PRIVATIZATION TAKE-OFF

Saudi Arabia 2018-19 | TRANSPORT & AVIATION | FOCUS

Growing air traffic and tourism numbers mean Saudi Arabia needs to privatize its nearly 30 airports, and the Kingdom is hoping to do so by 2020.

As part of the economic reforms set out in Vision 2030 and the National Transformation Plan (NTP) 2020 to boost economic diversification and reduce reliance on oil, the Saudi Arabian aviation sector started an ongoing privatization process. There are 27 airports in Saudi Arabia, and the General Authority for Civil Aviation (GACA) aims for all of them to be privatized by 2020.

By 2016, Saudi Arabian airports handled more than 84 million passengers. In the last six years, domestic and international passenger travel in Saudi Arabia has increased 10% annually. Moreover, travel is expected to surpass 140 million by 2022, spurred by the open skies policy, recently launched tourist visa, and growing number of pilgrims for Hajj and Umrah. For the final growth driver, both Medina and Mecca airports need to go through an expansion process to allow increased pilgrim traffic and reach the goals set in Vision 2030. Medina is one of the Kingdom's four main airports, and Jeddah, Riyadh, and Dammam complete the quartet. Together, they represent more than 80% of the passenger traffic.

The goal of the privatization process is to contribute to improving the level of services for passengers and turn the airports into profitable units. In the process of privatization, each airport will initially be transformed into a private operational company that will be owned by the Public Investment Fund (PIF). Moving forward, the fund will take on the responsibility for future privatizations, which can be done through sales of equity stakes or IPOs. For this, the Saudi Arabian government has established three ways airports can be privatized.

The first option would be to transfer ownership of an airport to a company and establish a new board to manage it. This is the case for King Khaled International Airport in the capital. It is the first major privatization of an airport through the sale of a minority stake. The international financial institution Goldman Sachs was hired to manage this transaction. The second way is awarding the operation and maintenance tasks of an airport to a private company, but with GACA bearing the capital cost. This is the case for King Abdulaziz International Airport (KAIA) in Jeddah. In 2017, the Singaporean Changi Airports International, in a consortium with the local Saudi Naval Services, won a bid to operate and maintain KAIA. However, in early 2018, the concession agreement was terminated, and GACA announced that a new tendering process will be released for the airport.
Finally, the third option is through a build-operate-transfer (BOT) system. This is the case for the airports in Medina, Taif, Hail, Qassim, and Yanbu. Notably, foreign companies will be allowed to invest in the privatization Saudi Arabia's airports without the need for local partners. More so, local investment will be capped to encourage and give more opportunities to foreign investors.
The business opportunity of the privatization process caught the attention of Turkey's TAV Group. In 2017, in a consortium with the Al Rajhi Holding Group, they were awarded 30-year concession rights to develop and operate three small international airports in the Kingdom: Yanbu, Hail, and Al-Qassim.

The strategy for the airports in Saudi Arabia not only includes expanding existing airport infrastructure, but also new airports. In fact, there are plans to build two near Riyadh. In addition, a new airport is expected to open in 2020 in Taif, a city near Mecca, with the main objective of serving the religious tourism segment. It is being developed in cooperation between Consolidated Contractors Company, Asyad Holding Group, and Flughafen Munchen, which operates Munich's airport in Germany. In the end, once the privatization process is finalized, GACA will remain the regulator and controller of the aviation sector. However, questions remain on how the airports, and broader aviation sector, in the Kingdom will compete with other hubs in the Gulf.