MENA: On the up as oil price falls

Having been based in Saudi Arabia for the last eight years, David Brazier – a director with Deloitte Middle East’s Infrastructure & Capital Projects team – has been actively involved with government procurement efforts and has helped governments in the region with the creation of ‘enabling’ models which seek to foster more effective private sector engagement in public services and the provision of public assets. As such, he is well placed to judge the progress being made as the private sector seeks ways of helping Middle Eastern states to meet demand for new infrastructure.

In Saudi Arabia, he has noted the creation of large infrastructure programmes – including in rail and integrated urban transport – but also the unwillingness to give private financiers the sort of role they would have in similar programmes in Western Europe or Australia, for example. “In Saudi Arabia, the government has been the main financier and has only looked for private sector involvement around the edges. There is a culture change that is required to increase private sector involvement in critical projects,” he says.

SEEDS OF CHANGE

He observes that there are concerns from governments across the region about losing control over projects and of value disappearing offshore. While some countries such as Saudi Arabia have material cash reserves, he also thinks, however, that the falling oil and gas prices are sowing the seeds of change in some jurisdictions and accelerating pre-existing trends in others. The changed fiscal landscape is forcing a different outlook – essentially, less oil or gas revenue means governments have a greater incentive to consider alternatives to self-funding all or the majority of projects.

This nascent development has also been picked up on by Umer Ahmad, head of project and infrastructure finance at Deloitte Middle East. “Meetings with government entities in the region show more focus on doing social infrastructure public-private partnerships (PPPs) for the first time; this could be partially driven by falling oil prices,” he says.

Ahmad says that there are “really interesting dynamics” in the region but agrees with Brazier that private finance has so far had only a limited role, at least as far as social infrastructure and transport is concerned. But “there is growing realisation that PPPs are not just about capital, they are about expertise and value for money.”
The region has its bright spots and areas of further potential. Ahmad points to Egypt and Kuwait as examples of countries which have ratcheted up their PPP efforts through PPP units and the attempted creation of suitable legal frameworks and documentation.

Progress has not been easy for either country, with Egypt, for example, buffeted by economic volatility and social unrest. However, it has completed some social deals while Kuwait has seen one successful energy project.

“Kuwait said early on it was not just about the money, as it was cash-rich,” notes Ahmad. “It understood there were other drivers for PPPs that were more important.”

NON-STANDARD

Ahmad notes that there has been a social housing PPP in Bahrain and university PPPs in the United Arab Emirates (UAE), though they have had some non-standard features. In power and utilities, there has been plenty of activity in countries such as Oman, the UAE, Qatar and Saudi Arabia, while Morocco and Jordan have been at the forefront of renewable energy deals. Egypt is also showing lots of potential in the energy space and he also believes that opportunities will become increasingly apparent in Iraq at some point.

But while Ahmad believes Export Credit Agencies (ECAs) are well placed to bring capital and other forms of support to transactions in the region, he is less clear that it represents a fertile playing field for infrastructure funds. While a decent number of funds set up shop in anticipation of opportunities, they have found it hard to add value as part of consortia where they are not the only parties able to provide equity.
Furthermore, while there have been some opportunities to buy assets in the secondary market, funds find themselves at times competing with sovereign/quasi-sovereign entities which may be able to offer a high price as they may be more driven by political and/or strategic considerations.

The result of this is that a number of the funds which originally established operations in the region have since packed up and left. For those which remain, Ahmad notes a tendency to favour a wide investment mandate. However, he wonders whether this will go down well with investors who will expect a high internal rate of return (IRR) to compensate for the risk.

THE ROAD TO COMMERCIALISATION

Having said that, deal flow may be showing signs of expanding. Although he is reluctant to estimate how soon it will happen, Ahmad suggests the possibility of privatisations as governments look to find ways of commercialising assets and he also notes the use of the design, build, finance (DBF) model, including for some roads in Dubai. Again, though, Ahmad ponders whether the boxes of fund managers are being regularly ticked and hints that there may be a bigger role for the ECAs rather than funds.

For those firms which are looking to commit to the region, Brazier stresses the importance of socio-economic factors. “Governments have received a lot of push-back for not doing enough for their populations, including when it comes to job creation. Successful investors will be those which demonstrate a wider competence in supporting the economic well-being of the places they are working in.”

But despite the challenges, Ahmad remains upbeat about prospects. “There are some massive positives in terms of underlying medium-to-long term economic growth and the level of demand,” he says. “Changes are taking place that will drive the further use of private finance. In the meantime, traditional energy, utilities and renewable energy deals are all keeping private capital flowing.”