Welcome to the Gulf

The first of June 2015 was a landmark day for foreign investors in Saudi Arabia. A new ruling allowed qualified foreign financial institutions to invest for the first time in shares listed on the Tadawul, the Saudi Arabian Stock Exchange. Three months on, infrastructure investors are wondering whether the same welcome mat may now be rolled out for them.

Saudi Arabia, which has traditionally tended to shy away from the private sector – fearing a loss of control over important assets and reluctant to see value disappearing offshore – is one of the countries mentioned in a new report from rating agency Standard & Poor’s examining prospects for infrastructure in the Gulf States.

Governments in the region are increasingly cognisant that they can no longer provide all of the funding needed for infrastructure projects, given the debilitating effect on revenues brought about by a more than halving of the oil price since June 2014. The tightening of belts has seen some projects cancelled, according to the report, and – reflecting a weak economic climate – debt issuance by GCC infrastructure companies has tumbled by 58 percent in the last year to $7 billion.

Earlier this month, the Saudi Minister of Finance said the country was looking to cut unnecessary expenditures. This was perhaps the most explicit statement of intent from any politician in the region – but it’s a fairly safe bet that the sentiment behind it is widely shared. Further project cancellations would not come as a surprise, especially if the oil price remains low for a while yet.

However, the negative sentiment around a depressed level of activity may perhaps give way to a more positive view that private capital will come to be seen as the best way of getting money flowing into infrastructure projects once more. Indeed, beyond traditional energy projects, a wider opportunity set appears to be growing.

Renewable energy in particular is in the spotlight as governments begin to view it as the means of escaping over-exposure to the cyclicality and volatility of the oil price. In Dubai, which is aiming to generate 7 percent of its energy needs from renewable sources by 2020, a public-private partnership (PPP) aimed at developing commercial and residential solar power projects was recently launched.

Funds have typically found it difficult to muscle into consortia for infrastructure projects in the Gulf region, with other consortium members often able and willing to bring equity to the table. Although there have been opportunities to participate in the secondary market, here they frequently find themselves competing with sovereign wealth funds with political and strategic motives – and hence happy to pay whatever it takes.

In the face of these struggles, many funds have quit the scene. But as the oil price forces governments to face up to some uncomfortable realities, perhaps one of these will be the acknowledgement that private capital – including from overseas – is a vital ingredient in getting the infrastructure of tomorrow built.