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Study: $100bn PPP opportunity in MENA region

With public spending on infrastructure falling despite rising oil revenues, a sizeable gap is opening in GCC and MENA states between required and available infrastructure financing, opening the window for private investment.

More than $100 billion of public private partnership investments in the Middle East and North Africa region will be required in the next five years to supplement shrinking government funding for infrastructure, according to a study published by accounting firm Ernst & Young.

“At first look, you would think that infrastructure financing is readily available in the Middle East because of petrodollars. But once you take a closer look, you realize that infrastructure spending as a percentage of GDP is going down,” said Mike Lucki, global head of infrastructure at Ernst & Young.

Public spending in the Gulf Cooperation Council member states, Saudi Arabia, the United Arab Emirates, Qatar, Kuwait, Oman and Bahrain, declined from about 34 percent of GDP in 2002 to about 29 percent, or $206.3 billion, in 2007. This is despite rising oil revenues: the six GCC-member states earned $381 billion from oil exports in 2007 and another $26 billion from natural gas in 2007, the report found.

Lucki said the GCC states are reinvesting most of their increasing oil and gas revenues back into the sector. The countries intend to export more higher-margin processed petroleum products as opposed to lower-margin crude. As a result, non-oil and gas infrastructure projects are getting sidestepped by government funding sources.

To some extent, the private sector has been stepping in to fill the gap. Ernst & Young estimates that nearly $40 billion in Shariah-compliant financing will flow to GCC states in 2007. Of that, $9 billion, or 22 percent, was spent on infrastructure.

But with nearly $1.3 trillion worth of current and active civil engineering projects in the GCC region, Ernst & Young points to a “huge need for infrastructure capital” in the future, much of it in water infrastructure. For example, despite the Middle East boasting two-thirds of the world’s desalinisation plants, the World Bank has predicted that the amount of water available per person in the region will halve by 2050 due to population growth and climate change.

Lucki estimates that, with PPP legislation still largely in development mode across the Middle East, half of that $1.3 trillion could go through PPPs, creating a potentially sizeable opportunity for private capital going forward.

Global Investment House, a Kuwait-based investment manager, recently estimated the GCC infrastructure project pipeline much higher than Ernst & Young, at $2 trillion dollars.