Saudi Arabia’s nascent privatisation programme gathered speed this month when it signed contracts for the development and operation of five airports in the country, reports Arabian Business.
The General Authority of Civil Aviation (GACA) entered into long-term public-private partnerships (PPPs) with companies from Turkey, Germany, Singapore and at home, in deals set to invigorate the kingdom’s privatisation agenda in line with Vision 2030.
Described as “game changing” by the Clifford Chance lawyer who led the negotiations, the deals are significant as they represent the start of a more sophisticated approach to PPPs in Saudi Arabia.
They are also among the first tangible examples of how PPPs can be deployed beyond the power and water programmes, notes PwC Middle East partner and infrastructure lead, Maarten Wolfs. “The GACA airport concession contracts represent a significant boost for the privatisation agenda in Saudi Arabia and the region,” he states.
Contracts were signed on June 8. Under the deals — which are long-term concession arrangements rather than transfer of ownership — Singapore’s Changi Airports International (CAI) will operate King Abdulaziz International Airport (KAIA) in Jeddah for 20 years; a consortium comprising Munich Airport, Consolidated Contractors Co and Saudi Arabia’s Asyad Holding will develop and operate the new Taif International Airport; and a consortium of Turkey’s TAV Airports Holding and local firm Al Rajhi Holding Group will operate Prince Naif Bin Abdul Aziz Airport in Qassem, Hail International Airport and Prince Abdul Mohsen Bin Abdul Aziz Airport near Yanbu. Contracts for the Taif, Qassim, Yanbu and Hail airports are based on a build-operate-transfer (BOT) model while the Jeddah deal is an operate and maintain arrangement — no construction is required. The value of the deals was not disclosed.
Under the Vision 2030 economic diversification programme, Saudi Arabia intends to privatise 11 airports by 2020 along with other state-owned organisations.
GACA chairman and the kingdom’s transport minister, Sulaiman Al Hamdan, told Saudi Press Agency the latest deals would help drive increased foreign investment and economic activity in the kingdom, and improve the quality of services at the five airports.
Previously, only one airport operated on a PPP basis, Prince Mohammad Bin Abdulaziz International Airport in Madinah. Under the terms of the 25-year deal signed in 2012, Tibah Airport Development Co, a special purpose vehicle formed by Turkey’s TAV Airports Holding, Saudi Oger and Al Rajhi Group, have led a $1.2bn airport expansion project including a new three-storey passenger terminal and upgraded runway. The renovated airport opened in 2015 and is to be operated as a private enterprise.
The concession agreements signed this month are more groundbreaking, according to Riyadh-based Mohamed Hamra-Krouha, partner and head of finance at Clifford Chance who advised on the deals. He says not only were they completed in record time, but they do not include ‘traffic risk guarantees’, unlike the Madinah PPP. The contractual caveat promises to compensate PPP stakeholders should a minimum quantity of passengers not be achieved, as a way of offsetting risk and encouraging companies to get involved. This time, the parties have split the commercial risk.
“These contracts saw a departure from the traffic guarantee model adopted at Madinah, which was the first airport privatisation in Saudi Arabia and wasn’t really considered a model to replicate,” Hamra-Krouha tells Arabian Business. “The approach taken this time is more in line with the commercial and risk-taking approach we should be looking at [in the future].
“It is also a departure from utilities privatisations, which typically adopt a guaranteed ‘take or pay’ model. So it is a useful precedent for how risk is allocated in other PPP contracts.”
The deals offer other lessons for emerging privatisations. “The Madinah PPP took significantly longer [to progress] from inception to closure than these latest (around a year),” he says.
“In this instance, Vision 2030 and huge political will helped to speed things along, while the critical mass of doing five deals at once gave credibility to the partnerships.”
Each investor or consortium will aim to achieve financial close for the deals in the coming months. Last week, Turkey’s TAV was reported to be in talks with banks to secure $250m to develop the three airports for which it is now responsible.
How the concessions are managed will be watched closely by government departments, market analysts and private companies considering a slice of the action in a fast-developing Saudi Arabia. As JLL MENA head of research Craig Plumb says: “With Vision 2030 in place, and the economy adjusting to lower economic growth, we predict there will be increased activity in the kingdom’s real estate sector in 2017…[including] through a series of PPPs.”
CBRE Middle East managing director Nick Maclean concludes: “Saudi Arabia’s PPP strategy to bring international operators and investors into its aviation infrastructure is an important step in the GCC’s journey towards creating a globally attractive capital market.
“Good quality infrastructural assets are in high demand from institutions and sovereign wealth funds across the world and their release from wholly public ownership or operation is an exciting way to tap into new sources of capital and expertise. I am sure this initiative will be replicated throughout the region.”