Social Impact Bonds (SIBs) are being used by Saudi Arabia as part of its Vision 2030 drive to diversify its economy and tackle the country’s biggest problems. This mechanism enables investment in water scarcity combatting, renewable energy and youth employment projects that cannot be funded without measurable social outcomes and investor returns. SIBs are good news for attracting private investment into the mix because two-thirds of the population is under 30 and there is a growing need for sustainable solutions. Already ahead of a broader market appetite for such financial instruments, investor appetite for such sustainability-linked financial instruments has proven, having raised USD 8.5 billion in green bonds (in 2022 and 2023). In doing so, Saudi Arabia is leading a new and groundbreaking way of funding social projects, which will bring significant economic and environmental benefits.
Role of Social Impact Bonds
Social Impact Bonds (SIBs) are performance-based financing where investor returns are dependent on the success of measurable social outcomes. In education and healthcare, poverty alleviation and social housing, SIBs have been successful around the world. For example, the UK and US have used SIBs to address problems of homelessness and criminal justice reform; other countries have used SIBs to address inefficiencies in healthcare systems and unemployment.
Source: Arab Gulf States Institute in Washington
The Public Investment Fund (PIF)’s commitment to sustainable finance is already well known. In 2022 and 2023, PIF has issued $8.5 billion of green bonds, the largest in the region, to fund clean energy and environmental projects. These bonds helped to underpin Saudi Arabia’s ambitious climate and environmental goals, including the Kingdom’s pledge to produce 50 per cent of its energy from renewable sources by 2030. These green bonds have proven successful, and the government is expanding financing mechanisms by introducing SIB as a key method for financing social infrastructure projects. The Green Financing Framework introduced in 2023 is a step the government takes in its efforts to expand the financing options for sustainable development. Now that SIBs are marching into this frame, Saudi Arabia can continue to leverage the rising interest in impact investing. Some facts regarding leveraging SIBs for Key Social and Environmental Challenges are as follows:
- The situation in Saudi Arabia is one of the world’s most severe water scarcity challenges: the country depends on desalination and groundwater extraction. The already strained supply is expected to increase demand for water by 20 per cent in the next decade.
- The Kingdom of Saudi Arabia’s Vision 2030 aims to diversify its energy mix by 2030 to 50% renewable energy. Further, the large-scale solar and wind energy projects committed to the NEOM Green Hydrogen Project and Red Sea Solar Complex are already in Saudi Arabia.
Source: Climate Scorecard
- The population of Saudi Arabia is more than 60 per cent of its population under 30, so it has a demographic challenge on education, skills development, and employment opportunities.
- Vision 2030’s target to increase female participation in the workforce to 30 per cent by 2030 can be funded through SIBs, which will allow projects to provide women with access to job training, entrepreneurship programs, and leadership development.
Synergy Between SIBs and PPPs
In the realm of large-scale infrastructure projects, Saudi Arabia’s approach to PPPs is already a matter of fact. For instance, international firms playing a role in the Riyadh Metro, a $23 billion project that depends on private sector participation to get up and running. What it does is based on the same program that was launched in 2017 by the Ministry of Housing, which will give the society housing and it will build 500,000 new homes until 2030 with what we call the Sakani Housing Program, but it is much easier and much cheaper. The initiative — which blends public spending and private investment — has already constructed more than 100,000 units. There is an estimated housing demand deficit of 1.5 million homes and 200,000 new homes every year are required to meet the 2030 target.
The Saudi Public Investment Fund (PIF) has already shown the way, already offering $8.5 billion in green bonds in 2022 and 2023. Funded by green bonds, these clean energy projects mean Saudi Arabia has hit its target of powering its energy from renewable sources at 50 per cent by 2030. The success also demonstrates the appetite for impact investing in the region and paves the way for SIBs to engage in financing social infrastructure projects (in particular housing affordability, water scarcity and youth employment).
Key Initiatives and Projects
- The Ministry of Housing is the flagship initiative of the Ministry to raise the homeowners rates among lower and middle class Saudi citizens. The program is delivering over 100,000 homes since it launched in 2017, on course to deliver 500,000 new homes by 2030. There is an extremely high demand for affordable housing and the deficit at 2023 will be 1.5 lac units. To meet the Vision 2030 target, 200,000 new homes per year had to be built, closing this gap. The partnership of this program with both public and private sectors has seen them provide affordable housing and access to finance for their citizens.
Source: Sidra Capital
- The Public Investment Fund (PIF) has raised $8.5 billion in green bonds this year and is next to finance clean energy and environmental projects, in line with its sustainability goals. The issuance of green bonds is part of a broader Green Financing Framework that the government is establishing to roll out other efforts to combat climate change, and to attract private sector investments into sustainable projects.
- The Riyadh Metro is one of the biggest public-private partnership (PPP) projects in the region and worth $23 billion investment in such infrastructure. The project is to revolutionize transportation in Riyadh — the most congested city in the Kingdom — which is a project to enrich the living experience. The 176-kilometer-long metro system, including six lines and 85 stations, once completed, is expected to carry 1.5 million passengers daily. International consortiums provide capital and expertise to ensure firm delivery of the project, and the project relies heavily on private sector investment.
- With nearly 60 per cent of its population less than 30 years old, Saudi needs jobs today. But the government has also made a few moves to address youth unemployment — 'Nitaqat,' a system that provides financial incentives for firms to hire Saudi nationals, and 'Misk Foundation,' a program meant for the provision of job training and business funding for young Saudis. In technology, healthcare and engineering, the Kingdom aims to have youth employment hit 40 per cent by 2030. The Saudi Human Resources Development Fund (HRDF), which also runs the training and employment services, has pledged to create 500,000 jobs for youth by 2025.
- One of Saudi Arabia’s most pressing challenges is water scarcity. However, the government is investing in big projects to be sure that has water quality, and one of the largest desalination plants in the world is the $9 billion Ras Al Khair Desalination Plant. This facility is capable of producing 1.025 million cubic meters daily of fresh water to meet about 3 million people in the Eastern Province. Saudi Arabia has also advanced in renewable energy, as well as in water management. It includes huge solar and wind projects, including the Al Faisaliah Wind Power Plant, and its target is to produce 2.6 gigawatts of electricity by 2030.
- Under a $7 billion PPP deal the King Abdulaziz International Airport (KAIA) in Jeddah is expanding. The project will transform the airport into one of the biggest in the region in 2030, capable of handling 80 million passengers a year. It is crucial to Saudi Arabia's Vision 2030 to grow the tourism sector, aiming to attract 100 million visitors by 2030, and is desperately needed by the Arabian Peninsula.
Conclusion
Seeing some light at the end of the tunnel, Saudi Arabia has the chance to lead the world in the application of SIBs and PPPs to finance social projects. Continued efforts by the Kingdom to push for economic diversification will be able to benefit from efforts to attract foreign investment and promote sustainable development and the most pressing social challenges. Integrating this model into the wider economic plan will achieve the short-term needs of the existing population as well as set the ground for a successful and sustainable future for future generations. Social Impact Bonds will be integrated into Saudi Arabia's financing strategy to meet the demands of its fast-growing population in areas like affordable housing, renewable energy, and youth employment. SIBs will help the government further diversify its economy as it pushes for Vision 2030, with private investment to fund these key sectors and measurable, impactful outcomes. These projects won’t just make a difference to millions of Saudi citizens, but they will also help strengthen the kingdom’s long-term economic and social stability.
Disclaimer: The content provided in this article is for informational purposes only and should not be construed as investment advice. Tanemya Capital will not be held responsible for any decisions made based on the information provided. Always consult with a qualified financial advisor before making any investment decisions.
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