Why regional tensions threaten Saudi PPP pipeline

Experts explain how the Red Sea conflict could hike Saudi PPP costs and delay investment decisions

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Senior economists have warned that the continuing Red Sea conflict between Western powers and Yemeni Houthis could adversely affect investor sentiment into Saudi Arabia’s giga-projects.

In recent weeks, a coalition of forces led by the US and UK have bombed a number of Houthi locations in Yemen and against Iran-backed Shia militants in Iraq. The action has been taken in an effort to prevent Houthi attacks on Western ships in the Red Sea heading to and from the Suez Canal, which have escalated in recent weeks in retaliation for Israel’s war in Gaza.

Although experts have told Partnerships Bulletin that the Gaza conflict is not currently having an impact on the wider region’s PPP and infrastructure investment potential, there is growing concern that the activities in the Red Sea could.

Saudi Arabia’s major plans could be particularly vulnerable: the kingdom’s infrastructure projects, which are valued at over $1.25trn, incorporate major initiatives such as smart city NEOM and tourism district Red Sea Global, with a large number of PPP-funded deals expected to be involved in these developments.

According to a note from sovereign wealth fund advisory Global SWF, Saudi Arabia’s Public Investment Fund faces “significant risk” to the array of giga-projects under its umbrella, most of which are within range of Houthi drones and cruise missiles.

“Since most of these projects have a tourism dimension, their success could be undermined by any ongoing, lengthy conflict, even if there is no direct hit by Houthi strikes,” Global SWF said.

Nasser Saidi, former Lebanon economy minister and founder of Nasser Saidi & Associates, told Partnerships Bulletin that there may be more “perceived investment risk”, which could delay some PPP investment decisions in the region.

There could also be some significant impacts on costs. Graham Robinson, global infrastructure and construction lead at global economic forecasting firm, Oxford Economics, said that the ramp up in Red Sea attacks is “reigniting inflationary pressures” on construction materials globally, including for Saudi’s giga-projects, as significant flows of high value construction materials and components are shipped to the kingdom.

Robinson continued: “Saudi has alternative ports for importing construction materials, but the Red Sea ports, closest to many of the Giga Projects, will be constrained, and transportation costs will be heightened as a result of hostilities.

“Saudi ports infrastructure capacity will see heightened pinch points and transport of heavy materials within the kingdom will need careful planning. Any further escalation will have more damaging effects, as insurance coverage is withdrawn for shipping.”

Robinson noted that there will be an impact on all projects, including PPP deals, which will make investors wary until all the implications are more fully understood.

However, Saidi added that many of these deals will be insulated to a certain extent because of their long-term nature. “These are long-term projects with investors with patient capital,” he explained.

Abdulelah Aleidan, senior director of infrastructure advisory and head of transport at the kingdom’s National Centre for Privatisation and PPPs, told a Partnerships Bulletin webinar in December that Saudi Arabia is undergoing a “once-in-a-lifetime” transformation, with more than 200 approved PPP projects, plus a further 200 awaiting approval across 16 sectors.