Medina Airport PPP, Saudi Arabia


The Medina Airport PPP project, which is credited for being the first public-private partnership airport concession in Saudi Arabia, is also the first airport PPP in the entire GCC region.

The landmark deal reached a successful financial close in July this year and saw three local banks lead the US$1.2 billion financing to make it the first fully Islamic financed airport project globally. There is no doubt that all these "firsts" will make a good case for future transport PPP projects in the MENA region, especially after the past year's political and social turbulence which has put infrastructure at the top of governments' agendas.

The project is also a major feat for the transport sector in the MENA region because previously most of the successful PPP transactions have taken place in the oil & gas, power and water sectors. While activity in the traditional sectors is bound to continue given the need for such infrastructure, Medina Airport's success will hopefully motivate developers and lenders to be part of the region's growing transport infrastructure pipeline.

Project scope

The Medina Airport project will facilitate expansion and modernisation of the existing Prince Mohammed Bin Abdulaziz International Airport to cater for the growing passenger numbers to the Medina city - one of the most significant religious centres for Islam.

As pointed out in an IFC report, the city is not only a major destination point for pilgrims but also a designated centre for knowledge-based industry in the country. The existing airport which serves the Medina region has been struggling with the rising number of religious visitors to the city and the infrastructure has been in need of upgrade for some time. With some figures suggesting that passenger numbers are set to increase exponentially to around 14 million a year by 2021, the procurement could not have come at a better time.

The Saudi Arabia government first announced its intention to tender the Medina Airport project under a PPP structure in 2009. World Bank member IFC was appointed to advise the government on the pilot project from the very beginning and in spite of experiencing delays during 2010, the project still gathered strong interest from both domestic and international consortia.

Some 10 international, regional and local firms submitted qualification applications and four consortia finally submitted bids for the project in mid-2011. At the end of a careful evaluation process by the procuring authority - Saudi Arabia's General Authority of Civil Aviation (Gaca) -  TIBAH was named preferred bidder for the project in August 2011 and signed the 25-year BOT concession agreement at the end of October. The consortium consists of TAV Holdings of Turkey, Al Rajhi Holding Group and Saudi Oger, both from Saudi Arabia. The TIBAH consortium presented a fully financially committed bid and banks were mandated in the same month TIBAH was named preferred bidder.

Under the project's first phase, TIBAH will deliver a new state of the art passenger terminal with a capacity of eight million passengers per year in 2015 (current capacity is 3.3 million), increasing to 19 million passengers towards the end of the concession period in 2037. The first phase comprises construction of a new terminal building, apron and taxiway and extension of the existing runway. Phase two is set to begin in 2021.

The project was structured as a build-transfer-operate contract (as opposed to a B-O-T model) as the Saudi government expressed a desire to retain ownership of the asset. Under a BTO contract the physical assets are transferred back to the government once construction is completed and not at the end of the concession.

The project is also expecting to set a new precedent regarding the gross revenue share it will bring in, estimated at around 54.5 per cent. According to an IFC report the airport will generate an estimated US$7 billion of revenues for GACA during the concession.

The airport also boasts energy efficiency and will employ best practices in recycling, greenhouse gas emissions, and water use once fully modernised and expanded. It is said to be the first "green" airport in the MENA region, as it is required to attain the internationally recognised LEED certification.

There are also social benefits to the project which provides direct employment through construction and airport operations, and indirect employment through increases in tourism and the development of the new Knowledge Economic City in Medina (to be linked to the airport), which aims to be a national centre for knowledge based industries, generating around 20,000 jobs.

Financing

Predictably local banks came out in full force to finance the deal, securing a US$1.2 billion debt package. However both domestic and international lenders showed good interest, as did sponsors at the bidding stage.

"The transparency and good structuring behind the deal attracted lenders and sponsors from all over. But local banks here have good liquidity and provided most competitive pricing when compared to their international peers," Muneer Ferozie, principal and head of the project at the IFC told IJ News. The three lenders - Arab National Bank, National Commercial Bank and SABB - involved in the project were comfortable with the long-term loan tenor and provided attractive margins on the project.

The deal comprises a SR1.635 billion three-year equity bridge murabaha facility, matching the three-month construction period, a SR2.4 billion plus US$48 million 18-year project facility, US$60 million standby facility and US$20 million working capital facility. All tranches were structured under Islamic finance requirements. All three banks picked up equal tickets on all tranches of the debt on the project.

Due to the BTO model, the financing agreements have been structured so that the airport operating rights are sold to the lenders and then leased back by the project company in exchange for lease payments, the IFC report notes.

Japanese Bank SMBC - which acted as financial adviser to the sponsors on the project - was thought to have been initially considering lending, but could only have lent in dollars and in the end the sponsors discounted this. The Islamic Development Bank had also been expected to lend but decided not to since sponsors had difficulty accommodating the sharia requirements of the IsDB with those of the already-mandated bank group.

The project benefits from hard currency revenue from foreign travellers and guaranteed traffic growth due to the annual hajj pilgrimage to Mecca.

Advisory Roles

SMBC acted as financial adviser to the sponsors, Norton Rose was legal adviser and Atkins and Mott MacDonald were technical advisers. Pascall + Watson is architectural sub-consultant to Atkins for the passenger terminal.

The IFC was financial adviser to the authority and White & Case was legal adviser.

More landmark deals to come for MENA

As mentioned the airport PPP deal is a first for both Saudi Arabia and for the entire GCC region. It is significant in its procurement as well as in its use of pure Islamic financing. While experts do point out that Medina Airport certainly has challenges to face along the way, it does not take away from the fact that it was a well-structured pilot transaction.

The airport will face bouts of heavy seasonal traffic since it stands to primarily serve pilgrim visitors, that will come in huge numbers for a period of two months each year. However the sponsors and guarantor were aware of these when framing the business case for the project and the planned expansion was absolutely necessary.

The project's success will pave the way for future project financing activity in the region away from the traditional power sectors. As noted by IJ previously there is definitely a strong pipeline of transport and social infrastructure projects across the Middle East and governments are hoping to see equal enthusiasm from developers and lenders alike, especially in this post Arab-spring era.

Snapshots

Asset Snapshot

Medina Airport


Est. Value:
USD 1,200.00m
Full Details
Transaction Snapshot

Medina Airport Expansion PPP Phase I


Financial Close:
02/07/2012
SPV:
Tibah Airport Development Company
Value:
$1,204.29m USD
Debt:
$1,204.29m
Debt/Equity Ratio:
100:0
Concession Period:
25.00 years
PPP:
Yes
Full Details