Public-private participation for Mena infrastructure projects

Tightening liquidity coupled with increasing country risks have limited the appetite of banks to lend for projects on a long-term basis, such as in the power sector.

The participation of private-sector investors in state-backed infrastructure projects is being reimagined in the Middle East and North Africa amid a US$270 billion gap in spending.

Lower revenue because of the lower oil price has pushed regional governments to increase private sector involvement, such as promoting the public-private partnership (PPP) model in areas that have historically been funded exclusively by state money.

Mouayed Makhlouf, the director for the World Bank’s International Finance Corporation’s (IFC) Mena region, said on Sunday in Dubai that the largest growth sector for private participation was the power industry.

“There’s a power gap of 20 per cent and the region needs [investment of] over $100bn annually for the next few years,” he said. “There’s a lot of pressure for governments to find solutions to challenges that they’re facing.”

One example comes from Dubai as the emirate’s power utility, the Dubai Electricity and Water Authority, announced at the beginning of the year that it would tender renewable energy projects totalling more than Dh27bn with private companies picking up a large chunk of the cost through PPPs.

Tightening liquidity coupled with increasing country risks have limited the appetite of banks to lend for projects on a long-term basis, such as in the power sector. And regionally there is a lack of refinancing mechanisms in place that makes PPPs more difficult to structure.

Villiers Terblanche, the managing partner at Latham & Watkins law firm, pointed to a scale-back in the number of private-sector banks lending since 2010.

“Fewer lenders are available and good projects are competing for limited resources,” he said, adding that there was not a refinancing culture in the Middle East to overcome this.

“In the West, contracts aren’t as long because of the refinancing option.”

He said that in places such as the United States and Europe, local lenders offer refinancing structures that have pushed down the duration of PPP contracts from more than 20 years, as seen in the Middle East, to about six years.

While oil prices and technology have always affected the region, Mr Terblanche said that changes coming about were unique, pointing to a need for an evolution to reach other soft markets such as education and even digital payments. This could be a remittance platform funded by a private company that created a substitute for debit cards.

“It’s different this time because demographic fundamentals have shifted past the point of no return,” he said.​

Project bonds could be another option to bridge the funding gap for infrastructure deals, according to the IFC.

“Financing is tight now and the region needs to think about building capital markets, which are shallow at this time,” said Muneer Ferozie, the IFC’s regional manager for PPPs. “I think that’s where the markets are going to get another pool of liquidity.”

lgraves@thenational.ae

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