Public-private partnerships set to rise in Saudi Arabia as major transport projects get under way

Despite lower government spending, transport infrastructure projects are set to continue in the Kingdom, with increasing opportunities for private sector involvement, whether through privatisation, private contracts or public-private partnerships (PPPs).

PPP

In 2015 the authorities revealed a 10-year expansion programme for the public transport sector, which will see $91bn spent on infrastructure and $51bn on operations. The programme includes new bus routes, metro lines in major cities, and thousands of kilometres of railway. Yet, in a break from the norm, the Kingdom announced plans to bring private partners on board to help develop these projects. A fast-track scheme for foreign investments that focuses on key sectors, such as transport, has also been announced. According to Faisal Bafarat, executive-director for investment development at the Saudi Arabian General Investment Authority, “… Over the next 10 years, Saudi Arabia will spend $140bn on metro and national railway projects alone in Riyadh, Jeddah, Makkah, Medina and across the Kingdom. Companies setting up shop in Saudi Arabia will not only have access to billions worth of projects domestically, but they will also have access to a larger and continuously developing market, containing 300m people living just within a three-hour flight of Riyadh.”

Healthy Precedent

Transport PPPs include the $1.2bn contract to build and operate Prince Muhammad bin Abdulaziz International Airport in Medina. Signed in 2012 between the General Authority of Civil Aviation (GACA) and an international consortium led by Turkish airport operator TAV, the 25-year concession was the first full PPP project in Saudi Arabia. The contract has been structured as a build-transfer-operate (BTO) model, rather than the more traditional build-operate-transfer model, leaving the ownership of the airport infrastructure in the hands of GACA, and giving the responsibility for building and operating the facility to the private partner. Further PPPs planned for the aviation industry could help spread the BTO model into other areas.

Challenges Ahead

Developing PPPs will likely remain a challenge for the Kingdom, particularly with respect to the issue of final ownership. The Landbridge project, for example – a 950-km railway linking Jeddah on the Red Sea with Jubail on the Gulf, – was initially planned as a PPP. However, the parties reportedly could not agree on the financial terms, leading to long delays. In 2011 the project was re-launched under the direction of the state-owned Saudi Railway Company. All of the Kingdom’s railway projects are fully funded by the government, with private sector involvement constrained to limited-term operation and management contracts.

Thus, the Kingdom may need to show more flexibility in its ownership stakes in infrastructure. One test case could be the international airport in Taif, 70 km from Makkah. In May 2014 GACA announced it would be pursuing a PPP model for the new airport. The chosen PPP partner will also operate the existing airport until the new international airport is completed. Tendering for the contract to finance, design, build and operate the airport began in March 2016.

Cause For Optimism

With public spending on transport and infrastructure set to fall by 62% in 2016, there is a strong incentive to move towards greater private sector involvement in infrastructure projects. Funding for projects like the Riyadh Metro and King Abdulaziz International Airport in Jeddah has fallen from SR63bn ($16.8bn) in 2015 to SR23.9bn ($6.4bn) in 2016, and while the authorities have said that the scale and timelines of major projects will not be affected by the reduced budget, this may be difficult to accomplish without outside financing or assistance. The scale of transport infrastructure spending earmarked for the next decade should lend itself nicely to signature PPPs, which could help alter the landscape for PPPs in other sectors of the economy.