Starting from issuing the governed rules of revenue-sharing method by Minister of Finance’s resolution No. (1877) dated 24th of Dhuʻl-Hijjah 1443 H, it is worth saying that the revenue-sharing method is not a recent practice in Saudi Arabia as it has a valuable experience of practicing such method in technology’s projects based on Council of Ministers’ resolution No. (110) dated 05th of Rabiʽ al-Awwal 1425 H, where the contractual relationship between several of Ministries and the companies owns by them, gives us a good example of it.
Therefore, this article briefly presents the key concepts and provisions included in the governed rules of the revenue-sharing method and the promising opportunities that do offer.
The revenue-sharing method is built on a number of essential concepts that represent a crucial element in the revenue-sharing contract’s efficiency, in particular, when a government entity is party to it. Here we have lightened on (3) most important concepts as follow:
- Building the contract on counter obligations and rights that defines the contract’s purpose explicitly, in a manner that erases ignorance on how to execute the contract.
- Addressing the main risks usually associated with such contracts, e.g. data protection, that creates from providing the public services from the private sector party in the revenue-sharing contract on behalf of the government entity, also, furnishing a review mechanism for the government entity to monitors the private sector party’s execution, and to prepare plans for continuous services providing and emergencies situations, additionally, the dispute resolution, where the two parties agree on potential disputes classification, in order to not solve the simple generic disputes through a similar mechanism as the technical complicated ones.
- Placing a formula for calculating and collecting the financial consideration, such formula shall point out what, when, and how the financial consideration will be collected.
With the aim of lifting the revenue-sharing contract’s efficiency and success, the issued rules of the revenue-sharing method set criteria for when to apply such a method. The criteria are that the revenue-sharing contract shall not exceed (5) years, to distinguish such a method from the privatization method, also, the government entity’s contribution could be tangible or intangible assets, where the private sector party can exclusively either usufruct, rent, or be licensed to benefit from such assets in accordance with the relevant laws and regulations. In addition to that, the government entity should not be the source of revenue nor a provider of any warranties or insurance support to the private sector party in such a contract.
Furthermore, the governed rules of the revenue-sharing method include the journey of applying such a method, starting from preparing a feasibility study that should fulfill the defined requirements, getting through the government entity’s president and Ministry of Finance approval, and then further complemented with releasing the tender according to the Government Tenders and Procurement Law, bearing in mind that there is an additional phase, which is negotiation with the bidders regarding the revenue-sharing formula before the award phase, in which afterward, signing service-level agreement (SLA).
In conclusion, the governed rules of the revenue-sharing method furnished what is essential and specific to the revenue-sharing method, referring the details to the Government Tenders and Procurement Law provisions and considering maturity and experience that shall be created by the practice.
Income-Sharing Journey Contract Structuring
In income sharing, the foundation is establishing clear and measurable obligations between contracting parties. This requires drafting contracts that clearly reflect what each party provides and expects in return, to ensure balance and fairness in the distribution of benefits and risks.
Core Concepts Key Risks Highlighted
Joint ventures between the public and private sectors involve multiple risks that must be managed wisely and precisely. This includes data exchange risks, transparency requirements, project management, handling disputes, and market fluctuations. Designing contract clauses to address these risks enhances project efficiency and contributes to long-term success.
Review and Monitoring Procedures
The necessity of an effective monitoring and review system ensures compliance with contract terms and precise implementation tracking. Procedures include clear performance indicators, business continuity plans, and arrangements for handling defaults or crises, to ensure that public services and third-party interests are not affected.
Income Sharing Equation
This equation regulates how financial compensation in the contract is calculated and income is distributed among the parties. The mechanism depends on performance and results, enhancing efficiency and effectiveness. It must be transparent and agreed upon by all parties to ensure fairness and motivate performance.
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Limits and Standards of Income Sharing
Contract Duration Limits
Contracts in the income-sharing model are usually limited to a duration not exceeding five years. However, this period can be extended depending on the nature of the contracts and the project requirements. This flexibility is important for adapting to long-term projects that require significant investments and longer collection periods.
Defining the Source of Income
It is essential to clearly identify the sources of income generated from the contract, emphasizing that these sources should not be primarily funded by the state. This ensures transparency and reliability in project financing and reduces direct financial dependency on the government.
Relevant Regulations and Regulations Preparation of Competition Documents and Feasibility Studies
The studies and documents necessary for initiating competitions must include all legal and technical requirements as specified in the rules, to ensure that all submitted proposals meet the required standards and reflect the realism and effectiveness needed for project implementation.
Competition Launch and Pre-Qualification
Competitions must be launched through an accreditation portal, using competition methods that include pre-qualification of applicants. This helps in more effectively evaluating proposals and ensures the selection of offers that meet the highest professional and technical standards. The provisions of the government procurement and competition system must be observed to ensure transparency and fairness in the process.
Approvals and Negotiations Ministry of Finance Approval Controls and Conditions
Before initiating any contract under the income-sharing model, it is essential to obtain approval from the Ministry of Finance. This approval is specifically required in the following cases:
Financial Proposals:
Contracts that include a final proposal for the income equation exceeding the usual financial limits.
Contract Duration:
Contracts extending beyond the standard duration of five years.
Expected Income:
Any contracts expected to generate income exceeding five million Saudi Riyals. These procedures ensure that projects comply with the state’s financial and regulatory standards, promoting stability and economic transparency.
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Negotiations and Offer Evaluation Formation of the Negotiation Committee
To ensure effectiveness and transparency, a special committee is formed to conduct negotiations with applicants. The committee is responsible for:
Evaluating Offers:
Reviewing all submitted offers and assessing them based on the criteria set in the competitive documents.
Negotiations:
Negotiating with applicants to improve contract terms and ensure the best possible terms are obtained.
Contracting and Post-Qualification Contracting Procedures
Upon reaching an agreement, the contract is documented according to the requirements stated in Article (10) of the rules governing income sharing, considering the provisions of the government procurement and competition system, especially if pre-qualification has not been applied.
Post-Qualification
In cases where pre-qualification has not been applied, post-qualification procedures are implemented to ensure continued efficiency and effectiveness in contract execution. These procedures ensure that contractors maintain high performance and adhere to contract terms throughout its duration.
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