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Rising costs raise privatisation fears

The ongoing development of the region’s infrastructure through public and private partnerships (PPPs) and privatisation could be under threat from rising investment costs, a leading finance expert has warned.

Delegates gathered at the Broader MENA Investment Summit in Dubai earlier this month to discuss infrastructure investments in the region, expected to be worth between US$100bn and US$300bn from 2007 to 2015.
While the debate predicted PPPs and privatisation would explode in the region, experts also warned that a number of possible limiting factors could slow growth in the sector.

Darren Davis, head of project and export finance at HSBC Amanah, the group’s global Islamic banking division, said: “Clearly there’s a huge demand for a lot of investment in infrastructure in terms of education, health and transport [but] one of the big constraining factors at the moment is investment cost — for example, a power plant could easily cost 15% more than it did 12 to 18 months ago.

“As long as there is a strategic need to invest in these projects, they will go ahead but the momentum that’s been building over the last few years could be constrained,” he added.

Davis also stated that the Middle East’s project finance market was considered the largest in the world.

Meanwhile, Ravi Suri, managing director and head of project and export finance for the Middle East and South East Asia at Standard Chartered Bank, outlined the need for more regulation from the region’s governments.

“For privatisation to be successful, it is critical that public policy, regulatory and market structures are in force before private capital is deployed. Governments must decide what to regulate and how to regulate,” he said. “This is the critical ingredient where the Middle East [is] lacking,” he added.

Stating that the region was at a “privatisation crossroad,” Suri also called for the introduction of independent regulators with significant judicial powers to the region.

Dismissing the argument that the rising investment cost of infrastructure projects would stifle growth, Mustafa Abdul-Wadood, managing director of Abraaj Capital, told Arabian Business: “The infrastructure climate in this region is tremendous and our estimate is in excess of US$600bn over the next five to 10 years.

“The reality is that a massive amount needs to be invested, so there isn’t the same pressure on returns that you have in developed markets.”

The governor of the Dubai International Financial Centre used the summit as an opportunity to encourage closer ties between the Middle East, Africa and Asia. Delivering his welcome speech, HE Dr Omar bin Sulaiman, said.

“Across Asia and Africa, governments must work with the private sector to institutionalise a reform process that will make the region a more attractive destination for foreign direct investment. At the same time, investors must prove more willing to examine the opportunities that already exist in infrastructure, industry and financial services.”

The summit, which attracted in excess of 250 delegates, was organised in conjunction with the Islamic Development Bank Group and the World Bank’s Multilateral Investment Guarantee Agency (MIGA).

The executive vice-president of MIGA, Yukiko Omura — who has just completed a tour of the region covering Kuwait, Jordan and the KSA — told delegates: “I was struck by the commitment of investors to explore new opportunities and of lenders to find innovative financing solutions for those investments.

“On my trip through the region, I have met with many Saudi and Kuwaiti investors who are keen to invest in Africa and Asia, for example.

Within this globalising trend, Islamic financial institutions are playing a rapidly growing role as are private equity and venture capital funds.”

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