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GCC Infrastructure Projects Need New Fund Sources

Rocel Felix / 21 December 2009

DUBAI Infrastructure spending is still a major growth driver in the Gulf Co-operation Council countries, with current projects valued at a whopping $2.6 trillion, but alternative funding schemes need to be explored as the global economic crisis is stifling commercial lenders, experts said.

While other parts of the world are re-thinking infrastructure investments due to the downturn, the GCC is continuing its massive infrastructure spending,  Dr Nasser Al Saidi, chief economist of the Dubai International Financial Centre Authority, said at a recent conference.

“There continues to be enormous demand for new infrastructure across the GCC countries and the region. This is driven  by population growth, economic development and diversification imperatives. Counter-cyclical fiscal policy has focused on maintaining or even increasing government expenditure on public works and infrastructure.”

Al Saidi said infrastructure spending in the region helped avoid the contagion effects of the credit crisis, and allowed countries to sustain growth. He said other emerging markets like China, have also  followed the same prescription.

GCC countries, aside from their domestic projects, are also trying to accelerate the pace of  projects that foster regional integration such as integrated transport systems, electric grid, pipelines, telecommunications and fibre optics.

The value of projects in the Gulf rose to $2.6 trillion last November, from more than $2 trillion in August of last year. Of these, 34 per cent was accounted for by the UAE, 23 per cent by Saudi Arabia, 12 per cent by Iran, 10 per cent by Kuwait, 9 per cent by Qatar, and 6 per cent by Iraq.

The  availability of long-term finance, continuous and timely funding, are critical to the smooth implementation of new infrastructure projects, said Al Saidi, but the global credit crisis, had banks tightening access to funds.

As a result, alternative funding options are increasingly being relied upon by project managers. These include project financing, public-private partnerships, built-operate-trasnfer models, capital market based financing, housing finance, as well as raising public debt and Islamic instruments such as sukuk or Islamic bonds.

“The challenging amounts of financing to be raised for infrastructure developments, require a more diversified approach towards funding sources compared to the bank loan focused approach,” said Frank Beckers, managing director of project and capital advisory at Deutsche Bank for the Middle East, Africa and Asia.

Beckers said that in the Middle East and North Africa region, project funding activities  are largely dependent on  the loan market, but the underdeveloped bond markets, will increasingly play a larger role in the coming years, along with export credit agencies.

“Large investments need to access all available funding sources to arrange the amounts of financing required.”

Al Saidi noted that the crisis has raised the profile of Islamic bonds as a way to raise long-term financing.

Last month, the International Finance Corp., an affiliate of the World Bank, listed a Sukuk on the DIFC’s international exchange, Nasdaq Dubai and Bahrain Exchange.

The $100-million IFC Hilal Sukuk, with a five-year maturity, marked the first time that a non-Islamic financial institution issued a Sharia compliant security for term funding. The Hilal Sukuk will raise funds for IFC infrastructure and heralth projects in Yemen and Egypt.

“Given the infrastructure projects in the pipeline, this issue underscore the opportunity in infrastructure spending,” said Al Saidi.

“So far, a liquid Sukuk secondary market in the region has struggled to emerge in part due to a shortage of high quality securities, compared to the demand by a host of Islamic institutions that typically buy and hold most of the supply. The IFC issue might help turn the tide.”

With access to credit from commercial banks already limited, government leaders and project implementors will have to increasingly diversify funding sources to bankroll the GCC region’s huge infrastructure projects.

“I expect new financial players to emerge,” said Adil Marghub, manager of infrastructure and energy in the MENA region for International Finance Corp., noting that local state-owned banks, as well as multilateral and bilateral agencies are becoming key finance providers. 



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