GCC governments are now waking up to the need to involve the private sector in the funding of infrastructure developments, which is known as Public Private Partnerships (PPPs), and it took them an oil price crisis to achieve that.
The ‘World Bank GCC: Economic Outlook April 2017’ says that Qatar is in the midst of a $200 billion multi-year infrastructure upgrade ahead of hosting the World Cup. Qatar is dealing with around $7.8bn budget deficit.
Saudi has announced a $54 bn deficit, and the World Bank says that “cheap oil continues to test the economic resilience of the Kingdom.”
Hydrocarbons account for about 80 per cent of Saudi fiscal revenues; and with oil averaging $54 a barrel, the prices remain below half of their 2014-peak.
The UAE is preparing to host Dubai’s Expo 2020, but a slowdown in the global economy and the tightening of regional liquidity pose risks, according to the same report.
The World Bank says: “Persistently low oil prices and fiscal austerity continue to weigh on the UAE’s economy. Hydrocarbon GDP growth is estimated to have slowed down to 3 per cent in 2016, and the OPEC-mandated oil production cuts (Cuts until March 2018) are expected to limit growth in 2017 to 2 per cent.
Private sector involvement
Oliver Wyman is a global management consultancy, which announced late last September that GCC governments should lay the groundwork for increased public-private partnerships.
“Methodologies and collaboration are required in the GCC, in order to achieve economic transformation and adapt to a ‘New World Order’,” it recommended in a statement.
“Robust economies rely on a dynamic private sector,” said Jeff Youssef, Partner at Oliver Wyman.
he added: “Middle East and GCC governments should favour private sector involvement over the coming years, and in particular, GCC countries should benefit from the private sector’s ability to inject capital and improve the performance of infrastructure in the region.”
Global infrastructure deficit
Oliver Wyman estimates nearly $2.7 trillion being invested worldwide in infrastructure each year. “However, it has been estimated that an annual spend of $3.7trn would be needed to meet the global growth in infrastructure demand, thus an annual gap of nearly $1trn,” the statement added.
It continued: “Whereas more than 50 per cent of infrastructure projects are privately funded in developed economies, private investments in emerging markets and developing economies (EMDEs) remain limited. Today, nearly 70 per cent of infrastructure projects in EMDEs are financed by government budgets, 10 per cent by multi-development banks, and the remaining 20 per cent by private investors.”
OBOR needs billions
The nearly $1.3trn One Belt, One Road (OBOR) initiative by China, connecting it with regional markets, is expected over the next five years to require investments worth around up to $500bn.
“Despite the anticipated economic development, financing OBOR will be challenging,” says Youssef.
He added: “ Many public-private partnership attempts have failed, due to the government’s inability to recognise and counter the potential risks from increased private-sector involvement.”
Saudi recognises the PPP potential
A recent roundtable by accountancy and finance body ICAEW tackled PPP prospects in the Kingdom and said that Saudi’s Vision 2030 required the country’s government to involve private sector partnerships to attract additional foreign investment.
It said that it must create a pipeline of projects in specific sectors that would increase attractiveness to sponsors.
Michael Armstrong, ICAEW’s MEASA Regional Director, said: “Adopting a PPP model for future infrastructure spending would mean that the Saudi Government could save valuable public finances during the current challenging period. It also transfers many risks, typically borne solely by the public sector, to the private sector.”
He added: “But Saudi Arabia must establish a strong legal and regulatory framework to support the PPP model, in order to ensure its success. Although the framework for large-scale PPP projects in the Kingdom is yet to be developed, a well-structured national PPP strategy will represent a significant and positive change.”
Saudi Arabia’s Madinah Airport expansion project was the first full PPP project in the Kingdom, when the Saudi Arabia’s General Authority of Civil Aviation (GACA) liaised with the private sector to expand, modernize and operate the airport, and that in order to accommodate future traffic growth. The concession fell on a consortium of firms from Turkey (TAV Holdings) and Saudi Arabia (Al Rahji Holding Group and Oger) in 2011.
The International Finance Corporation (IFC) said that the project aimed at accommodating 18 million passengers by 2037 (from 3.5 million prior to project award), and that the project mobilized $1.4bn in private investment.
Legal advisory service company King&Spalding (K&S) published in its Middle East Vision 2030 PPP Legal Report 2017 examples of sector projects coming to the GCC.
UAE: Water, Waste, Transportation, and Leisure
K&S named actual projects, like the UAE’s Ministry of Climate Change and Environment tendering a municipal solid waste treatment plant in the Emirate of Umm Al Quwain, which will see the selected private sector participant enter a joint venture agreement with the procuring ministry.
The Dubai Government is also proposing to develop a mixed-use development PPP to transform Union Oasis station into a transit-oriented development.
KSA: Water, Power, Airports, Waste, Healthcare, and Education
For example, K&S said that the Saline Water Conversion Corporation (SWCC) was considering new and expanded desalination projects (some involving the production of power). The Saudi Electricity Company (SEC) has also indicated that it is considering new Independent Power Producers (IPPs).
GACA is also seeking to undertake a privatisation programme of the Kingdom’s airports. That is anticipated to involve a number of PPPs and privatisations.
Other GCC countries mentioned in the K&S report include:
Kuwait: Water, Power, Education, Waste, Labour, Road, and Rail
Qatar: Sport/Leisure, Water, and Waste
Oman: Water, Power, Healthcare, Leisure Bahrain Water, Rail, and Waste
Bahrain: Water, Rail, and Waste