Saudi airport PPPs – government plans USD1 billion programme for two small airports, more to come
After several years somnambulating, the Saudi Arabian privatisation show is back on the road.
The show being originally intended to cover 200 projects across 17 sectors, airports have been included - mainly small ones, but a notable one being at Medina, the Kingdom's fourth busiest. However, there have been casualties along the way as well, for a variety of reasons, both air transport and politically related.
There is the impression that while the country's huge city and vacation resort projects are under way and attracting global attention, the Saudi government is treading cautiously in this domain, sounding out those investors who will commit to smaller airport projects now, with the bigger fish in mind for later.
Hence, just two of a projected four concessions will now be tendered this quarter. One for a revamp of an airport and the other a new-build greenfield one (Abha and Taif airports), but both with ambitious growth and passenger targets that the contractors will probably be held to - although recent changes in Saudi law will protect them from issues that have thwarted previous deals.
If they are successful, two others will likely follow.
Saudi Arabia, even at this low level of activity, is relatively a hotbed for airport privatisation in the region, and the rest of that region will be watching for encouraging signs of foreign interest and co-operation that might prompt their own belated action.
Summary
- Saudi airport privatisation momentum is reinvigorated at two small airports: this quarter Abha and Taif are to be made available for DBFOM contracts that collectively amount to USD1 billion.
- The method has been centralised on DBFOM (design-build-finance-operate-maintain) rather than BTO (build-transfer-operate), which is more investor-friendly.
- The programme has been in limbo for years, as a result of airport-related issues and unrelated political ones.
- Despite the modesty of the programme, Saudi Arabia leads the way in the Middle East in privatising its airports.
- A number of foreign companies are already actively managing Saudi airports, including Groupe ADP (TAV), and may be attracted here, although the airports are small now.
- Changes in Saudi law are designed to help foreign investors avoid issues that have thwarted previous deals both there and abroad, and that might inspire new investors, too.
- The country's drift away from western influence and into the arms of the BRICS could influence the selection of partners.
- The attraction at Abha is a projected international economic zone, and at Taif it is its development as a religious centre.
- If they are successful, two further concessions are expected this year as Saudi privatisation gets back into gear.
USD1 billion PPP contracts to be issued for two small Saudi airports at Abha and Taif
The Saudi government's National Centre for Privatisation (NCP) is expected to issue requests for qualifications in 1Q2024 for two public-private partnerships worth USD1 billion in total, to develop regional airports in Abha and Taif.
Both projects will be 30-year design-build-finance-operate-maintain (DBFOM) public-private partnerships.
The former will expand the existing airport at Abha and the latter will create a new greenfield airport.
Several foreign firms already managing airports in the country
Several non-Saudi companies are already present in the country's airport portfolio, including at Medina [alt: Madinah] (Groupe ADP/TAV, the former having a large minority share in TAV), since 2012. The same consortium, which also involved Saudi companies, was later selected to develop and operate airports in Yanbu, Qassim and Hail.
Saudi airports
Thereafter, in 2016 a management contract to operate a new terminal (5) at Riyadh's King Khalid International Airport was awarded to Dublin Airport Authority (daa International).
Before that there were multi-year management and consulting contracts, the most prominent being with Fraport (Riyadh and Jeddah), under which Fraport staff served in executive positions.
All of this established Saudi Arabia as the leading country in the Middle East for airport privatisation, or at least - projected privatisation.
Hiatus in the privatisation process arose out of airport-related and unrelated issues
The entire future privatisation process was questioned, though, when GACA (the Saudi General Authority of Civil Aviation) announced that it would undertake a fresh international tendering process for the concession contract at the new King Abdul Aziz Jeddah International Airport, following an internal review which raised "a number of fundamental concerns".
GACA then terminated its concession agreement with Singapore's Changi Airports International (CAI) and Saudi Naval Services (SNS), in accordance with the terms of the agreement. Other concession agreements were also suspended, and the privatisation process went into a state of limbo.
These latest announcements concerning Abha and Taif are not new projects, first being made public almost a year ago when the NCP announced plans to tender for four new airport projects under the public-private partnership (PPP) model as part of a bigger pipeline of 200 privatisation and PPP projects across 17 sectors. They are perhaps indicative of the stop-start progress of Saudi airport privatisation, which accelerated in 2017 but then faltered as a result of the Jeddah incident (referred to above) and external events which cast the government and national leader in a poor light internationally.
The country is modernising fast, but drifting away from western influence
In Saudi Arabia to tender four new airport privatisation projects, a previous CAPA - Centre for Aviation report on the state of airport privatisation in Saudi Arabia from Apr-2023, it was stressed that the country had changed in the past five years.
It increasingly covets foreign tourists, and especially those prepared to 'splash the cash' in the new global scale cities and resorts that it is creating, epitomised by the huge developments of 'Neom' and 'THE LINE' - a vast 'smart' linear city, as its name suggests, which will be 170km (110 miles) long but without streets and cars.
At the same time, it was distancing itself politically from the west, from where it has previously received support, and was seeking allies elsewhere, which would likely impact on the selection of the 'private' partners for these ventures, including the airport privatisations.
Saudi Arabia is another BRIC in the wall from Jan-2024; Argentina's Milei says 'don't cry for me' and takes a rain check
And that scenario was then further complicated by the invitation extended in Aug-2023 by the BRICS political and economic bloc to six countries - Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates - to join it.
Full membership would take effect on 01-Jan-2024, and five of them did so, including Saudi Arabia, but excluding Argentina under its newly-elected president, (the right wing) Javier Milei, who is engaging in his own rapid privatisation programme there. But the programme is one that is not going down too well, so far, with the population (the majority of Argentina's airports have long been privatised anyway).
BRICS member countries could feature in the bidding process, but possibly not Argentina
The formal entry of Saudi Arabia into the BRICS, but not Argentina's, does increase the likelihood of organisations from the full complement of members - which includes the original Brazil, Russia, India and China, together with the later South Africa - bidding for Saudi airport projects. A mutual 'self-help' philosophy pervades the organisation - and especially in the air transport sector, as CAPA - Centre for Aviation has observed previously.
But ironically, it probably diminishes the opportunity for one of the world's largest private sector airport operators, Argentina's Corporación América Airports (CAA), from taking part, assuming that it wanted to.
CAA isn't in the Middle East at the moment, but it is not so far away in West Asia (Armenia), the homeland of its founder.
But in 2023 it did try to enter the African market, with concessions in Nigeria which were subsequently suspended by the government. It might be a case of once bitten, twice shy, outside its comfort zone.
But there will be plenty of other interested parties, from within the BRICS and outside it.
RFQs for PPP tenders are now anticipated shortly with the NCP, in collaboration with the Saudi aviation authority Matarat - publishing firstly the 30-year DBFOM tender for Abha, followed later by an announcement on Taif.
It is believed that prospective bidders, including major airport operators, have already taken on advisors.
Abha will amount to the expansion of the existing airport, but Taif requires a new greenfield airport to replace the smaller existing facility.
Capex for each project is not yet known, but they will jointly require in excess of USD1 billion.
The fifth and sixth largest airports, but still minnows
Both airports are much smaller than the country's principal gateway airports, which include the capital Riyadh, Jeddah, Damman and Medina, which is the second holiest city in Islamic tradition. Abha is reported to be the fifth largest airport in the country, and Taif the sixth.
Independent verification for that claim is not possible, but it is known that Abha handled 4.3 million passengers in 2019 (when its capacity was just 1.5 million) and Taif, 1.7 million. By comparison, the total at Jeddah was 37.5 million.
The projects at these airports go hand-in-hand with large injections of capital into the two regions in which they are situated.
Money, money, money will be attracting people to Abha
Abha, the capital of the Aseer region, is expected to become a major economic zone, attracting three times the number of business visitors in 2030 as it does presently.
The new (expanded) Abha airport will be able to handle 13 million passengers annually. The ambition has been increased from 8.5 million by 2030 originally, which is suggestive of how that objective has been scaled up.
Location of Abha Airport, Saudi Arabia
At the airport 92% of seat capacity is on home-based domestic airlines.
The three leading airlines are all Saudi-based - Saudia, flyadeal and flynas (the first two state-owned) - and collectively they have more than 92% of capacity - up from 86% in Apr-2023, and with an even greater share of movements.
All flights are within Saudi Arabia or to/from Middle East or North African cities.
Full service/low cost carrier capacity is split 62%:38%, and that has not varied in the past year (2023-2024).
More than a third of capacity (36.5%) is on aligned airlines (SkyTeam).
The DBFOM arrangement being applied to Abha will be conducive to greater interest from investors
Originally the facility at Abha was to be procured under a 30-year build-transfer-operate (BTO) contract - an unusual vehicle in air transport, but more common in other sectors, and in which asset ownership is transferred once construction is complete rather than at the end of the contract, as is the case with a BOT.
The DBFOM contract now envisaged (the same as originally for Taif, below), would remove the early transfer of ownership requirement, which would not have been attractive. DBFOM contracts sometimes do not tie investors to high levels of expenditure on infrastructure in the early days either, a bugbear of some of the concessions in Brazil, for example.
Taif International Airport is targeting a capacity increase from 600,000 to four million passengers annually by 2030, scalable to 7.4 million passengers by 2053 by way of its new airport, which should be completed by then. The new facility is to be constructed under a 30-year DBFOM contract, as was the original intention.
Why the type of contract should initially have varied at Abha is unknown. It has been common in, for example, Brazil, for concession periods to vary between airports in any one auction tranche, but not the type of concession.
Taif's growth prospects hinge on its religious centre functionality
Taif, which is just east of Mecca, is a key centre for international pilgrims, and the expansion of the airport should increase their number.
The airport's profile is broadly similar to that of Abha but with a greater international component, as evidenced by 32% international capacity.
The second largest airline is Kuwait's Jazeera Airways. LCC and low cost capacity is greater at Taif than at Abha.
There are services to and from Central and Eastern Europe and almost half the total capacity is on aligned airlines, with all three of the main ones present to some degree.
The Taif PPP, with a value of USD950 million, was previously tendered (in Jun-2015) and awarded to a consortium comprising the Oman state-owned logistics firm Asyad Group, the Greek Consolidated Contractors Company, and Munich Airport International.
It was signed in Apr-2017, but did not close after a reported breakdown in the relationship between the consortium and Matarat, and the failure of the Saudi government to provide a payment guarantee in expectation of traffic development not reaching the anticipated levels.
It is possible that stipulation by the consortium again was linked to developments in Brazil at the time, when the original tranche 1 and 2 concessionaires were very unhappy about what they considered to be wildly inaccurate traffic forecasts provided as part of the government's sale proposition. That led to legal changes that have benefitted investors since, and which have resulted in handsome financial compensation in some cases.
Recent legal changes should offer confidence to existing and potential investors
In Saudi Arabia, too, there have been legal changes implemented that affect investment decisions since 2017, including a law to protect private sector participants in government projects.
Those laws, backed by the top tier of politicians, provide a formal framework for the procurement of PPPs and offer credit support, among a range of guarantees to investors.
That should offer a greater degree of confidence to both existing foreign investors in the country and potential newcomers.
Hail and Qassim airports probably next on the list
It was mentioned earlier that this is just part of a much bigger privatisation movement that has been reinvigorated.
Following these two concessions, if they are completed successfully, those at Hail International Airport (targeted increase in capacity to 3 mppa) and the Prince Nayef [alt: Naif] bin Abdulaziz International Airport (capacity increase to 5.3 mppa) seem to be next in line.
Details concerning the contract type and duration, and the anticipated transaction launch, have not yet been made public.