Challenges and opportunities

The MENA region's exponential population growth means there is an increasing strain on the region's existing infrastructure and an immediate need for building new infrastructure to cope with the continued increase in demand and anticipated future growth in the region. Despite a traditional preference for public procurement by governments in the region, a high infrastructure deficit means PPPs are fast gaining ground as a procurement method for key public infrastructure.

1.               Challenges

1.1           Infrastructure deficit

The MENA region covers a wide economic area.  Within it are countries with varying levels of natural resources, different political and social systems and, therefore, different drivers for their infrastructure development.  Despite this economic and demographic diversity, a common feature of this region is the high degree of infrastructure deficit.  With significant population growth in the region over recent years, there is not only public demand for improvements in infrastructure to cope with this growth but there is also a need to provide quality infrastructure to enable further economic growth beyond the recession.

1.2           Liquidity crisis

While the political will to adopt the PPP model is still spreading throughout the region, the present difficulties in accessing the private commercial loan markets have also become a serious challenge to its implementation.  Most major international banks have reduced their interest in the MENA region for the short term in order to focus on their domestic markets as liquidity becomes constrained.  Some commentators have noted that there will be a need to increase reliance on short-term debt with governments to take the resulting refinancing risk.

1.3           Cautious optimism

There is, however, an increasing perception that the market is beginning to ease; time will tell whether this is a blip or the beginning of the end of a very difficult period for project finance lending. Despite the tight market conditions, there appears to be a healthy pipeline of infrastructure projects that are being touted as potential PPPs.

2.               Opportunities

2.1           Rail

Traditionally, the Middle East has faced many barriers to the implementation of public transport networks: barriers such as the difficult summer climate and the perceived cultural preference for private transportation.  However, there has recently been a seismic shift in the mindset of the rulers in the region.  Almost every country in the Middle East region has announced plans for massive infrastructure spending in the transport sector.

Rail is fast becoming the "buzzword" in the region after Dubai's launch of its US$4.2bn metro in September 2009.  With government funds now under pressure for competing needs, the Dubai Government has announced that it is looking at delivering connecting lines of the metro (the "Blue" and "Purple" lines, on hold) by utilising a PPP structure.

The UAE has the most ambitious transport plan in the Gulf region: the US$11bn "Union Railway" project.  This is the first stage of the wider plans to have a GCC-wide rail network.  The project aims to link the seven emirates of the UAE by rail, initially for freight and then for passenger traffic.

In addition, there are numerous other important regional rail projects coming online including Haramain High-Speed Rail, Mecca Metro, Abu Dhabi Metro & LRT, Kuwait Metro, Kuwait Heavy Rail, Batinah in Oman and various Qatari projects. It is worth noting that all of these projects are at the government study stage and many will be non-PPP.

2.2           Ports and airports

There is tremendous competition between the many ports across the Middle East to establish the region's shipping hub.  The increased investment in ports can be seen in the US$3bn Aqaba New Port PPP and Abu Dhabi's US$24bn Khalifa Port & Industrial Zone amongst others.  However, it is probable that many ports projects will be delivered through traditional means, not PPP.

Governments have also seen the need to enhance airport investment in the region.  Some of the current projects (following on from Queen Alia Airport PPP in Jordan, where Ashurst advised the sponsors) include Dubai's US$8bn Al Maktoum International Airport, Saudia Arabia's US$4.5bn King Abdulaziz International Airport and the US$2.4bn Medina Airport PPP, and Kuwait's US$21bn airport expansion.  Again many of these projects will be EPC rather than PPP-based.

2.3           Road

The PPP model has not, until recently, been considered in the structuring of road projects in the region.  The US$2.7bn Mafraq-Ghweifat Highway Project (upon which Ashurst is advising) is the first project to use the PPP model.  The significance of this project goes beyond the fact that it is the first to be structured via PPP, with industry commentators touting its success to the future procurement of regional road projects by PPP.

Following the passing of Kuwait's BOT law, the country is now considering using the PPP model to structure its future road projects.  Major projects underway in Kuwait include the US$3.7bn Subiya Causeway, the US$1bn Al-Jahra Road upgrade and the US$200m Eighth Ring Road.  There are also plans for a trans-Kuwait highway network stretching from the border of Iraq to Saudi Arabia.

Qatar is rumoured to have put aside US$20bn for its road-building programme.  The most significant road project currently under construction is the North Road Project which will connect Qatar and Bahrain.  The project will culminate in the US$4bn Qatar-Bahrain Causeway (now on hold).  However, there has been no announcement by the Qatar Public Works Authority that any of the proposed road projects are going to be structured by PPP.

2.4           Water and wastewater

GCC countries have, self-evidently, a very limited supply of natural potable water.  Paradoxically, however, they also have one of the highest per capita usages of potable water in the world.  Accordingly, both "stand-alone" potable water projects and wastewater WWTPs are fast-growing markets in the region.  The scale of project costs for water/wastewater treatment is lower than for IWPPs (e.g. the US$470m New Cairo WWTP) and therefore have a significant advantage in today's liquidity-constrained loan markets.

Examples of upcoming and ongoing wastewater related projects include Bahrain's Muharraq STP and Tubli WWTP, Egypt's New Cairo WWTP, 6^th October WWTP and Abu Rawash WWTP and Saudi Arabia's Mecca, Medina and Greater Dammam WWTPs.

3.               Conclusion

Clearly, PPP is a procurement model that has had some historical success in the MENA region and is growing in appeal given the time and cost advantages that it offers.  As a result, across the region as a whole, there is a healthy pipeline of opportunities and a growing political willingness to implement PPP legislation and programmes in order to encourage private sector investment. 

With the price of oil set to reach towards US$100/barrel in 2010, the petrol-powered economies of the MENA region seem set to continue to pursue their ambitious plans of massive infrastructure spend post-crisis, albeit on a slightly more muted basis.