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Thu 16 Jul 2009 04:00 AM

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Ask the expert: David Harley

Question: When it comes to developing Middle Eastern airports is there an appetite for using PPP delivery methods?

Ask the expert: David Harley

Question:When it comes to developing Middle Eastern airports is there an appetite for using PPP delivery methods?

Expert:DLA Piper partner David Harley

With transportation hubs being key economic drivers, many GCC States are investing heavily in their airport infrastructure to ensure that capacity is sufficient to facilitate future growth.

A shortage of liquidity together with a reduced appetite for risk has, however, resulted in a general shortage of lending for transport and other infrastructure projects in the region. Coupled with increased budgetary pressures brought on by the drop in oil prices, it is likely that many countries have had to make difficult decisions regarding the viability and scale of various projects and how best to finance them.

Along with the much publicised airport expansion projects such as Saudi Arabia’s US$20 billion King Abdulaziz International Airport in Jeddah and Dubai’s planned Al Maktoum International Airport at Jebel Ali, there is also the construction of a new $700 million airport at Ras Al Hadd in Oman, while Bahrain is undertaking a several billion-dollar upgrade of its international airport.

But given the current drop in oil revenue, the need to fund other economic and social infrastructure and the capital-intensive nature of airports projects, governments may consider delivering these projects off their own balance sheets. Public Private Partnerships (PPPs) provide a tried and tested means of securing private funding for delivering public projects.

The sharing and management of risk, whereby each party is allocated the risk which it is best placed to manage, is a key benefit that the PPP model brings. This results in a project in which each party is clear about the risks that they are assuming and the implementation of appropriate risk mitigation practices, which ultimately benefits the delivery of the project. Quality and efficiency is another benefit as, in a genuinely competitive environment, PPPs tend to produce public infrastructure that is higher in quality than the more traditional method of publicly-financed projects. In addition, PPPs encourage operational efficiencies, including a focus on the output or service and the transfer of skills to the public sector.

Despite the benefits, the current economic position has severely curtailed the lending ability and appetite of banks. With lenders withdrawing from the market and continuing uncertainty about the prospects for economic recovery, securing the private investment required for PPP procurement has been and will continue to be challenging. Lenders that are willing and able to finance such projects will have an added impetus to achieve the best outcome for their individual credit committees, with loan tenors, margins, the level of debt funding available as a proportion of total funding required and the allocation of risk being some of the areas to be impacted.

The consequence in the short-term is a level of uncertainty about the capacity of the private sector to participate in regional airport projects. Nonetheless, there is a sentiment that the PPP market will recover and it is encouraging that the region, despite the current economic climate, appears committed to investing in essential infrastructure in order to meet growing population forecasts and provide further stimulus for economic development.

In this context, the upgrade of the Hajj Terminal at Saudi Arabia’s King Abdulaziz International Airport is a significant development in the use of PPPs in the airport sector in the GCC region. With government concerns regarding private sector access to strategic national assets, and a requirement for a Sharia-compliant financing structure, this PPP project was a particular groundbreaker in the region. The project was procured on a Build-Transfer-Operate (BTO) basis whereby the concession rights to the terminal and other intangible assets were sold to the lenders and then leased back to the SPV using an Ijara financing structure. The significance of this deal is that it was the first airport BTO in Saudi Arabia, a country which is traditionally opposed to allowing private sector participation in its infrastructure assets, and also the first time such a structure has been used in a Sharia-compliant manner.

As such, it offers a model for other GCC countries who wish to retain ownership of their strategic airport infrastructure and desire an Islamic law compliant financing structure, while drawing on the benefits of the PPP method of procurement. With a large number of airport expansion plans set to proceed and despite the current uncertainty in the financial markets, PPPs are likely to play an important role in the region’s success in the long-term.

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