Riyadh airport sale a challenge for privatization policy, and for Goldman Sachs

They are tricky things to sell, airports. With high infrastructure costs, and major consumer interface and national strategic considerations to take into account, they tick many of the boxes marked “avoid” in modern investment strategy.

So this week’s news that Saudi Arabia has hired investment bank Goldman Sachs to handle the sale of a stake in Riyadh’s King Khaled International Airport will represent a rigorous test of how the Kingdom intends to manage the huge privatization program — worth some $300 billion, including the estimated $100 billion Saudi Aramco initial public offering (IPO) — which is at the heart of the Vision 2030 reforms.

News reports about the hiring of Goldman — later confirmed by the Saudi aviation authorities — did not specify what kind of sale would be involved. Would it be a sale to public equity investors via an IPO? A sale to private equity firms? Or a sale to a trade partner, like an existing airport operator?

Exactly how much is for sale is also unclear. Given a reluctance to hand over control of something deemed so strategically important as an airport, you would think it would be in the 20 to 49 percent range.

Britain wrote the book on airport privatizations in the 1980s, and then came back to add several chapters of addenda 20 years later.

The government of former Prime Minister Margaret Thatcher sold the airports owned by the British Airports Authority (BAA) in 1986 in a classic “popular” privatization whereby new shares were issued and sold to ordinary investors. They were called “flotations” then rather than “IPOs,” but the principle was the same: Create the shares and then sell them on the open market.

As a vehicle for personal enrichment of investors, it probably worked, at least for a while. But it did little to enhance the airport experience because, largely, the same people were left to manage the privatized entity — essentially government bureaucrats for whom the passenger experience was unimportant.

By the early 2000s, BAA was facing growing criticism over quality standards at big British airports, and a new strategy was put in place: BAA was sold to a Spanish infrastructure company and required to sell off some of its smaller airport assets. Other strategic investors came in, including Qatar Holding with 20 percent.

That consortium still owns Heathrow, Gatwick and Stansted and a few other airports in the UK. None of those are models of passenger gratification, it must be said. 

The lessons from the British experience are that the public IPO model is not really appropriate for airports, which require an element of large-scale, long-term capital investment. For that reason, Goldman will almost certainly be looking for a private equity partner with vision and deep pockets, or a trade partner with industry experience and possible synergy with their own business.

Saudi Arabia seems to like the trade partner route: Already the Irish airport operator DAA manages the new Terminal 5 at King Khaled International Airport, while Singapore’s Changi Airport Group recently won the contract to operate King Abdul Aziz International in Jeddah.

Goldman is well versed in the airport business, having been involved throughout the changes to British airport corporate structure described above. But even so, if the big US investment bank is formally appointed to the Riyadh privatization process, it is a test for it too.

So far, Goldman has not figured prominently on the lists of advisers to the Kingdom’s privatization process. It has not been mentioned at all in the biggest prize, the Saudi Aramco IPO. If it manages to sell Riyadh successfully, keeping the government and passengers happy, it could pick up a lot more of the huge program of state sell-offs.

It could also find itself the adviser of choice on the Kingdom’s airports. There are another 24 of those, including the busiest in Jeddah, where much of the traffic is from Hajj and Umrah pilgrimages. You could not call that a traditional business stream for Goldman, whatever its airports expertise.