Airport deal signals that Riyadhs commitment to PPP is serious
It is not the biggest contract signing, but it is arguably the most significant in recent times as the construction industry looks for signs that the regions largest market, Saudi Arabia, is starting to recover.
A team of Turkeys TAV and the local Al-Rajhi Group has signed an agreement with the Saudi Arabia General Authority of Civil Aviation (Gaca) to build and operate a new terminal at Yanbu airport for 30 years. By GCC standards, the airport is not a big one. It is expected to handle 1.2 million passengers in 2017, with the capacity increasing to 3 million once the new terminal is completed.
What makes it so significant is that it is a public-private partnership (PPP). Ever since oil prices dipped in late 2014 the region has been looking to PPP as a way for governments to deliver infrastructure without the upfront financial burden of paying for the construction, while at the same time bringing in expertise from the private sector.
This process has taken time. Outside the power and water sectors, there are few examples of PPP projects being successfully delivered, and most countries still need to develop the regulatory and legal frameworks needed to give the private sector the confidence to invest. To deliver this Riyadh has established a PPP unit that with help drive privatisation in the kingdom.
At the same time, there has been scepticism about whether governments are truly committed to PPP. This is not without good reason. The market still remembers the cancellation of Abu Dhabis Mafraq-Ghuweifat highway scheme and the apparent volte-face that the government took once oil prices rebounded from lows in 2009.
The Yanbu deal shows that this time the resolve of the regions governments to use the PPP model is stronger. Oil prices have been lower for longer and there is the expectation that they will not return to the 2010-14 highs any time soon if at all.
It is also not a surprise that it is an airport deal that is blazing the trail. A consortium that includes TAV and Al-Rahji is operating Medina airport on a PPP basis after signing a deal in 2012, and construction work was completed on schedule in 2015.
With another airport PPP scheme now signed, the market will be confident that other Saudi airport PPPs such as Taif will move forward.
More importantly, there will be increased confidence in the PPP model in general, and with projects ranging from housing to metros, and hospitals to schools all planned that award of Yanbu airport could arguably the most significant award of the decade.
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