Gulf still struggling to attract private cash for public projects

Reuters /Fahad Shadeed

• PPP push driven by lower oil prices
• But credibility lacking says expert
• Region still learning discipline

Lower oil prices are driving Gulf countries, particularly Saudi Arabia and the UAE, to involve private companies in financing critical infrastructure projects worth tens of billions of dollars.

Despite some successes, the expansion of public-private partnerships (PPPs) is being hampered by inconsistent project delivery and changing regulatory frameworks that are holding back investor confidence, experts say.

“Four or five years ago the region began focusing more on PPPs, announcing pipelines of projects,” says Sami Neffati, managing partner of Investcorp Infrastructure Partners, part of Bahrain’s Investcorp (part-owned by Abu Dhabi sovereign wealth fund Mubadala). 

But when you look at the delivery, “you would have seen delays, process [challenges] and cancellations.” The region is still “teething”, Neffati says, and learning about the discipline of PPPs.

While most countries have PPP offices, often housed within finance ministries, Neffati says certain authorities, who own the assets, sometimes struggle to delegate project management and “intervene too much”.

“They feel they need to control the process, but they don’t know how,” he says. “Very often, that leads to a failed or delayed process.”

Progress is being made and we are confident in the future, Neffati says, but “delivery needs to accelerate”.

• Riyadh hopes to entice private sector to landmark projects 

• UAE releases details of new PPP regime

• End of ‘blank cheque’ culture for Saudi consultancy

Both Saudi Arabia and the UAE see PPPs as a way to accelerate key projects while reducing the financial burden on governments.

Abu Dhabi is looking for private investment money for 600 infrastructure projects valued at more than $54 billion as part of its Economic Vision 2030 plan, offering private sector investors a lucrative pipeline of opportunities.

Next door, Saudi Arabia approved more than 200 PPP projects across 17 sectors in 2023, including desalination plants, airport and transit developments, with investments exceeding $50 billion under its own Vision 2030.

The kingdom is also urgently courting private sector investors for its giga-projects. 

Riyadh has become a focus for investment since it was chosen as the site for the World Expo 2030 and the Fifa World Cup in 2034. 

Neffati believes that investors’ eagerness to capitalise on the region’s growth potential needs to be anchored through their involvement in tangible investments.

“We are witnessing an unprecedented appetite for regional infrastructure from regional SWFs, pension funds and private wealth. Moreover, we are seeing increasing demand from Asian institutional investors. The region needs to capitalise on this trend to fund the phenomenal pipeline”.

PPPs have been used in the Gulf since the 1990s, but Gulf states were “selective in their choice of which PPPs to adopt, not initially embarking on a full-fledged experience due to abundant financial resources from oil revenues,” a research paper published in the Public Works Management & Policy journal last year said.

The paper, by Mhamed Biygautane from the University of Melbourne and Stewart Clegg from the University of Sydney, said PPPs were mostly deployed in technology-intensive sectors such as independent water power plants (IWPPs) and independent power plants (IPPs), which governments could not execute alone. 

“Currently, any other projects outside the scope of IWPP or IPPs are either in the planning or tendering stages, with a handful only reaching financial closure,” the paper said.

Alamy

Now, falling oil and gas prices have prompted a shift.

Neffati warns that delivery failures could hurt the region’s reputation and deter investors eager to capitalise on its growth potential.

“Credibility is very important,” he said during a panel at the Big 5 Global conference in Dubai in November. 

Whenever projects are announced, they must actually happen and the deals close, Neffati says.

“This really should be the focus of the various governments in the region. Processes, keeping the timelines, not cancelling projects, is something that is very important for the credibility of countries. The entire region is now coming to understand and grapple with this, and it is improving.”

Neffati says some of the main challenges that were earlier deterring institutional investors from engaging with PPP projects in the Gulf region, such as oversized bid bonds, double performance guarantees and unrealistic budgets, are still there.

While the Gulf’s banking sector remains liquid, Neffati says, the scale of investment needed for upcoming projects will require diversified financing sources.

“At some point, we will reach the limits for what the local and regional banking sector can do,” he says. 

“Governments and central banks need to be thinking about how to bring more debt financing to finance the next 10 to 20 years, and not only focus on the current success.”