A shift is occurring towards greater private sector involvement in the financing, construction and operation of projects in the Middle East. The Organisation for Economic Co-operation and Development predicts that the increase in public-private partnerships (PPPs) in the Middle East and north Africa region over the next five years will attract $100bn-worth of investments.
Economic growth and diversification has been the driving force behind the proactive approach of the Gulf Co-operation Council (GCC) to upgrade its infrastructure to cope with fast-growing populations, as well as to invigorate local area economies and attract global capital investment. With GDP growth forecasted to slow from 6.2% in 2011 to 4.3% in 2012, according to economic and market strategy research firm Roubini Global Economics, and the growth of an alternative fuels market creating further uncertainty about future oil demand, the GCC is taking further measures to establish frameworks that facilitate PPPs, with a goal to attracting more FDI.
Building for the future
Online business information provider AMEInfo estimates that GCC expenditure on infrastructure in the next decade will be worth $1500bn, and that joint ventures will play an integral role in developing, managing and operating infrastructure projects.
“There is a real need for these projects as several of these countries lack basic infrastructure,” says Samer Qudah, a partner at law firm Al Tamimi & Company. “The Middle East is wealthy; however, it is still developing. Therefore there remains a need for infrastructural development.” It is for this reason that foreign lenders have expressed support for infrastructure projects in the GCC and foreign lending has generated further global interest in long-term infrastructure projects in the region.
“We are currently witnessing a greater presence of Asian investors, more so than the GCC’s traditional investors from the West”, says Mr Qudah. “While this is not intentional, due to the setbacks the West is experiencing from the global financial crisis it makes more sense for Asian economies to be more involved as they continue to grow at a faster rate.”
Asian investors, in particular South Korea and China, have been keeping a pulse on the investment opportunities as they engage in joint ventures in large infrastructure projects. South Korean investors stamped their mark on the Middle East when in 2009 the country won $36bn-worth of infrastructure and construction projects, representing a quarter of all such contracts publicly offered in the region.
Yet several joint ventures have taken place within the region. The King Abdullah Economic City, a joint venture between the Saudi Arabian government and the UAE-based Emaar Properties to develop a 'world-class city' is worth an estimated $93bn, according to information solutions provider MEED Insight. This forms part of Saudi Arabia’s plan to build six economic cities throughout the country that will contribute $150bn to Saudi Arabia’s GDP by 2020. The Qatari government’s expenditure will also reach $57bn over the next decade, in preparation for the 2022 Football World Cup.
“Joint ventures are common in the Middle East, as they also reflect an ownership dictated by legal limitations in the local jurisdiction, where it is expected in large-scale projects the foreign investor will engage with the local partner,” says Mr Qudah. “Saudi Arabia has a huge market, and the Saudi Arabian city of Jeddah in particular has attracted more than $12bn in infrastructure projects. Qatar is another example of a country starting from scratch. If you go beyond the GCC, huge infrastructure projects are likely to be replicated in Iraq and Libya. They will need robust infrastructure to support their operations, so I do not see this current development stopping at any point in the near term.”