With the declining oil prices challenging the Middle East government budgets, the continuing expansion of airport infrastructure across the region will require alternative financing solutions.
Deloitte’s latest report on the construction industry in the region highlights the alternative forms of funding available to deliver the required infrastructure across Middle East airports and to counteract the potential reduction in the ability to raise necessary finance.
“Airport privatization and the appeal of public-private partnerships (PPPs) have long been talked about in the region with varying application of PPPs as a financing solution,” explains Deloitte Corporate Finance Ltd. Middle East’s Head of Aviation Dorian Reece.
“However, there is a broad spectrum of differing financing options across the risk, return and control considerations when tapping the PPP market,” Reece said.
“The track record of successful airport PPPs provides a cautionary tale and one that the Middle East region’s governments and investors should consider. Some of the challenges witnessed include lack of regulatory clarity, optimism bias, and weak dispute resolution,” he added.
According to the Deloitte report, there are varying models being applied to airports across the spectrum of privatization options.
The art and the science of structuring an optimal airport PPP centers around achieving the best value for money, which comes from carefully arriving at the appropriate risk allocation between the public and private sectors. It is also important that the required controls needed to protect the traveling public are in place while at the same time putting in place a pricing mechanism, which maximizes financial returns.
A strong reflection of the appetite for airport PPPs is the current interest from leading global airport operators seeking to secure airport transactions or management agreements in the region, including Malaysian Airports, the Airport Company of South Africa, and Changi Airport Group’s rumored interest in the operate and maintain concessions in Saudi Arabia currently in the market.
The Deloitte reports predicts continuing success of the Middle East region’s airports, particularly Dubai, Abu Dhabi and Doha, enabling them in the future to seek to leverage their global brand and pursue international opportunities.
With declining funding from government for major projects, we are also observing the region’s airports increasing their focus on maximizing returns from existing assets as well as leveraging PPPs delivery models of standalone projects such as baggage system upgrades, security and car parks.
“We are increasingly seeing airports within the region seeking to better understand opportunities to generate additional revenue to improve overall profitability," said Cynthia Corby, partner and construction leader at Deloitte in the Middle East.
“This is likely to see further airports in the region implementing similar charges to enhance the financial returns that airports deliver. We are also seeing the need to drive improvements in performance through airport operators gaining greater insight into the true performance (Return on Investment, Return on Equity) of their assets. This is through airports improving cost allocation and improving the modelling to assess the whole life cost of the assets to ensure the right level of capital investment is being made as efficiently as possible,” Corby added.
Comments