The Saudi legal system is based on Islamic law (Shariah). Shariah is derived from the Holy Quran and Sunnah (the witnesses' sayings and actions of the Prophet Mohammed). In addition to Shariah Law, the Saudi legal system is supplemented by enacted legislation such as the Foreign Investment Laws, Companies Law and the like. If there is a conflict between the two, and a law or governmental decision is challenged, Shariah legal principles will always prevail.
The Shariah legal principles are set out in general terms. Scholars and legislators utilize analogy and deduction where necessary to adapt to modern day arrangements; the details of which are to be agreed between the parties. The concession agreement is typically the contract which provides the overarching structure to a PPP transaction and in line with the general Shariah principle of the sanctity of agreements (albeit if for a few exceptions), the provisions of the associated agreement are typically open to negotiation and agreement between the parties. This is important as the project agreement is fundamental to the success of the project, particularly as the agreement is expected to cover an extended period of time, much longer than the time required to construct and build the public asset or service.
Historically, major project finance transactions in the Kingdom, such as the independent power producer (IPP) schemes, have been based on key project agreements that are subject to English rather than Saudi law, so it will be a major step if the core PPP contracts are made subject to Saudi law.
Furthermore, the legislative instruments governing large-scale PPP projects are under development. The Government Tenders and Procurement Law, issued by Royal Decree No. M/58 dated 4 September 2006 (Procurement Law) governs most contracting with government departments (or government owned companies) and has been relied on heavily to provide the legislative basis to undertake large infrastructure projects to date, including some PPP projects. There is currently plans to amend the Procurement Law, with a draft of the new Government Tenders and Procurement Law being shared with the public for comment by the Ministry of Finance on 28 October this year. It should be noted that a majority of the power and water sector PPP projects undertaken in the Kingdom to date have not been subject to the Procurement Law, as the principal procurers in these projects have not been Government bodies subject to that law.