The Abu Dhabi Government is preparing private sector participation in the Mafraq-Ghweifat highway project.
The Abu Dhabi Government is preparing private sector participation in the Mafraq-Ghweifat highway project.

Compelling case for private-sector co-operation to boost key UAE infrastructure projects



When Sheikh Ahmed bin Saeed Al Maktoum called for a dialogue on the merits of private-sector co-operation at the inaugural Dubai Economic Outlook seminar, it was also a call to investors, contractors and banks to capitalise on the emirate's commercial appeal given the state of uncertainty that overshadows the wider region.

The potential for such partnerships to diversify the funding sources for Dubai's existing and future infrastructure projects is a benefit that should not be overlooked by policymakers given the existing state of capital markets.

Recent political turmoil has confined lenders to their home economies, and raised hurdle rates for private-sector investors interested in the Middle East.

Finance ministries will have to curtail their investment programmes or diversify their funding bases to address their fiscal challenges. Infrastructure funding commitments present daunting obstacles for economies looking for growth.

A new breed of investor is required today to meet the objectives of developing the required infrastructure, extracting operational efficiencies and building the best-in-class processes for a more efficient allocation of resources.

Dubai is well-positioned to attract a new pool of capital given the political stability that thus far has been the hallmark of the emirate's business model.

Other governments such as those in Egypt, Bahrain, Jordan and Syria will find this much more challenging, at least in the short term.

Ironically, the region's less stable countries have been at the forefront in bridging the funding gap and developing the private-public partnership (PPP) framework to roll out their infrastructure requirements.

Infrastructure funding is a balance-sheet-hungry exercise for any government, and private partnerships offer multiple benefits in the absence of suitable appetite from debt capital lenders.

Dubai's legacy economic growth engines of trade, tourism and transportation have, to date, mostly been underwritten by its balance sheet.

As Dubai continues to embark on major infrastructure projects to spur its economic development, the time is right to adopt solutions to alleviate funding pressures, access private-sector efficiencies, independently assess project viability and ensure capital expenditure optimisation.

As part of its diversification strategy, Abu Dhabi has established precedents that consider the private sector as an integral partner in developing both its hard and soft infrastructure requirements.

Projects under consideration have included the Mafraq-Ghweifat highway - linking the emirate to Saudi Arabia at an estimated cost of US$2.5 billion (Dh9.18bn) - as well as less capital intensive, but equally critical schools, hospitals and car parks.

While the success of some of these projects remains to be seen, there is a history of successfully executing pioneering independent power and water projects that have now become a template for a similar project in Dubai, such as the Hassyan power project, which was tendered this month.

For the sponsor, the Dubai Electricity and Water Authority (Dewa), it paves the way for other private procurement opportunities, and reduces its need to access debt capital markets on its own balance sheet.

It is likely in this instance that the PPP structure will be able to access a more economical cost of capital given lenders will probably be comforted by a robust project structure with a suitable set of risk mitigants.

In the wake of the political instability that overhangs the Middle East, international capital markets have become increasingly reticent towards longer repayment maturities that such infrastructure funding requires.

Leaving aside tighter regulatory restrictions, liquidity challenges and asset liability mismatches, lender dynamics have altered dramatically in recent weeks and months, as has the prospect of finding an investor base that shares a similar long-term return horizon.

Governments in the region traditionally could have relied on conventional project bonds or sukuks as a means of diversifying their funding sources.

And there will come a time when such debt capital market instruments will resume their importance, as demonstrated by the recent $800 million securitisation by Dubai's Roads and Transport Authority. However, the stricter (and shorter) terms available, higher margins and debt-holder aversion to project risks has made such channels less able to fulfil the size of the "ask".

It remains to be seen whether the newly established UAE finance ministry's Public Debt Management Office could provide the catalyst for infrastructure debt issuances, although the prudential limits that have been set ($3bn) could limit its effectiveness.

That the discourse on the benefits of the PPP agenda is now being championed by leading officials at all levels of the Dubai Government, a more determined approach to developing the structures and PPP framework is naturally evolving.

The appeal of diversifying a government's infrastructure funding base, as well as introducing private-sector disciplines on both operational and capital expenditure matters, is a compelling proposition where finance ministries choose not to stretch their balance sheets in current debt markets.

Eli Chahin is a director at AlixPartners in Dubai

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