Exploring other avenues

Johan Hesselsøe
Is it time for the GCC to look beyond publicly financed infrastructure? Johan Hesselsøe, Managing Director, Middle East & Africa at Faithful+Gould and Tammam Al-Dandachi, Associate Director, Financing Group, Middle East & Africa at Atkins Acuity, both are members of the SNC-Lavalin Group help us answer this question.

The top-line numbers of the GCC infrastructure sector tell a story of a sector at the forefront of economic growth. As total active infrastructure projects have surged to $1.14 trillion, governments and developers' plans show no sign of slowing down, especially in the UAE and Saudi Arabia, with rail, metro, mega smart cities and smart infrastructure all on the table.

The ambition of these plans has led to the need to think strategically about methods of infrastructure financing.

While the infrastructure industry is an important pillar of economic growth, the region has broad priorities and tapping into alternative financing creates an opportunity to reduce the pressure on its’ fiscal positions allowing more flexibility to allocate spending to other socioeconomic areas and provide better infrastructure solutions such as efficient project delivery, provisions for innovative designs, and maintenance of high quality standards throughout the project lifecycle.

Investor-friendly legal and regulatory frameworks

With governments seeking to encourage greater participation and investments by private establishments and companies in development projects, regulatory developments have gathered pace.

Dubai issued its law governing public-private partnerships (PPPs) in 2015 and Saudi Arabia’s draft, which was put to consultation in 2018, is set to become law imminently as the Government prepares to launch infrastructure projects worth billions of dollars and seeks to attract foreign investors.

Amends to bankruptcy and relaxed private ownership rules in strategic sectors should also increase confidence among international players looking for investment opportunities.

Trend towards collaboration

We are witnessing increased innovation in the GCC infrastructure sector. As the rationalisation of project governance is moving forward, outmoded manual projects are being replaced by digitised and automated controls.

Entry of new competitors, new technologies, realisation of the importance of private capital from institutional investors to bridge the funding gap and promising regulatory reforms are necessary to facilitate the delivery of major capex programmes, especially those related to mega projects.

Identifying the appetite for foreign investment, through PPPs and privatisation—both the UAE and the Kingdom have made a concerted effort towards facilitating the flow of capital, and now is the time to further provide impetus to the idea of utilising alternative funding solutions and accessing global capital markets towards building the region’s infrastructure.

Alternative financing options

Other than oil and gas projects, there have been a relatively limited number of project bonds issued to capital markets to finance infrastructure projects in the GCC region. As green finance is likely to continue its growth momentum in the GCC with predictable pipeline of renewable projects, the development of a GCC project bond market is imperative.

Project bonds open an alternative debt funding avenue to source financing for infrastructure related projects, and we expect project bonds to be an increasingly popular financing option for project sponsors in the GCC markets.

Additionally, project bonds offer long-term investors an attractive yield and significant credit spreads. Infrastructure companies are keen to expand their investor bases and, if this brings cost savings, they are even willing to attempt new structures. These efforts are deepening the bond markets as many lower-rated issuers can raise funds.

While it is unlikely project bonds will completely replace bank lending, we expect that GCC project sponsors will consider an increasingly broad suite of options blending bank lending, project bonds, global markets, and private equity to finance infrastructure projects in the future.

By introducing PPPs as a potential procurement model for its infrastructure projects, the region would be able to attract higher private sector participation through the introduction of new technology and innovation in providing better public services through the improved operational efficiency.

PPPs to drive transformation: Saudi, a new vision

Private participation enhances collaboration and Saudi Arabia today is turning more towards private sector to help finance infrastructure projects as they bring in efficiencies with greater access to hybrid financial instruments and global markets, irrespective of the role they play in the supply chain or the project development lifecycle.

Earlier this year, HE Eng. Khalid Al Falih, Minister of Energy, Industry and Mineral Resources in Saudi Arabia announced that the Kingdom is seeking to attract SAR 1.6 trillion ($429 billion) in private sector investment over the next 10 years for an infrastructure and industrial programme.

The plan aims to channel investments through the National Industrial Development and Logistics programme, which was established under the Vision 2030 programme.

Plus, the establishment of the National Centre for privatisation and PPPs (NCP), and the issuance of the draft Private Sector Participation (PSP) law in Saudi Arabia are two important steps forward when it comes to establishing the necessary legal and regulatory frameworks to attract private capital for infrastructure financing.

With an ambitious economic transformation plan involving sizeable infrastructure projects, the Kingdom is planning to optimise its capital structure on infrastructure projects by continuing to leverage on the support provided by export-credit agencies (ECA) of the organisation for Economic Cooperation and Development (OECD) countries to local and regional commercial banks to finance projects.

This trend will continue, and infrastructure projects will benefit from these associations. PPPs play a critical role in achieving global scale and local impact. As the Gulf looks to seize the tremendous infrastructure opportunities, it becomes essential for the region to broaden its infra financing model, draw on international experience, leverage technology and innovation, and strengthen governance to ensure economic growth and sustainable development.

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