As low oil prices force Gulf countries to cut public spending, Sofia Lotto Persio looks at what can be done to fill the funding gap for infrastructure investment.
Oil revenues have been key in supporting infrastructure investment in the Mena region, particularly in the Gulf countries. Just look at the way cities like Dubai or Doha have developed in the past 30 years: a barren landscape of sand and stones turned into futuristic-looking urban oases of steel and glass.
But the spending splurge that characterised the development of the Arabian Peninsula took the toll of the decision by oil-producing countries, led by Saudi Arabia, to keep production levels unchanged for months, despite falling prices, to retain their stake in the market. Lower oil revenues have affected producing countries’ public finances and spending plans, including in the infrastructure sector.
As a case in point, Saudi Arabia has cut its 2016 transport and infrastructure budget by 63% compared to last year, slashing funding nearly by half for projects such as Jeddah’s King Abdulaziz Airport and Riyadh’s metro. “The record-low level of oil is having and will continue to have a downward impact on government spending. With less revenue flowing, schemes will be slowed, deferred or even cancelled until prices pass US$50-60 per barrel,” Andrew Jeffery, managing director for capital projects, Mena, at Deloitte Middle East, tells GTR. Deloitte predicts investment in major infrastructure and social infrastructure across the region will continue, but in a more measured way.
Standard & Poor’s (S&P) forecasts that slack energy revenues will also affect the flow of bank deposits and erode bank liquidity, particularly in Qatar and the UAE. As such, the cost of bank lending for infrastructure is expected to increase across the Gulf. The ratings company also estimates that over the next four years, US$604bn will be needed to upgrade the countries’ infrastructure. As governments struggle to cover the costs on their own, the agency calculates the deficit in capital spending on infrastructure to be about US$270bn. The funding gap is big, as are the opportunities for the private sector, whose involvement is becoming ever-more vital for the development of infrastructure.
Capital markets show a healthy level of appetite for these investments. According to S&P, in 2015, project debt issuance across the Gulf grew by 68% to US$76bn compared to the previous year. What offers great promise are public-private partnerships (PPPs): water and power sectors in the Gulf are already using this model, and countries such as Oman, Qatar and Saudi Arabia are revising their legislations to open up more projects, such as airports, metro lines and solar plants, to private investment.
As Abu Dhabi-based Stephen Knight, senior associate for law firm Allen & Overy, explains in a note, the PPP law recently proposed in Dubai has a number of objectives, including: encouraging private-sector participation in development projects; increasing investment to serve Dubai’s economic and social growth; enabling the government to perform strategic projects efficiently and effectively; using the private sector to enable the public to obtain the best services at the lowest cost; increasing productivity and improving the quality of public services; transferring knowledge and experience from the private sector to the public sector; minimising the financial risks to the government; and increasing competition for projects locally, regionally and internationally.
Out of various infrastructure opportunities, those in the energy sector remain the most attractive. The demand for infrastructure related to the oil industry, and particularly those dealing with the logistics of handling the oversupply of oil, is still present, but the low oil prices and declining subsidies for fuel in the Gulf may spark greater interest in the renewables sector, strengthening the project finance and PPP markets.
According to Karim Nassif, Dubai-based lead analyst at S&P, countries such as Bahrain, Oman, Qatar and Saudi Arabia are considering energy sector reforms, raising the price of gas supplied to downstream industries. “While subsidies for fossil fuel-based industries have historically put renewable energy projects – such as windfarms or solar plants – at an economic disadvantage, more cost-reflective tariffs in the energy sector could improve the renewable market in the future,” he writes.
In Saudi Arabia, where capacity tenders for clean energy projects had been delayed, the oil prices have boosted efforts to reduce the country’s dependency on fossil fuels, with the aim of generating 50% all electricity from atomic and renewable energy sources by 2032. “Just at a time when carbon revenues are under pressure, we expect many countries will be reluctant to invest properly in this area, which is clearly counter-intuitive for their future when you think of it,” says Deloitte’s Jeffery.
Bringing in the cash
Barry Lynch, managing director, onshore, at Mainstream Renewable Power, sees growth in the number of viable renewable projects looking for investment, and contrary to S&P’s expectations, enough liquidity in the market – at least for renewables. “We haven’t been constrained from a project finance point of view on any project, in any of our markets. We always try to bring the local banks into a project. We usually start with the development banks and then, in time, we look to bringing in local banks as part of the syndication process,” he explains. However, the local banks are more likely to get involved in the post-financial close, when the lead arranger is essentially selling down debt to local banks. “That has been quite an attractive option,” Lynch notes.
“There is great demand for new banking relationships,” says Bora Bariman, head of energy and marine at National Bank of Fujairah. “Every bank is revaluating what their approach to the energy sector will be.”
According to him, this presents an opportunity for both sides: for the corporates on one hand, to identify banks that understand their strategies, the risk particular to their corporate business and to determine if banks are able to support them with appropriate structures. On the other hand, for banks this is an opportunity to forge relationships with corporates who are hungry for investment.
Collaboration between banks alone is often not enough to finance these projects due to their size, and support from export credit agencies (ECAs) is increasingly in demand. “These projects are huge, and they are just becoming bigger and bigger. This means that every financing source available will be at least investigated and called upon for support,” says Morten Sørensen, senior director, head of large corporates at EKF, the Danish ECA.
According to him, one of the ways in which ECA involvement is beneficial is in facilitating access to foreign currency, particularly for countries like Egypt. “There is a demand for banks or financing sources that are capable of delivering the US dollars and euros that these projects need. This is not as obvious in the oil-rich countries: they have good reserves of US dollars,” he says. “But in the coming years, if the oil prices do not pick up again, that may be an issue for them too.”
Under the spotlight
Two of the smallest Gulf countries are preparing for big, global events taking place in the next few years. Expo Dubai 2020 and the 2022 Qatar World Cup are expected to attract business people and tourists from all over the world, as well as investment in the infrastructure needed for the events, from stadiums to airports.
Expo 2020 will culminate Dubai’s recent efforts to establish itself as a trading hub and tourism destination. “The Expo will showcase to the world the fantastic business environment and innovation here in the UAE, engendering long-term investment interest in company relocation, helping to further diversify Dubai in particular as the financial hub of the Gulf Co-operation Council,” says Andrew Jeffery, managing director for capital projects, Mena, at Deloitte Middle East.
According to him, the urban development of Dubai South, which includes the improved Al Maktoum International Airport and the 438-hectare site planned for the Expo, will add a huge new commercial and residential district to the city of Dubai as an investment legacy for the next 10-15 years at least. Italian ECA Sace has already awarded a €1bn credit line to the Dubai Aviation City Corporation, for the purchase of goods and services from Italian companies involved in the project.
The government forecasts to spend US$7bn on infrastructure, and several international banks, including Citi, Credit Suisse, HSBC, Société Générale, and Standard Chartered, have reportedly expressed their willingness to expand their UAE balance sheets to support both public and private-sector projects.
A much more controversial project than the Dubai Expo 2020, Qatar’s World Cup ambitions have been tarnished by allegations of corrupting officials to win the bid, something that Qatar strongly denies. The alleged irregularities in the bidding process nonetheless sparked an FBI investigation that charged almost 40 Fifa executives to date with racketeering, money laundering and wire fraud allegations, and ultimately brought down Fifa president Sepp Blatter and Uefa president Michel Platini. In Qatar’s defence, Blatter awkwardly declared to the Financial Times that there was a “gentlemen’s agreement” to award the World Cup for 2018 and 2022 to Russia and the US respectively, but that Nicolas Sarkozy, the French president at the time, encouraged Michel Platini to vote for Qatar, eventually tilting the count in favour of the Gulf state.
Having survived calls for vote recasting so far, the World Cup is still set to take place in December 2022. However, Qatar is now facing its first budget deficit in 15 years, with a reported 2016 budget of around 8% lower than the previous fiscal year. Qatar’s ambitious plans for stadium construction are predicted to be downsized from 12 to eight, and analysts expect the government to look for cost-saving measures amid widespread spending cuts.
“Given the prolonged nature of the current oil price slump, we can expect to see a sustained period of restructuring within the country, with a spotlight likely to be firmly placed upon the 2022 World Cup and its related developments,” Matthew Green, head of research and consulting, UAE, at real estate investment firm CBRE, told the local press.
According to Deloitte’s Jeffery, Qatar’s long-term investment benefits are slightly different from Dubai’s. “Less mature in its financial markets and regulations than Dubai, we expect Qatar to enjoy a strong investment platform up to 2020, but key to its long-term success is how the legacy planning teams control, re-purpose and plan for potential softening demand after the World Cup,”
he tells GTR.