Private equity's push for a brighter future

Given the number of infrastructure funds that have been created in recent years by private equity firms, the answer may be more than you think. With governments worldwide struggling to find ways to manage a major shortage of electricity, private equity firms in the MENASA region have stepped in to help satisfy the need through US$14.1bn in infrastructure funds.

Firstly, the power sector. In Asia the continued robust economic growth has increased demand for electricity for lighting, heating and cooling, household appliances and other electronic devices associated with rising standards of living. Total electricity generation is expected to nearly triple to 10 trillion kWh by 2030. However, until transmission infrastructure can be put in place, power cuts will remain rampant during the sweltering summer months. Many rural areas that currently do not have access to transmission lines are expected to replace indigenous fuel with electricity from diesel-fired generators.

Electric power generation in the Middle East is projected to grow by 2.9% per year, to just over 1 trillion kWh by 2030. High population and income growth in the region are expected to result in a growing demand for more electric power in the future.

The changing landscape in the Gulf also provides ample opportunity for power investments. Projects are becoming bigger and more expensive with plant capacities that are five times larger than those currently in operation. Industry analysts project that GCC and South Asia will need to invest US$200bn in the power sector over the next 10 years. Despite positive fiscal results, regional governments alone cannot meet the necessary power requirements especially given the lack of expertise and soaring construction costs.

Secondly, addressing inefficiencies. There are significant infrastructure inefficiencies prevalent throughout the region. Most utilities companies are not run profitably. Electricity tariffs are highly subsidised and represent only a fraction of actual market cost leading to overuse and resulting in significant wastage. Revenue collection is poor and illegal connections are a problem in many countries. Some of these inefficiencies are being addressed with new technological developments and government initiatives including the interconnection of national electric grids across borders.

Finally, the role of private equity. With projected returns in excess of 15%, private equity firms have been quick to realise that an opportunity exists. Private equity provides the specialised investment skills needed to fund large power projects. The size and scope of these developments require a new ‘public-private' collaboration model. Governments agree to purchase the power under long-term contracts while the private sector provides the technological and project management expertise to deliver the needed power. Private equity investments drive long-term value creation and private equity managers often have a high degree of control and influence over investments. The tools that private equity firms employ to create value such as improved corporate governance, transparency and institutional quality internal control systems and active participation at the Board and strategic planning levels will be particularly relevant to improve efficiency for power projects.

Ultimately, the success of these private equity firms will lead to the creation of an asset class that will forge a new relationship between private equity investors and governments and, in the process, allow these firms to play an increasingly important role in the region's economic development.

Tabish Gauhar is the Senior Vice President of Abraaj Capital.

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