Saudi Arabia commits to private partnerships in transport sector

27 March 2017

Saudi Arabia is aiming to privatise all airports by 2020

If you are flying in and out of Riyadh these days, it is more than likely you will find yourself sandwiched between bankers and lawyers.

The Saudi capital has become the region’s focal point for ambitious public-private partnership (PPP) projects and privatisation programmes. The aviation and rail sectors will form a central part of the kingdom’s privatisation plans.

Over the past few weeks, the General Authority of Civil Aviation (Gaca) has tendered four airport PPP schemes, with one awarded last week and, if things go to plan, another to be signed over the next few weeks.

The release of tenders is premised on the fact that airports are not merely infrastructure projects; they are commercial, revenue-generating entities that can pay for themselves over time if they are developed using the right framework, business model and leadership. This should ensure local and regional banks have appetite for providing financing for the kingdom’s airport PPP programme.

Given the relative novelty of the PPP model and its many variants in this sector in the region outside the power and water sectors, lawyers will play a key role in negotiating the terms of these contracts and in ensuring investors will be able to recover their investment regardless of the outcome of the scheme.

The past few weeks have marked a significant change in pace for Gaca, which last year indicated it wanted all 27 airports in the kingdom to be privatised by 2020. The ultimate goal is for the authority to focus on its role as an aviation regulator and devolve airport ownership and operation to private entities.

Gaca awarded an airline operator’s certificate (AOC) last year to two privately-owned airlines, SaudiGulf Airlines and Nesma Airlines, which shows its commitment to modernise and introduce competition into its aviation sector. It took four years for SaudiGulf to obtain the AOC, which is required for a carrier to begin commercial operations. Gaca also managed to form Riyadh Airports Company in 2016, and is in the process of converting King Fahd International airport in Dammam into a shareholding company,

Based on the developments during the first quarter of 2017, it is not unlikely for Gaca to achieve its stated privatisation goal by 2020. According to regional projects tracker MEED Projects, there are more than $30bn-worth of planned, on-hold and unawarded airport schemes in the kingdom, most of which require financing.

The developments in recent weeks appear to indicate that banks, contrary to popular opinion, are not shutting off these opportunities. Indeed, their participation will probably be the single most important factor that will determine the success of Gaca’s new strategy. Their continued participation will depend on how well the first few airport PPPs are executed.

It must be mentioned that the kingdom already has a successful airport PPP template in place. Prince Mohammed bin Abdulaziz International in Medina was completed and entered full operations on schedule in June 2015. It is operated by Tibah, a special-purpose vehicle formed between Turkey’s TAV and local contracting firms Saudi Oger and Al-Rajhi. The $1.2bn project was financed by Saudi Arabia’s National Commercial Bank (NCB), Sabb and Arab National Bank under the supervision of the Washington-based International Finance Corporation (IFC).

Apart from airports, banks are also understood to be keeping an eye on the kingdom’s railway sector, where at least $100bn-worth of schemes are planned, on hold, or being studied. Like most infrastructure projects in the kingdom, all of these schemes will require private sector funding in one form or another.

Indeed, taking the PPP route could also potentially help avoid the problems facing the projects planned for the international airport in Riyadh. The $2.9bn redevelopment of the four terminals at King Khaled International – awarded as a build contract in 2014 – has stalled since last year, and it is unclear when Gaca and the contractor will reach an agreement to proceed with the construction work.

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