Investors wait for a new wave

Qatar has its eyes on the ball. Eight years before hosting the 22nd edition of the FIFA World Cup, the kingdom is sparing no expense to welcome football enthusiasts in grand fashion: its “Q2022” infrastructure investment programme, which Deloitte says could amount to $200 billion, targets large-scale developments in highways, metro, greenfield ports and rail. Visitors passing through Doha’s new Hamad International Airport, due to open this year, will even be treated to the sight of a $6.8 million sculpture of a giant teddy bear.

The country is no exception in the region. Most members of the Gulf Cooperation Council – which includes Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman – have slated multi-billion dollar infrastructure programmes for the coming decade. And a number of transactions, such as a $1.8 billion Independent Water and Power Producer (IWPP) project in Kuwait and a $1.2 billion rail development in the UAE, have reached landmark closes over the last year.

“The programmes for infrastructure investment in the Gulf are vast. There are some significant numbers out there,” comments Karim Nassif, an associate director at Standard & Poor’s.

For local developers, investors and operators, this will come as a relief. The Gulf’s construction industry hit a bump in the immediate aftermath of the Lehman Brothers collapse: public procurers turned cautious, private credit became harder to come by and non-essential projects were shelved. This was followed by the Arab Spring and the shale revolution – the disruptive impacts of which fed concerns over the sustainability of local commitments to infrastructure spending.

If there was a lull, however, it didn’t last long. According to Qatar National Bank, the GCC governments spent an estimated $112 billion – equivalent to 7.1 percent of the region’s GDP – on infrastructure projects in 2012. The lender says this may have reached 8.2 percent for the whole of 2013, marking the second-largest share on record in the GCC.


In part, this rebound happened because some of the headwinds initially faced by the region unleashed dynamics that soon justified a fresh infrastructure push.

“What happened in Dubai had a knock-on effect across all the Gulf States,” says Oliver Cornock, regional editor for the Middle East at publishing and consulting firm Oxford Business Group. The desire to keep their economies on track led local governments to adopt expansionary fiscal policies, which in turn brought back confidence to the sectors targeted by fresh public spending – including infrastructure.

The volatility of oil prices, and the prospects of long-term downward pressures due to the shale boom, has also pushed Gulf States to consider economic diversification seriously, adds Tim Risbridger, a partner at consultancy EC Harris. This has meant trying to develop downstream oil and gas facilities – such as refining or petrochemicals – as well as boosting competitiveness in other industries. Both made it necessary to modernise infrastructure.

Another silver lining of the Crisis has been the tight prices offered by developers and contractors, says the head of a fund manager based in the region. “Because power plants aren’t being developed in the West, the likes of Sumitomo and General Electric have significant spare capacity. They tend to scout for deals by offering aggressive pricing.”

Yet the timing and scope of this new construction impetus perhaps owes even more to the social and political changes brewing across the rest of the region. “The Arab Spring has made all the Gulf countries willing to enhance their social infrastructure, inducing them to boost spending towards public benefits,” confides a Middle East-focused analyst. “It is essentially a political decision: governments need to be seen as looking after their population.”

The social imperatives to invest in sectors as varied as power, water or education are all the more acute as GCC countries host fast-growing populations. The region, which counted 30 million inhabitants in 2001, now has a total population of roughly 47 million; while forecasts by the Population Reference Bureau show this could grow to more than 71 million by 2050.


Fortunately, the return of readily available credit has made things easier over the last couple of years.

“During the most difficult times, which probably stand from 2009 to the early part of 2012, you had the international banks more or less out of the region,” says the fund manager. “Now you are seeing lenders like HSBC, Standard Chartered, Sumitomo as well as French banks coming back. Their balance sheets have repaired, they’ve got some cash surplus resources, so they’re back to lending more globally.”

Meanwhile, the appetite of Export Credit Agencies (ECAs), another traditional source of funding in the Middle East, has not abated, says Ravi Suri, head of corporate finance for the Middle East, North Africa and Pakistan at Standard Chartered. This is particularly true in the case of Japanese and Korean institutions, he notes.

These are being supplemented somewhat by the greater involvement of regional lenders, which he reckons can back projects of up to $2 billion in bigger markets such as Saudi Arabia. These have benefitted from the temporary withdrawal of international institutions during the Crisis – although they often remain unable to provide the longer tenors infrastructure developers typically look for.

This is where the Gulf’s burgeoning capital markets may help, says Nassif. They received a boost in August when Ruwais Power successfully issued $825 million in project bonds to help refinance the Shuweihat 2 power and water plant in Abu Dhabi, ending a pause in issuance since the Dolphin transaction of 2008. There is now hope that the proportion of debt raised by project bonds, traditionally marginal, could soon increase.

“Pricing conditions continue to be favourable in the bank market. But when looking for long tenors, as was the case for the Ruwais transaction, investors may prefer to go for the bond option.”

Islamic finance also plays an increasing role. Utilities such as Dubai Electricity and Water Authority (DEWA) and Saudi Electricity Company have made large sukuk issues in the first half of 2013, with tenors reaching 30 years in the latter case.

Meanwhile new players are entering the market, seeking to provide extra liquidity: London-based Gravis Capital Partners, for example, is seeking to raise $250 million for a Gulf-dedicated debt fund. The vehicle, which aims at allowing developers to free up capital by providing refinancing post-construction phase, has already agreed to terms for $350 million worth of projects.


Yet big ideas and big money are not always enough, says Cornock. He notes that for the first time since 1990, the fiscal year 2012 to 2013 saw expenditure below budget in Qatar, with development spending even declining – by 2.5 percent year-on-year to $13.5 billion. “The development budget shortfall was largely attributed to delays in the roll out of government capital projects, highlighting one of the challenges in managing rapid economic expansion.”

Compounding traditional execution issues is the growing need to involve private investors. “There is so much demand on governments’ balance sheets that they can’t finance it all,” says Suri. “Which means you have to try and corner private funding by diversifying in the public-private partnership (PPP) space.”

The issue is not that Gulf States have no experience of PPPs, but that these have traditionally been limited to a narrow sector base. “Partnerships today are primarily focused on the power and water space,” notes Nassif. “Can you do that in sectors like renewables, transportation, roads, railways, universities? That’s the real question.”

Some initiatives have also backtracked. A plan to bid out the construction of Saudi Arabia’s first private refining facility in the southern province of Jizan was finally cancelled – with Saudi Aramco now in charge of developing the $7 billion facility – because it allegedly did not provide an economically viable proposition for the private sector.

Nassif thinks progress will thus largely depend on political will to provide support – especially for assets where there is no track record of revenue generation, like toll roads, because governments currently provide such services for free. “If you are going into a new asset class, the financial community and investors want to see some availability-based mechanisms for payments by whatever authority is responsible for it.”

An analyst based in the region notes that a number of PPPs failed because of their over-reliance on volumes, which did not present investors with an attractive enough proposition. “Sometimes the issue is that governments themselves don’t want to be committed.”

But there could potentially be even more basic problems, according to Cornock. He thinks the raw materials needed to fuel the upcoming infrastructure push could soon be in short supply, feeding price volatility for a variety of inputs such as cement and steel. His fears are topped by concerns over migrant workers and human rights, which he says have become more publicised and could grow louder as the region raises its international profile.


Yet if much of the Gulf infrastructure story remains to be written, most investors think it is one well worth following closely.

For one, governments have now largely recognised that, for certain projects, the private sector can bring more than money. “Many of these countries want to go to the PPP model not because they want capital but because they want efficiency,” says Suri. This is giving a wider base for collaboration, where private partners have a greater say in the development of projects.

What’s more, argues Stephen Ellis, a senior partner at Gravis Capital Partners, the region is not a new ground for investors. “We find the projects we are looking at in the Gulf region structurally very familiar. Because of the preponderance of British and French banks in the region’s project finance sector over the last 35 to 40 years, many of the templates for contractual relationships in infrastructure financings are based upon English law and British PPP and Private Finance Initiative (PFI) arrangements.”

He points out that investors and lenders can take comfort from the fact that they are dealing with some of the most credit-worthy counterparties in the world – with all of the six GCC countries granted top marks by rating agencies.

A number of fresh opportunities are also arising. Suri thinks the initial needs for basic commodities like electricity and water has now been met, pushing sectors like housing and education higher on the political agenda. Renewable energy is also emerging on investors’ radars, following the realisation that both solar and wind have great potential to thrive locally.

“Things are not going to rush ahead,” says the fund manager. “But I can’t think of any particular minefield or iceberg that would derail this. I see enormous value for private sector involvement in the region, with a lot of transactions closing within the next five years.”

It may be unwise for Gulf-based investors to bet on an infrastructure revolution this year. But provided governments manage to create a level playing field, the odds are that the region’s early backers won’t be caught offside.