Weather the Storm and Prepare for the Future
The global economic downturn and sharp decline in oil prices are putting pressure on Gulf Cooperation Council (GCC) governments’ budgets and threatening to restrict regional infrastructure development. Given the region’s rapidly growing population and economic growth, however, GCC countries cannot afford to put off investment in their infrastructure. Governments, banks, and other private stakeholders must collaborate to prioritize sector investment and provide or attract financing to enable infrastructure development to continue.
Governments
GCC gov¬ernments need to prioritize infrastruc¬ture projects, taking into account the degree to which those projects align with strategic objectives such as meeting a growing population’s demands for housing, water, and electricity, or contributing to GDP diversification in key sectors such as telecommunicationsor transportation. Governments also need to make sure that they have the appropriate legal and regulatory framework in place to foster private-sector investment, decrease risks to lenders and developers, and provide required incentives, especially to the emerging class of regional infrastructure and private equity funds. They must support the creation of dedicated infrastructure
investment vehicles that are managed for profit, in order to facilitate access to infrastructure financing in the region and decrease overreliance on foreign banks for funding. Finally, governments must structure deals that facilitate easier debt financing and private financing by breaking projects into smaller pieces or phases, so that they are more digestible to the credit markets and accessible to single developers.
Banks and Lending Institutions
Infrastructure development is key to the long-term growth of GCC economies; therefore, banks need to participate in the financing of infrastructure projects for the sake of their own long-term financial health and growth. These projects do require the creation of large volumes of debt at lower margins, but because of their government support, they carry the benefit to banks of proportionately lower risk than other types of loans. To successfully and profitably support necessary infrastructure developments, banks and financial institutions should disintermediate themselves, taking a proactive approach to financing infrastructure projects and relying more on the capital markets in this regard. Additionally, given the challenge borrowers face in securing large amounts of long-term debt in the current environment, banks should step in to provide short-term financing where necessary, provided that they receive government and sponsor guarantees. Finally, banks should participate in state-sponsored infrastructure investment vehicles to reduce their overall risk while providing good investment return opportunities.
Private Infrastructure Developers and Other Equity Investors
Private infrastructure developers willing to demonstrate their commitment to the region by investing time, effort, and capital during difficult economic times have the chance to secure a leading position in the GCC infrastructure market. Those that can invest now not only to establish market share, but also to reap the benefits of debt recapitalization once the credit markets ease. When it comes to financing, the private sector should consider tapping into the capital markets in order to obtain additional and cheaper sources of financing and reduce dependence on syndicated bank loans. When bank lending is unavoidable, developers may need to find ways to give extra reassurance to lenders: They should consider reaching out to secure sovereign guarantees or putting their own balance sheets on the line by deviating from non-recourse project finance schemes.
Article index
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Executive Summary
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The Immediate Future of GCC Infrastructure
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Exhibit 1: Infrastructure Projects Awarded in the GCC, 2002–2008
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Sizing Up the Financial Requirements
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Exhibit 2: GCC Estimated Infrastructure Investment Needs by SectorBold
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The Impact of Sharply Reduced Oil Priceson Governments’ Infrastructure Spending
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Exhibit 3: Break-even Oil Prices for Fiscal Accounts in the GCC
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Exhibit 4: Estimated Government Assets
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The Impact of the Credit Crisison Infrastructure Financing
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Exhibit 5: Infrastructure Loans from Financial Institutions
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The Way Forward
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Conclusion
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Exhibit 6: GCC and OECD Ratios of Private to Government Expenditure (Average over 2000–2007 Period)
Author Profiles
Fadi Majdalani, is a partner with Booz & Company in Beirut, leading the transportation practice in the Middle East. He focuses on large-scale transformation programs for the aviation, travel, postal and logistics, rail, and maritime industries.
Alessandro Borgogna, is a principal with Booz & Company in Dubai. He focuses on governance, strategy development, operational improvements, infrastructure planning, and public-private partnerships in the aerospace and transportation industries.
Walid Fayad, is a principal with Booz & Company in Beirut and leads the firm’s activities in the Middle East utilities sector. He specializes in strategy, privatization, restructuring, and business building in the energy, utilities, and telecommunications
sectors.
Tarek El Sayed, is a principal with Booz & Company in Beirut and leads the firm’s activities in the Middle East utilities sector. He specializes in strategy, privatization, restructuring, and business building in the energy, utilities, and telecommunications
sectors.
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