Lack of funds threatens utilities growth, reports A.T. Kearney

Growing demographics and wealth in the Middle East will lead to an ongoing increased demand for utilities of more than 4% per annum in the coming decades, with selected countries such as United Arab Emirates growing even stronger.

"Large capital expenditures in utilities of more than $1 trillion by 2030 are required to facilitate this growth," said Dr. Dirk Buchta, Managing Director of A.T. Kearney Middle East. "In the electricity sector for example, investments are estimated at around $500bn in that timeframe. Similar investments for potable water, waste water treatment and district cooling also have to be considered."

To finance these investments, fund raising becomes crucial for utilities in the Middle East, but independent operators or management contractors are typically not keen to take on assets according to A.T. Kearney. Governments in the region are considering decreasing subsidies and financing but the global financial crisis has led to increased skepticism among investors. Thus, conventional finance instruments such as bonds might not be sufficient to secure funding, since investors with higher risk awareness expect higher returns.

But where will the funding come from?

Dr. Goetz Wehberg from A.T. Kearney's Global Utilities Practice, said:

"Utilities compete in a worldwide investment market and must attract funds accordingly. Aside from conventional finance instruments we observe an increasing interest of Sovereign Wealth Funds and Private Equity Funds in the utilities sector as soon as the return of investment exceeds 10-15%. Such investors are expected to accelerate the change of the sector in terms of growth, efficiency and operational excellence. Funding instruments are expected to become more diverse and investment amounts larger."

The development and funding of the utilities sector needs to be stimulated by an appropriate regulation. Most regulators in the Middle East have already started to privatize the different businesses through public and private cooperation and deregulate the markets through tenders. Many are looking to leverage the experience of other countries, i.e. within the European Union (EU). However, a 1:1 adoption of European or US regulations without the consideration of regional requirements of the Middle East might not work for this region.

For example, low energy prices in some countries due to reliance on subsidies lead to specific local requirements which must be taken into consideration when regulating the utilities sector. Of course, one has to differentiate between Middle Eastern countries with high oil and gas reserves and those without. To develop the regulatory framework appropriately, both a deep understanding of the GCC country characteristics as well as international regulation best practices are key.

"To meet the growing demand for utilities in the region, regulators need to provide a clear vision on the future regulatory framework and utilities companies need a sound business plan based on strategic foresight and targeting operational excellence to attract and secure the value for potential investors in the region," concluded Dr. Wehberg.