The $100 billion prize: Development finance can boost economic diversity in the GCC
Foreign direct investment, which according to the World Bank has declined by about 40 percent as a percentage of GDP over the past decade, must be rekindled
Jorge Camarate (top left) and Aurelien Vincent (top right), partners, Krzysztof Ignaciuk (bottom left), senior manager and Misa Lazovic (bottom right), senior associate, with Strategy& Middle East, part of the PwC network
The GCC governments have been trying to diversify their economies away from hydrocarbons for years with mixed success. To accelerate the development of the non-oil economy, GCC governments must attract more private sector investments, from domestic and international sources, and looking to attract foreign direct investment is a solid start.
The dual shock of lower oil prices and the Covid-19 pandemic – which devastated the construction, retail and real estate sectors in particular – has underscored how dependent GCC economies remain on government largess, which derives mostly from the energy sector.
Foreign direct investment, which according to the World Bank has declined by about 40 percent as a percentage of GDP over the past decade, must be rekindled.
Development Finance Institutions (DFIs) are ideal catalysts for private sector investments. DFIs are specialised organisations usually funded by national or regional governments to finance projects with a significant developmental impact. Their purpose varies, but typically they pursue socio-economic impact – in areas as diverse as agriculture, culture, SMEs, mortgages – while ensuring self-sustainability.
A DFI’s involvement in a particular company or sector can provide a strong signal of confidence to the private sector and can create a significant multiplier effect for investment. For every $1 a DFI invests, we estimate based on our research that it can attract $10 of private capital. Given that the top five GCC DFIs (excluding sovereign wealth funds) have invested $10 billion, the DFIs could help unlock upward of $100 billion.
To make this happen, DFIs must walk a fine line as they pursue economic diversification in the GCC: trying to maximise socio-economic impact while delivering superior financial returns. A common issue that restrains DFIs’ organisational agility and investment effectiveness is rigid pipeline management and reporting processes. As a result, some GCC DFIs have only 60 percent of their assets invested, while global best-in-class DFIs invest around 95 percent, based on GCC and global DFIs’ annual reports.
We believe DFIs should take three actions to spur economic diversification in a post-pandemic world: Rethink internal processes, enhance product offerings, and develop new partnerships.
Rethink internal processes
DFIs should clarify their mandate and institute flexible and pragmatic day-to-day decision making. To invest more quickly on more promising opportunities, DFIs should review authorisation steps, simplify pipeline management, streamline their governance wherever possible and exploit data, analytics, and automation to improve risk management and reporting practices.
Enhance product offerings
DFIs should improve existing products and offer innovative approaches to expand the breadth of offerings and the scope of opportunities. They should improve the versatility of existing products. They also can introduce loans and credit lines of various sizes and tenures, with flexible features such as easy prepayment options or grace periods, and take into account new sources of collateral such as government guarantees, inventories, and receivables. DFIs should propose tailored products, such as lines of credit to help small businesses develop e-commerce channels.
Develop new partnerships
DFIs should rethink their distribution strategy, especially in pandemic-affected, fragmented sectors where they want to reach small players that can create growth and innovation. If they lack certain sector-specific expertise, they should build or acquire it swiftly to properly assess and originate deals, and then invite private capital to co-invest with them. This means new partnership capabilities, such as express approval to accelerate co-financing with qualified private lenders. It also means exploring partnerships with new types of organisations, such as financial technology start-ups focused on micro- and small-businesses lending.
With government support from the pandemic gradually coming to an end, DFIs in the GCC will have ample opportunities to put more money to work and enhance their socio-economic impact. Capturing these opportunities, and accelerating private sector investments at large scale, will require more agile investment processes and more creative, digital-powered organisations that can take advantage of a wider set of partnerships and products.
Jorge Camarate and Aurélien Vincent, partners, Krzysztof Ignaciuk, senior manager and Misa Lazovic, senior associate, with Strategy& Middle East, part of the PwC network.
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The $100 billion prize: Development finance can boost economic diversity in the GCC
Foreign direct investment, which according to the World Bank has declined by about 40 percent as a percentage of GDP over the past decade, must be rekindled
Jorge Camarate (top left) and Aurelien Vincent (top right), partners, Krzysztof Ignaciuk (bottom left), senior manager and Misa Lazovic (bottom right), senior associate, with Strategy& Middle East, part of the PwC network
The GCC governments have been trying to diversify their economies away from hydrocarbons for years with mixed success. To accelerate the development of the non-oil economy, GCC governments must attract more private sector investments, from domestic and international sources, and looking to attract foreign direct investment is a solid start.
The dual shock of lower oil prices and the Covid-19 pandemic – which devastated the construction, retail and real estate sectors in particular – has underscored how dependent GCC economies remain on government largess, which derives mostly from the energy sector.
Foreign direct investment, which according to the World Bank has declined by about 40 percent as a percentage of GDP over the past decade, must be rekindled.
Development Finance Institutions (DFIs) are ideal catalysts for private sector investments. DFIs are specialised organisations usually funded by national or regional governments to finance projects with a significant developmental impact. Their purpose varies, but typically they pursue socio-economic impact – in areas as diverse as agriculture, culture, SMEs, mortgages – while ensuring self-sustainability.
A DFI’s involvement in a particular company or sector can provide a strong signal of confidence to the private sector and can create a significant multiplier effect for investment. For every $1 a DFI invests, we estimate based on our research that it can attract $10 of private capital. Given that the top five GCC DFIs (excluding sovereign wealth funds) have invested $10 billion, the DFIs could help unlock upward of $100 billion.
To make this happen, DFIs must walk a fine line as they pursue economic diversification in the GCC: trying to maximise socio-economic impact while delivering superior financial returns. A common issue that restrains DFIs’ organisational agility and investment effectiveness is rigid pipeline management and reporting processes. As a result, some GCC DFIs have only 60 percent of their assets invested, while global best-in-class DFIs invest around 95 percent, based on GCC and global DFIs’ annual reports.
We believe DFIs should take three actions to spur economic diversification in a post-pandemic world: Rethink internal processes, enhance product offerings, and develop new partnerships.
Rethink internal processes
DFIs should clarify their mandate and institute flexible and pragmatic day-to-day decision making. To invest more quickly on more promising opportunities, DFIs should review authorisation steps, simplify pipeline management, streamline their governance wherever possible and exploit data, analytics, and automation to improve risk management and reporting practices.
Enhance product offerings
DFIs should improve existing products and offer innovative approaches to expand the breadth of offerings and the scope of opportunities. They should improve the versatility of existing products. They also can introduce loans and credit lines of various sizes and tenures, with flexible features such as easy prepayment options or grace periods, and take into account new sources of collateral such as government guarantees, inventories, and receivables. DFIs should propose tailored products, such as lines of credit to help small businesses develop e-commerce channels.
Develop new partnerships
DFIs should rethink their distribution strategy, especially in pandemic-affected, fragmented sectors where they want to reach small players that can create growth and innovation. If they lack certain sector-specific expertise, they should build or acquire it swiftly to properly assess and originate deals, and then invite private capital to co-invest with them. This means new partnership capabilities, such as express approval to accelerate co-financing with qualified private lenders. It also means exploring partnerships with new types of organisations, such as financial technology start-ups focused on micro- and small-businesses lending.
With government support from the pandemic gradually coming to an end, DFIs in the GCC will have ample opportunities to put more money to work and enhance their socio-economic impact. Capturing these opportunities, and accelerating private sector investments at large scale, will require more agile investment processes and more creative, digital-powered organisations that can take advantage of a wider set of partnerships and products.
Jorge Camarate and Aurélien Vincent, partners, Krzysztof Ignaciuk, senior manager and Misa Lazovic, senior associate, with Strategy& Middle East, part of the PwC network.
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