Change of season

12 February 2013 While the threat of violence is far from over, the Arab Spring is becoming more autumnal. Aaron Weinman considers how the recent upheaval has affected investor appetite in the region’s more established PPP markets

In the wake of the Arab Spring, new opportunities for infrastructure investment are beginning to emerge. The region was on the cusp of some significant PPP investment before the uprisings, with countries like Egypt and Kuwait having established PPP units and developed pipelines for investment.

But a change of leadership – and continued instability – in Egypt saw those plans shelved, while even those countries not directly hit by the violence were tarred with the same brush and found investor confidence melted away during the peak of the protests.

The signs are that, in some states at least, the situation is easing, but can countries present sufficiently secure opportunities to woo back the private sector?  

Pipeline in Egypt
After forming an independent PPP unit and infrastructure pipeline, the ousting of Hosni Mubarak saw Egypt’s entire programme shelved. But the country’s recent resurgent appetite for PPPs indicate that its pipeline is starting to take shape once again. 

“There were some good signs after the revolution,” says Atter Hannoura, head of Egypt’s PPP unit. “Eventually we started to receive a lot more interest, responses and requests for meetings or calls.” 

“The growing urbanisation of Egypt and its population growth make it a prime candidate for serious infrastructure development,” adds Barry Francis, partner at lawyers Pinsent Masons. “While its pipeline is a touch ambitious, it’s likely to materialise over a long-term period.” 

Hannoura notes four tenders of significance in the Egyptian market, which were all suspended during the revolution: the Alexandria schools programme due to reach financial close this month; the Abu Rawash wastewater facility; a Cairo-based tram project; and the Rod El-Farag highway PPP. He says Egypt’s market now has an edge over others in the region, and is “attracting a lot of investors”.  

One is Spanish water management company Aqualia, a subsidiary of construction giant FCC. After overseeing the New Cairo wastewater project in 2010, company vice president Miguel Jurado is currently vying for Aqualia’s participation in the Abu Rawash tender. He says Egypt is heading in the right direction, from a regulatory perspective. 

“Not only has Egypt expressed an interest in another PPP scheme but it’s starting to realise better ways to implement a working model,” Jurado says. “International investors and multilaterals are starting to show more interest in developing these projects – there is a need for infrastructure and need to develop water treatment plants.” 

Hannoura adds that Egypt is on a more stable track than it was 12 months ago and says it has delegations from Kuwait, Saudi Arabia, Turkey, the USA, Korea and the UK. 

“Economic and political stability will always be the biggest challenge, but as more investors come in the more potential Egypt can show.” 

Investing in Egypt
While the large pipeline might be attracting interest, concerns remain over the ability to finance such a long list of schemes. “The problem is the lack of capital, issues with local lending and stability,” explains Francis. 

Restrictions on the extent to which Egypt’s banks are exposed to a single borrower could potentially restrict the ability to raise debt on major PPPs. 

“Recently Egyptian projects (apart from IPP) have been required to be denominated in Egyptian pounds, rather than US dollars or other hard currency,” Francis says. “This exposes international investors to currency risk during the operational phase, which may generate issues surrounding long-term debt and refinancing risks.” 

However, he says long-term debt is an issue across several currencies in the current economic climate and despite the financial risk, global investment in Egypt is vital to the stability of the Middle Eastern region and its relationships with foreign governments. 

Jurado agrees that the capacity of local banks isn’t enough. “[It] needs to attract international help if it is to deliver projects of such ambitious sizes. Legal and financial aspects need to be put forth on the table”.  

Gulf Cooperation Council
Money without skill Currently the Gulf Cooperation Council (GCC) countries of Qatar, Bahrain, Saudi Arabia, Kuwait, Oman and the UAE don’t face significant fiscal challenges, so it’s no surprise that their governments have typically shied away from private infrastructure investment. But Ziad El-Khoury, partner at lawyers Squire Sanders in Riyadh, suggests things are beginning to change as the countries seek the know-how of the private sector, even if they don’t want private cash. 

“The Saudi King has enacted royal decrees, approving one of the biggest expenditures into healthcare and education,” he says. “But it needs the knowledge, which is where the private sector comes in.” 

Given the ongoing conflict in neighbouring Syria and political upheaval in Bahrain, El-Khoury says international investors are still tight-pursed when it comes to opportunities in the GCC. He says the region is going through a transitional phase and international investors are wary of the risks.  “In order to attract investors from abroad, there are many questions that need to be addressed,” he continues. “How are these countries going to implement policy into regulation and who’s accountable for what?” 

Last year a research study carried out between Gulf advisory firm Markab and Qatar’s Ministry of Business and Trade made the case for increased PPPs and pointed out that the GCC needed to build indigenous PPP models based on their requirements. 

Philippa Chadwick, El-Khoury’s colleague in London, says Kuwait, like Egypt, has adopted a model similar to Europe and Canada. She says “[The Kuwait government] acknowledges the experience in Europe and believes this method of PPP can help secure long-term commitments from international and local companies, critical for knowledge transfer into the local economy.” 
But is the GCC trying to bite off more than it can chew? How realistic is its pipeline? And can governments create a workable, transparent PPP model? 

Kuwait for example, has outlined plans to implement an $8bn metro PPP, an expansive schools programme and a $1.8bn wastewater PPP in Um-Al-Hayman, amongst other projects. But political indecision has led to delays in procuring its PPPs, throwing into doubt Kuwait’s ability to deliver on such ambitious promises. 

Kuwait’s wait
After implementing the Partnerships Technical Bureau (PTB), Kuwait has acquired a sound knowledge of PPPs and how to best implement them. But it has been lean pickings for the state’s projects, with many of them hanging in limbo. 

“Kuwait’s PPP unit has a realistic understanding of PPPs and has produced a good level of transparency, but the projects have been slow,” a source close to the industry says. “The model has some defective attributes, for example the requirement for equity participation in the Kuwait Stock Exchange can cause long delays.” 

Political opposition over the last 18 months has delayed the progression of Kuwait’s projects, but the presence of the PTB has enabled investors to keep faith in its billion-dollar schemes. Chadwick says Kuwait’s pipeline is balanced across social as well as economic infrastructure, which she believes will keep a variety of investors interested. 

“The risk factors for social infrastructure are lower for banks and the demand is higher in Kuwait, making these projects [social infrastructure] more realistic and easier to procure,” Chadwick says. “There are two strands for PPPs, first is social followed by economic infrastructure, so it makes sense to start with these projects as there is less wealth involved.” 

After shortlisting seven consortia in September last year, the Al-Andalus healthcare PPP will appoint its preferred bidder soon, according to an adviser close to the project. The 500-bed rehabilitation facility will lead the way in 2013, which the source believes will “open up” Kuwait’s broad programme to investor interest. 

Francis agrees. “All it takes is one project to proceed to financial close, then it’s likely faith will grow in Kuwait’s pipeline and approach to PPP. Projects are slow, but the PTB has a clarity of PPP law, with effective adjudication procedures and a dedicated unit to getting the projects off the ground.”

Whether Kuwait can transfer this momentum to economically driven transport infrastructure remains unknown. The country has a proven track record in developing expensive oil, gas and power projects, but the delays over some of its complex transport PPPs leave the private sector pondering the viability of such programmes. 

A request for qualifications is due for its $7bn rapid transport project later this year, while the $3bn Failaka Island development PPP appointed an adviser in 2011, and had been due to reveal the interested bidders late last year, but has yet to do so.

This page was last updated on:
23 January 2014.


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