The Kingdom Tower in Riyadh, Saudi Arabia.
Smart cities are rising in the GCC and especially in Saudi Arabia – from a one mile-high tower development to the world’s single biggest smart city project. It’s an exciting period of digital transformation across all regions of the Kingdom, underpinned by Vision 2030 and the National Transformation Program as the targets, including three cities in the Kingdom ranked among the world’s top 100 cities, by 2030.
Today, Saudi Arabia has one of the world’s most ambitious and diverse smart cities development programmes, with major projects underway focusing on vertical themes such as healthcare, financial services, industry, tourism and mixed use developments. This is a smart cities programme with a purpose.
Smart cities thrive on innovation – essential when you consider the scale and speed of the development of these greenfield projects, and not only in terms of ICT and smart city services. With the scale of ambition in Saudi Arabia, this inevitably demands financial innovation, as well, and success will ultimately depend on the ability to attract private investment into the smart city programme.
Public sector partners in the kingdom are looking for sustainable finance and funding partners; given the scale of the smart city projects, government agencies cannot go it alone for investment for all the operations and the PPP model is now emerging to finance projects based on an agreed business model.
It’s already clearly recognised in the Kingdom as PPP (Public Private Partnership) projects become more common, and the draft PPP law published in 2018 aims to provide guidance to help reduce the risk and provide reassurance for private investors making long-term commitments to PPP projects in the Kingdom.
Investor confidence is essential as smart cities are high-cost, complex, long-term major infrastructure projects, requiring the mobilisation and orchestration of multiple partners in a collaborative ecosystem created to deliver the project. And make it economically viable and sustainable – as well as smart.
PPPs are long-term agreements between the public and private sector partners – the sharing of investment and financial risk, and the design-build-operate responsibility all shared on an agreed basis; the entire project and risk may be transferred back to the public sector owner for ongoing operations, at the end of the contract. A PPP contract might require 25% financing by the public agency and then a private partner/s to co-finance the balance.
In Saudi Arabia, the government is building strong bridges to international and local private investors as it looks at the privatisation of a series of government assets and up to 75% of public services, and a shared revenue model for the implementation of smart ICT services within these existing operations.
Around 70% of smart city development projects in Saudi Arabia are linked to government entities, with the ultimate ambition for these to become fully privatised or state owned, and the government is taking the initiative to stimulate PPP opportunities across smart cities and other mega projects.
You cannot build a smart city without a Vision. Innovation starts at the outset with the smart city blueprint, the business case and model, the use case for the smart services required to deliver the resident/customer experience, and critically the financial model that will ensure it meets it objectives.
It must also be a sustainable model through the life of the city, from its design, to the build and operate phases, to the transfer stage when it may be handed over to the project owner/developer for ongoing operations. But the smart city is a place where there is a continuous flow of new use cases on which to build new smart city services – whether these are to enhance the citizen experience, create revenues or deliver operational cost efficiencies, so the financial model must be able to accommodate and flex to these evolving demands.
PPP is not an easy option; it brings together different organisational mind-sets and cultures, and this can lead to misunderstandings. The advantage of the PPP model may be clear in terms of risk and reward/revenue sharing, but it still depends on the business model for the smart city – this could be a design-build-operate, BOT model, based on an OPEX model for smart city services, for example.
There are many great success stories coming out of Saudi Arabia with smart city projects developing financing models that support the project vision and purpose; the industrial city with a PPP model based on a public agency and private partner supported by technology vendors in a multi-year revenue sharing build-operate model, with assets ultimately returned to the agency; the digital city supported by public sector finance and operated by private sector technology partners over a multi-year programme.