Managing Director and Senior Partner; Global Leader, Travel, Cities and Infrastructure
Dubai
The World Is Facing a Global Infrastructure Investment Shortfall
Economies are sustained by an intricate global network of infrastructure spanning energy generation, manufacturing, education, healthcare, and transportation via roads, railways, and ports. Infrastructure is a fundamental catalyst for productivity and economic growth. A 2022 World Bank study highlights the multiplier effect of infrastructure investment, finding that every dollar invested by the public sector generates an additional $1.50 in economic
Despite the existing stock of infrastructure, the Global Infrastructure Outlook reveals a substantial shortfall in investment, projecting a cumulative gap of approximately $15 trillion by
Exhibit 1. The cumulative gap between infrastructure supply and demand is expected to reach $15 trillion by
Historically, large-scale infrastructure projects have been funded mainly by governments. However, the magnitude of the required global investment, compounded by already overstretched public budgets, highlights a crucial emerging role for the private sector. Governments worldwide are increasingly formulating plans to bolster Private Sector Partnerships (PSPs), collaborative ventures where private players provide capital and expertise to develop public infrastructure, partnering with the government to deliver and maintain these projects.
A $2.5 Trillion PSP Infrastructure Opportunity in the GCC
Despite efforts to diversify, the GCC region remains heavily reliant on oil which accounts for over ~35% of government
At a recent PPP MENA Forum, economic leaders revealed that an impressive $4.1 trillion worth of PSP projects are planned for the region. Notably, 65% of these initiatives, representing a ~$2.5 trillion, are set to take place in GCC
Saudi Arabia leads the GCC in the value of total projects planned from 2024 to 2030 (Exhibit 2). UAE and Qatar also show significant potential, with substantial investments to enhance infrastructure and diversify their economies. Exhibit 2 highlights the steady rise in project value across the leading GCC countries, reflecting a regional commitment to infrastructure enhancement and economic diversification. While Saudi Arabia commands the largest share, the UAE and Qatar also present strong opportunities for PSPs, making them attractive markets for private sector investment.
Exhibit 2. Awarded and planned projects in the
The Balanced Path of PSPs: Seizing Opportunities and Managing Challenges
Many of governments’ biggest economic goals will not be solved by public funding alone. Complex issues like large-scale infrastructure development, efficient public service delivery, and sustainable urban growth can often be tackled most effectively through PSP. In this scenario, everyone wins—both governments and the private sector. And the win could be substantial: PSPs bring a host of advantages, including improved project selection, accelerated timelines, cost optimization, and enhanced service quality (Exhibit 3). By leveraging these benefits, governments can significantly improve their infrastructure, boosting economic growth and delivering better community outcomes.
Exhibit 3. Seizing the advantages of PSPs
While Public-Private Partnerships (PSPs) offer significant benefits, they also present several challenges. The first is overcoming regulatory and institutional inertia—being willing to adapt existing frameworks to accommodate new partnerships. The second challenge involves resources—ensuring adequate transaction & monitoring funding and expertise to implement these ambitious projects. Additionally, governments must navigate practical challenges such as loss of control, misaligned incentives, to successfully integrate PSPs into their infrastructure plans (Exhibit 4).
Exhibit 4. PSPs also come with challenges that must be managed carefully
To fully harness the potential of private sector participation in infrastructure, governments need a clear, strategic vision and a comprehensive framework for execution. With these in place, challenges can be effectively managed through robust collaboration between governments and the private sector. Establishing clear legal and regulatory frameworks that define roles, responsibilities, and risk-sharing mechanisms is essential. This fosters transparency, accountability, and public trust. Building capacity within the public sector to manage and oversee complex PSP projects is also crucial. Engaging stakeholders through comprehensive public consultations ensures the alignment of interests and secures the necessary support for projects. By learning from successful case studies and adapting best practices, governments can unlock PSPs’ full potential, driving economic growth and significantly improving public infrastructure and services.
Pulling It All Together: A Model of Successful PSP
Bengaluru (Bangalore) International Airport is a standout success story of what a well-executed Private Sector Partnership can achieve. As the country's first greenfield airport developed under a PSP model, it set a new benchmark for airport privatizations and demonstrated the great potential of such
- Bankability and financial backing: The Indian government played a pivotal role by providing an ~$40 Mn 20-year interest-free
loan.8 8 India Ratings and Research website Notes: 8 India Ratings and Research website This financial backing was essential in reducing the initial burden on the private sector, making the project more attractive to investors and ensuring long-term viability. - Supportive regulations and flexible contracts: Regulatory measures, such as maintaining a single-till system (pools all airport revenue, aeronautical and non-aeronautical, to keep charges lower for airlines and passengers) for revenue initially and transitioning to a hybrid system later, provided stability and predictability for investors. This single-till system boosted airport traffic and profitability. The flexible contracts, including a 30-year concession with a 30-year extension option, and exclusivity within a 150 km
radius9 9 Business Today- Where will Bengaluru's second airport come up?, 2024 Notes: 9 Business Today- Where will Bengaluru's second airport come up?, 2024 , guaranteed a secure and extended period for returns on investment, enhancing investor confidence. - Revenue sharing and BOT agreement: A deferred revenue share to the government for 10
years10 10 Consultation Paper No 10/2021-22 response, Aera.gov, 2021 Notes: 10 Consultation Paper No 10/2021-22 response, Aera.gov, 2021 allowed the private operator to reinvest initial earnings into improving the airport’s infrastructure and services without the immediate pressure of sharing profits. The Build-Operate-Transfer (BOT) agreement, which included comprehensive design, finance, construction, maintenance, and operation responsibilities, ensured streamlined and efficient project execution, leveraging private sector expertise and efficiency. - Land development for commercial use: The contract allowed Bengaluru (Bangalore) International Airport to develop the surrounding land for commercial purposes, including hotels, theme parks, golf courses, and business centers. This not only provided additional revenue streams but also created a vibrant ecosystem around the airport, driving further economic growth and making the airport a central business hub.
- Efficient operation and management: With private players holding a 74% stake in the
venture11 11 Association Of Private Airport Operators India website Notes: 11 Association Of Private Airport Operators India website , the project benefited from their expertise and efficiency in managing large-scale infrastructure projects. This private sector involvement ensured high standards in development and operation, leading to rapid growth and significant improvements in service quality.
The BLR Airport project has had a transformative impact, evidenced by several key achievements:
- Since its opening in 2008, BLR Airport has served over 38
million12 12 Economic Times - Bengaluru International Airport records highest passenger traffic in FY23-24, 2024 Notes: 12 Economic Times - Bengaluru International Airport records highest passenger traffic in FY23-24, 2024 passengers and become one of the world’s fastest-growing airports. - The airport has facilitated economic growth in Bengaluru and positioned the city as a critical aviation hub in South India.
- In the financial year 2017-18, the airport posted a net profit of ~$100 Mn, a 33% increase from the previous year. This impressive profitability was driven by passenger growth, increased rental income, and higher revenue collections from the user development fee.
A Broad Range of PSP Models Exist, and Governments Are Continuously Innovating to Mobilize Their Full Potential
PSPs encompass a dynamic range of models, distinguished by the level of private sector involvement in financing and operations (Exhibit 5). At the low end of private sector involvement, the private sector primarily manages operational tasks without substantial financial investment or ownership. This ensures efficient service delivery while minimizing financial risk and maintaining long-term control within the public sector.
In the mid-range, the private sector takes on the responsibility of financing and constructing projects. They operate these projects for a specified period to recoup their investments before transferring ownership back to the public sector. In this model, the private sector typically assumes cost risk but not revenue or demand risk. This approach strikes a balance between risk and reward, leveraging private sector efficiency and investment while ultimately returning the asset to public hands.
At the upper end of the spectrum, the private sector adopts a comprehensive approach, encompassing financing, construction, operation, and long-term ownership. This model represents full privatization, where the private entity assumes complete control and bears both cost risk and revenue/demand risk, driven by the potential for significant returns. Along this spectrum, stakeholders can tailor PSP models to harness the strengths of both sectors, paving the way for successful and sustainable infrastructure projects.
Exhibit 5. A range of PSP models featuring distinct levels of private sector involvement
New PSP models continue to be developed, to overcome specific challenges. The Hybrid Annuity Model (HAM), for example, shares risk more equitably between the public and private sectors. Under HAM, a government typically bears ~40% of the project cost during construction, while the private sector is responsible for the remaining ~60%. This cost-sharing mechanism mitigates financial risks for private players, making it especially attractive for large-scale infrastructure projects. India has pioneered the HAM approach to catalyze road investments. The model was introduced to address declining interest in the traditional BOT (Build-Operate-Transfer) model, which often faced challenges related to toll revenue versus cost. Since its introduction, HAM has proven to be immensely popular in India, with 235 projects totaling 10,000 kilometers of highway awarded between FY16 and
The model has been so successful that it is now starting to be applied in other areas of transportation, for example in India’s Eastern Dedicated Freight Corridor rail project. This project involves the construction of an 1,856-kilometer freight corridor for the more efficient transportation of goods across the
Harnessing Sustainability: The Future of Private Sector Participation
The global shift towards sustainable infrastructure is gaining momentum as countries aim to combat climate change and foster environmental stewardship. Infrastructure plays a pivotal role in addressing climate challenges and meeting diverse societal needs. The choices communities make in what to build and how to build it significantly influence progress toward lower carbon footprints and more inclusive societies. Investments in sustainable infrastructure are on the rise, with projects such as electrified public transport leading the way towards cleaner energy sources. Green infrastructure, including efficient public transport and essential utilities, elevates people’s quality of life and underscores the private sector's crucial role in driving green development.
A comprehensive approach to incorporating sustainability into PSPs is exemplified by the Rizal Wind Farm Project in the Philippines. Developed through a PSP model, this project generated 54 MW of renewable energy with 27 wind turbines, significantly reducing carbon emissions and creating
The project's success is due to innovative solutions and a strategic approach to meeting challenges. Financial hurdles were addressed through partnerships with private investors, the Asian Development Bank, and local banks. Logistical difficulties of transporting turbines to the mountainous area were mitigated by involving local government units (LGUs) and officials from the pre-development stage. Public consultations and meetings with local officials fostered social acceptance and trust. LGUs supported land mapping and negotiations, facilitating site acquisition and addressing landowner concerns. These elements, combined with local engagement, private sector participation, and policy integration, created a conducive environment for success, setting a precedent for future sustainable PSP initiatives.
The Rizal Wind Farm's success illustrates the potential for sustainability-focused PSP projects to attract significant investment. Future investments driven by sustainability developments are projected to rise dramatically.
Private Sector Participation to Drive Saudi Arabia’s Transformation
Saudi Arabia stands on the cusp of a monumental economic transformation. As the largest GCC economy, with non-oil GDP projected to reach approximately $1.3 trillion by
The Kingdom is planning multiple major projects, collectively estimated to reach $2.7 trillion by
Expanding its use of PSPs will significantly boost private sector employment, in line with the country’s goal to create 3 million private sector jobs in the next
Deep Dive
Medina Airport stands as a testament to the successful implementation of PSPs in Saudi Arabia. It is the first and only privatized airport in the Kingdom, and has achieved remarkable milestones since its privatization in 2012. Operated by Tibah, a consortium led by TAV Airports with local partners Al Rajhi and Saudi Oger, the airport has experienced substantial growth (Exhibit 6).
Medina Airport experienced a
Among its many successes, Medina Airport:
- Expanded airport size by over 50%
- Increased the number of destinations by 20%
post-privatization.22 22 Chaouk et al., 2019 Notes: 22 Chaouk et al., 2019 - Grew the number of airlines serving the airport by 16% from 2012 to
201623 23 Chaouk et al., 2019 Notes: 23 Chaouk et al., 2019 - Reduced aeronautical revenues as a proportion of total operating revenues from 92% in 2014 to 83% in
201624 24 Chaouk et al., 2019 Notes: 24 Chaouk et al., 2019 - Mobilized $1.4 billion in private
investment25 25 International Finance Corporation, World Bank, PPP Stories: Madinah Airport, 2012 Notes: 25 International Finance Corporation, World Bank, PPP Stories: Madinah Airport, 2012 - Introduced global best practices in energy efficiency, recycling, greenhouse gas emissions, and water use (it is now targeting LEED Silver Certification, which would be a first in the region
)26 26 International Finance Corporation, World Bank, PPP Stories: Madinah Airport, 2012 Notes: 26 International Finance Corporation, World Bank, PPP Stories: Madinah Airport, 2012 - Provided direct employment through construction and airport operations, and indirect employment through increases in tourism and the development of knowledge-based industries in the
area27 27 International Finance Corporation, World Bank, PPP Stories: Madinah Airport, 2012 Notes: 27 International Finance Corporation, World Bank, PPP Stories: Madinah Airport, 2012
The airport was also rated as the best airport in the Middle East region in the 10-15 million passengers per year category by the widely recognized ACI Airport Service Quality award program in 2018. Its financial success is evident in its impressive 54.5% revenue share to the General Authority of Civil Aviation
The argument for expanding PSPs in Saudi Arabia is compelling. Vision 2030 outlines ambitious goals that require an unprecedented level of investment and expertise, which the private sector can provide. By integrating private sector efficiencies and innovations, the Kingdom can address its mega projects’ financial and operational challenges. PSPs also offer a pragmatic solution to the pressing need for infrastructure modernization, which is critical for sustaining economic growth and improving the quality of life for Saudi citizens.
Saudi Arabia has made progress in this direction with the recent enactment of the Private Sector Participation Law and the formation of the National Center for Privatization (NCP). Prior to the introduction of the law, the regulatory environment in the country was not conducive to attracting private sector funding.
Countries like Türkiye and several others in the MENA region provide excellent examples of how robust legal and regulatory frameworks can drive PSP success. Türkiye, renowned for its best-in-class PSP regulations, has developed comprehensive legal schemes that promote transparency, competitiveness, and reliability, attracting substantial private investment across various
In 2022, the National Center for Privatization in Saudi Arabia introduced new Implementing Regulations that streamline the PSP process in the country. These regulations align with international best practices and local experiences, ensuring fairness, transparency, and efficiency in PSP projects. By replacing outdated guidelines, the NCP has created a more robust and transparent process, from initial studies to contract management. The approval of these regulations marks a significant step forward, positioning Saudi Arabia to attract more investors, mitigate risks, and increase private sector contributions to the Kingdom’s GDP.
To truly excel and lead in the global arena, Saudi Arabia must continue to evolve beyond traditional PSP models and embrace innovative approaches. While the new regulations provide a solid foundation, more creative solutions are necessary to meet the dynamic needs of the Kingdom's economic landscape. Drawing on global best practices, it is evident that innovation in PSPs can drive efficiency, reduce costs, and maximize value. By fostering a culture of innovation, Saudi Arabia can enhance its competitiveness and position itself as a leader in infrastructure development. The Kingdom's commitment to innovation will be crucial in attracting substantial private investment and successfully meeting Vision 2030 goals.
Recipe for Successful PSPs
- Favorable regulatory environment: Establishing a robust legal and institutional framework with an independent regulatory function and trusted dispute-resolution process is essential. This framework ensures PSPs operate within clear, predictable rules, reducing uncertainties for investors and fostering a stable environment. Key components include a comprehensive PSP policy, necessary legal modifications, and an institutional setup that clearly defines and allocates authority for managing PSPs.
- Strong government and political support for PSPs: Government commitment to PSP programs is crucial. This includes not only policy support but also the establishment of dedicated PSP units that possess the skills and talent to manage these partnerships effectively. Political stability and consistent support across different government administrations further strengthen the confidence of private investors.
- Pipeline of bankable projects: Developing a continuous and well communicated pipeline of projects derived from comprehensive infrastructure plans is vital. Each project should be selected based on rigorous value-for-money analysis to ensure that PSPs provide better value for taxpayers than traditional government procurement. This approach attracts companies to the market and signals the government’s commitment to the PSP program.
- Early and systematic private sector consultation: Early engagement with the private sector helps identify challenges, align objectives with market realities, and incorporate their expertise, fostering collaboration and enhancing PSP success and sustainability.
- Transparency and fairness: Transparency in the PSP program is essential to gain broad buy-in from both the private sector and the public. Transparent processes build trust and ensure that all stakeholders have confidence in the fairness of the system.
- Efficient, streamlined procurement processes: Standardizing the project preparation and procurement process can significantly reduce transaction costs and improve predictability. This includes establishing a clear approval process, a standardized process for land acquisition, institutionalized funding mechanisms for project preparation costs, and model documents for the tendering process.
Increased private-sector participation through PSPs is one of the key solutions the world needs for driving global infrastructure development. By forging robust alliances between governments and private entities, countries can effectively bridge the glaring infrastructure investment gap, fueling sustainable economic growth and elevating the quality of life for millions. Unleashing the private sector’s potential can not only ease fiscal pressures but can also help to cultivate a highly skilled workforce and diversify the economic landscape. This approach mitigates the risks of economic volatility and sets the stage for resilient, dynamic growth. Traditional financing methods are simply inadequate for future infrastructure demands; public budgets are stretched too thin to support the necessary investment levels. It is time to embrace innovative PSP models to tap into new streams of private finance and revolutionize project delivery, ensuring infrastructure that meets the needs of an evolving world.
Authors
Suresh Subudhi
Meto Trajkovski
Managing Director & Partner
Dubai
Parth Poddar
Project Leader
Dubai
ABOUT BOSTON CONSULTING GROUP
Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we work closely with clients to embrace a transformational approach aimed at benefiting all stakeholders—empowering organizations to grow, build sustainable competitive advantage, and drive positive societal impact.
Our diverse, global teams bring deep industry and functional expertise and a range of perspectives that question the status quo and spark change. BCG delivers solutions through leading-edge management consulting, technology and design, and corporate and digital ventures. We work in a uniquely collaborative model across the firm and throughout all levels of the client organization, fueled by the goal of helping our clients thrive and enabling them to make the world a better place.
© Boston Consulting Group 2024. All rights reserved.
For information or permission to reprint, please contact BCG at permissions@bcg.com. To find the latest BCG content and register to receive e-alerts on this topic or others, please visit bcg.com. Follow Boston Consulting Group on Facebook and X (formerly Twitter).