Saudi Arabia’s decision to drop plans to use private finance in its Landbridge rail project is a salutary confirmation there are parts of the Middle East economy that privatisation just cannot reach.

The Landbridge is one of the world’s biggest transport schemes and will include a 1,000-kilometre-long rail line through the Hijaz mountains and the Arabian desert to Riyadh, and another 115km line connecting Dammam and Jubail. It is a mouthwatering prospect for the global railway industry and local construction companies. The likely cost of $7bn is enormous.

The original plan was to develop the Landbridge on a 50-year build-own-transfer (BOT) basis. The tenor of the concession was a challenge for the banking industry before the 2007/08 credit crunch. After, it was mission impossible.

This is the latest of several large regional infrastructure projects where private finance is now no longer seen to be viable. But it is the one that most eloquently expresses publicly what many have been saying privately for years: that public capital spending often is the only sensible option.

Saudi Arabia has never had an ideological attachment to government ownership. The private sector flourished as the oil boom transformed the kingdom’s economy in the 1950s and 1960s.

Stimulating investment

The kingdom’s approach to economic development, although influenced by the statist solutions then favoured in most developing countries, was pragmatic. Nevertheless, by the start of the 1980s, government held the commanding heights of the kingdom’s economy. The private sector was wealthy but felt unloved.

This started to change with the rise of the Washington Consensus, a view that practically everything should be open to private investment. The Saudi government began to refer to the private sector with increasing enthusiasm. Business people were lionised. The turning point was the relaunch of the Saudi stock exchange, seen as the key to stimulating private investment in more areas of the economy.

The Saudi government officially adopted privatisation as a strategic priority in 1997. In the early part of this decade, the Saudi Telecom Company and the Saudi Electricity Company (SEC) were incorporated and floated. It seemed like the dawn of a new era. But it proved to be a false one.

The first reason was Saudi Arabia’s financial position recovered after hitting rock bottom with slumping oil prices in 1998-99. The need to raise money by selling government assets became less pressing.

Credit crunch

Then there was scepticism, created by the Asian crisis and the dotcom boom and bust, about the desirability of depending on equity markets. There were other issues. Devising the right regulatory environment for privatised industries was more complex in reality than it seemed principle. And now comes the hammer blow of the credit crunch.

Champions of privatisation hope this will be no more than an interruption to a trend they believe to be irreversible, inevitable and desirable. In the end, they argue, there is no alternative to private finance. They may be right. But probably not about basic infrastructure.

Deregulating and privatising services makes abundant sense. But roads, railways, power stations and water processing plants are too vital for long-term economic development to be left in the hands of finance markets, particularly since most of us are now utterly confused about what they are for.

The years of delay with the Landbridge, and the shattered hopes that private finance would make it happen, will have a profound impact on policymakers, and not just in Saudi Arabia. Their appetite for plans that depend on innovative privatisation programmes has been blunted. The death of the Landbridge private finance plan may also spell the end for new forms of infrastructure privatisations in the Middle East.