be implemented across other sectors as well.
The panel further discussed how the GCC have used the private sector route in the past, but have wielded it tactically and on an ad-hoc basis; as such, not all such initiatives have been successful. Among some of the identified challenges were:
•• Lack of clear governance •• Limited support from stakeholders •• Ineffective planning and prioritization •• Limited legal framework and a planned institutional setup •• Need for a national policy
14 • The Route to Prosperity in the Kingdom - Executive Summary SECTION 6 A NEW ECONOMIC DYNAMISM: THE CHALLENGES AND OPPORTUNITIES FOR INVESTMENT TRANSFORMATION
Indeed, there are several challenges to consider. Investor confidence in this region has been subdued, and the negative impact of fiscal consolidation and tightening liquidity on growth has had a probable greater-than- expected impact. Rising populism and nationalism in some large economies could also possibly slow down trade, financial, and labour flows, and further dampen growth and exacerbate financial market volatility. Heightened risk of security dislocation in the MENA region and related adverse spillovers could intensify and have a bearing on how the Kingdom works to make the economy attractive to private capital investment.
One thing however is certain: An effective, well thought out long-term strategy for privatisation and diversification can bring clear benefits to the economy. Provision of complete clarity on good projects with an assurance around delivery and execution will pave the way for private capital to invest in the Kingdom and the expected transformation to be achieved.
“ DIVERSIFYING OUR ECONOMY IS VITAL FOR ITS SUSTAINABILITY AND WE HAVE BEGUN EXPANDING OUR INVESTMENT INTO PROMISING SECTORS”
Source: Vision2030
Marsh • 15 SECTION 1SECTION 7 PROTECTION FOR YOUR INVESTMENTSRISK ALLOCATION WITHIN A PRIVATE PUBLIC PARTNERSHIP (PPP) TRANSACTION
THE EVOLVING DYNAMICS OF THE INSURANCE MARKETS IN KSA AND GLOBALLY: ENSURING THE CERTAINTY OF OUTCOMES
During this panel, insurance industry leaders in the Kingdom and abroad discussed the insurance markets in the Kingdom and its ever changing dynamics – from the increased awareness of the consumer to evolving regulations, and rapid local and international markets reforms in line with the Kingdom’s Vision 2030.
Speakers discussed how insurance can support KSA businesses in the days to come, and it was apparent that claims and risk management, and an effective claims process, would be key to supporting prevention and mitigation of uncertainty. In addition, having active management to assist in controlling the relationship with key client stakeholders in the market would help to improve both business innovation and change in the evolving insurance industry.
The Saudi Arabia Monetary Authority’s (SAMA) recent regulations around property lines of insurance were discussed in relation to mandated risk surveys and the minimum client’s deductible retentions. Speakers highlighted how this regulation could mitigate attritional losses in the market, by increasing awareness of risks prompting more investment into safety awareness and operational excellence for managing natural catastrophe exposures. Looking at business continuity management as part of the risk management framework will also allow risk assessment to take place and mitigation plans to be put in place in this area.
The panel also discussed the current status of local and international insurance markets and the impact on the Kingdom’s business.
The local market continues to be driven by medical insurance, which is mandatory in the Kingdom, with prices expected to rise due to medical inflation and some mandatory cover enhancements scheduled for Q3 2018.
Motor business continues to be driven based on statistics and performance of accounts. While the majority of the business continues to be retail, this line has shown positive traction following the regulations imposed by SAMA. With females starting to drive during June 2018, a new wave of rates revisions and different claims trends are expected to take place.
16 • The Route to Prosperity in the Kingdom - Executive Summary SECTION 7 THE EVOLVING DYNAMICS OF THE INSURANCE MARKETS IN KSA AND GLOBALLY: ENSURING THE CERTAINTY OF OUTCOMES
As for property and engineering, with Vision 2030, the opening of the market to foreign investments, and the mega and giga-projects being announced and lead by the Government, an increase in activity is expected in the upcoming period; accordingly, new risks are expected to emerge opening the door for increased understanding of new risks trends in the insurance market.
International markets in the Kingdom remain well capitalised despite the significant catastrophes that have been reported during 2018. Yet, natural catastrophe tools are being developed to support exposure assessments and pricing to drive more certainty.
Marsh • 17 For more information about the Infrastructure Risk Management Forum, contact your local Marsh representative.
BASSAM H ALBADER MAHAZIR ALI GAURAV BHATNAGAR Chief Executive Officer Specialty Practice Leader Head of Specialty Marsh Saudi Arabia Marsh Saudi Arabia Marsh MENA Tel: +966 13 896 9655 Tel: +966 50 0122 104 Tel: +971 4 212 9142 email: [email protected] email: [email protected] email: [email protected]
MOHAMMED MATTAR HANI S. AL-MANDEEL DAL BHATTI Eastern Province Leader Country Business Development Leader Construction & Infrastructure Practice Leader Marsh Saudi Arabia Marsh Saudi Arabia Marsh MENA Tel: +966 13 896 9655 Tel: +966 11 434 2746 Tel: +971 4 520 3853 email: [email protected] email: [email protected] email: [email protected]
TALAL OMAR BAHAFI VIVEK PARKASH NIRAV MODI Western Province Leader Construction & Infrastructure Practice Leader - Private Equity, Mergers & Acquisitions Practice Marsh Saudi Arabia Marsh Saudi Arabia, Bahrain, Kuwait Leader Tel: +966 12 652 1504 Ext. 145 Tel: +973 1 720 4288 Marsh MENA email: [email protected] email: [email protected] Tel: +971 4 212 9362 email: [email protected] MOHAMMED AL-KHABBAZ MARK BUTSON Non EB Leader - Central Province Country Head Employee Health & Benefits Marsh Saudi Arabia Leader Tel: +966 11 434 2744 Marsh Saudi Arabia email: [email protected] Tel: +966 13 896 9655 email: [email protected] ASAAD QASSAS Country Placement Leader Marsh Saudi Arabia Tel: +966 13 896 9655 Ext. 107 email: [email protected]
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