Investing in infrastructure

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Regional infrastructure investment requirements are set to surpass US$630bn.

The world’s population is set to almost double in the next forty years- from 6.5 billion it is predicted to rise to 9.1 billion by 2050, and virtually all the growth will be in the developing world.

Most populated will clearly be China and India, and the GDP of Asia will exceed the combined GDPs of Europe and the US. If one combines these trends - high population growth and the economic boom witnessed by the emerging nations in this region - it becomes obvious what this part of the world needs – appropriate infrastructure.

“The strong economic performance of the wider Middle East, North Africa and South Asia region (MENASA), can only continue when the existing infrastructure is upgraded accordingly,” explains Tom Speechley, Executive Director, Abraaj Capital.

According to Abraaj figures, investment requirements in this region are expected to exceed US$1tr in the next 5-10 years – expenses that cannot be covered by the respective governments alone.

“Even with large budget surpluses in the GCC, there is still a large deficit in required financing,” he adds.

Speechley argues that even if the current GCC oil production levels of 17,4 million barrels per day, with a excess price of US$25 per barrel, remain the same over the next 5 years, the Saudi government will still need an additional US$325bn worth of private investment.

“There is a large privatisation trend going on in the region,” he adds.

Regional governments, he explains, need to engage the private sector more “not only to raise capital but also to increase industry competitiveness on a global scale.”

“There is obviously a direct correlation between population size and infrastructure requirements. In the course of that development, job creation is another key challenge of the region, with 18million news jobs needed by 2015 to keep unemployment rates at the current level,” he says.

Infrastructure projects consist of three segments: traditional or hard infrastructure, which includes transport, ports, power and utilities, soft or social infrastructure which includes education and healthcare, and industrial, which comprises mining, manufacturing and oil and gas plants.

Investments in infrastructure can by done as green field investments, for example setting up a new power plant in Pakistan or a hospital in Saudi, or it can be given as growth capital, such as funding a school project across the GCC or a new production line in a petrochemical plant.

Besides the demand due to population and economic growth, infrastructure projects are a good opportunity for Middle Eastern governments to diversify their economies away from the oil and gas sector, Speechley argues. “Healthcare and education is unsatisfying throughout all developing nations,” he says.

“There is a chronic underdevelopment in infrastructure worldwide. The MENASA region now has ideal conditions to upgrade these sectors, and high demand and relatively low labour costs support this trend,” he adds.

Speechley reveals that in the first half of 2006 the Middle East became for the first time the largest source of infrastructure-related project finance worldwide, accounting for US$33bn. The entire MENASA region has further announced infrastructure projects that need a total of US$630bn investment within the next 5-10 years – a figure that consist of power (US$155bn needed particularly in power plants and transmission in the entire GCC and South Asia), water (US$133bn needed in the GCC, Egypt and Pakistan), healthcare (US$49bn needed in the GCC and India, with investment primarily in hospitals), education (US$18bn needed in the GCC, India, Pakistan and Egypt), transport (US$188bn needed in the entire MENASA for roads, airports, rail and ports) and petrochemical sectors (US$87bn needed in Saudi Arabia and Qatar).

The so-called “repatriation” of Arab money is another aspect of the large amounts currently being invested in regional assets, according to Speechley. “There is still interest to invest in US assets, but not as before.

Arab money is definitely shifting to wards East, especially the subcontinent, Indonesia and Malaysia,” he says.

Arab investments in the former Soviet Union states are also on the rise, Speechley argues. “Middle Eastern investors are increasingly looking for investment opportunities in the Muslim countries of the former Soviet Union,” he says. “Especially in the energy sector.”

Abraaj capital is raising a US$2bn private equity infrastructure fund in the MENASA region, the largest fund ever raised in this area.

The fund will have a target IRR (internal rate of return) of 20% on invested capital contributions and a life span of ten years. The fund’s focus will be to take majority/minority stakes in green field projects, growth capital investments and to participate in large-scale privatisations and buyouts across all infrastructure sectors. The fund is co-sponsored by Deutsche Bank and Ithmaar Bank.

Speechley believes that Arab investors and their funds are generally warmly welcomed worldwide. “The Dubai World deal was especially security driven, and therefore an exceptional incident.”

So would a military conflict in Iran slow down infrastructure investments in the region?

“It would certainly reduce investors’ appetite from abroad, but it’s hard to say to which extent,” Speechley says. “Our investments are not insured against war, but we select them thoroughly to minimize the risk potential as much as possible,” he adds.

Besides investing in infrastructure projects in the region, Arab investors like to acquire lucrative assets in the West, Speechley says.

“Some Western assets are trophy assets, but usually Middle Eastern investors know exactly how to locate opportunities that offer great returns and capital gain,” he says.

“DIC certainly looked at Liverpool FC from an investment-return perspective,” he adds.

Andrew Fraiser, Partner, Allen & Overy, says that in the UK “we see an absolute seller’s market at the moment”. Of all UK deals last year some 75% were auctioned, and private equity sponsors won around 75% of all UK auctions, compared to 25% in 2001.”Private equity will be the asset class of this year,” he predicts.

Last year saw US$211bn invested in infrastructure projects - an increase of 35% on 2005. Merger and acquisitions of existing infrastructure assets increased to US$143bn from US$65bn in 2005.

Fraiser says that infrastructure investments are equally required in developing and industrial nations, and that “infrastructure as a new asset class will continue to be a feature of our lives.”

He adds that there are various new dedicated infrastructure funds - Goldman Sachs raised US$6.5bn and JP Morgan raised US$800m, besides UBS, HSBC Middle East, Citigroup/CDC Africa and state-based funds such as the Singapore GIC, Mubadala, Qatar Investment fund and the Pakistan Infrastructure fund which have all been massively investing in the new assets class since last year.

As a trend one can observe that there is a move away from listed funds and listed infrastructure companies, and a move away from geo-centric funds, “which shows the extend of investors’ appetite,” he says.

As a final conclusion Fraiser highlights that “as the wealth in India, China and Africa increases there is great need for infrastructure. There is a shift towards the East that is supported by more transport links, increased outward investment and increased interest in renewable energy, and all these developments will rely more and more on private finance.”

And with sky-high oil prices and massive liquidity in the region those infrastructure projects are likely to attract investors for many more years to come.

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READERS' COMMENTS

Invest in The Future NOW
Posted by T Crowe Semler on Sunday 18 March 2007 at 21:20 UAE time


Infrastructure investment is critical for the Khaleej.  
The simple fact is you must have a strong infrastructure and the ability to project well into the future so that once a project is completed it is not obsolete.  
The investment within the region reflects the long term expectations of a solid, cohesive, Arab World.  
Any investment for the future generations brings about hope and security for the people. The future is now…invest wisely…invest in yourself. 
T Crowe O’Rourke Semler

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