Autumn 2013

INFRASTRUCTURE FUNDS: If you build it…

CranesWith the Mena region expected to spend $1 trillion on roads, railways and energy projects in the next decade, infrastructure funds ought to be popular. But the heavy hand of the state may limit the role of private investors and funds. Orlando Crowcroft reports. Major infrastructure projects in the Middle East are not a new phenomenon. Qatar, Saudi Arabia and the United Arab Emirates continue their quest to develop the desert, while Arab Spring nations such as Egypt and Libya seek much-needed investment after years of neglect. The World Bank estimates infrastructure spending in the Mena region will be $1 trillion in the next decade, with $140 billion in Qatar alone in the run up to the FIFA 2020 World Cup. Saudi Arabia and the UAE are building massive road, rail and energy projects, while Iraq has a huge need for investment as it struggles to recover from a decade of war.
But although there are many infrastructure-focused funds based in the US and Europe, according to a report by research company Preqin, there are only a handful in the Mena region. One such fund, the Al Waha Capital and HSBC-backed Mena Infrastructure Fund, has been active in Egypt, Saudi Arabia and Oman for the past three years, and recently acquired a 20% shareholding in Sohar Power Company, a Muscat-listed energy firm. The $300 million fund made four investments in the region prior to its Muscat venture, including acquiring stakes in Alexandria International Container Terminals in Egypt, United Power Company in Oman, and Hajr Electricity Production Company in Saudi Arabia. Hussain Al Nowais, chairman of the fund and of Al Waha Capital, believes infrastructure investment remains an attractive prospect in the region. “The Sohar Power investment reinforces infrastructure as an attractive asset class in the Middle East and North Africa,” he says. That said, even those involved in the sector would admit that in the Gulf, where infrastructure spending is dominated by governments, Mena-focused infrastructure funds are a recent development. Qatar’s $140 billion of pre-World Cup spending – much of which is on roads, highways, bridges, ports and airport projects – is largely state-controlled and difficult to access for private investors or funds. “The funding is primarily government-backed and funds don’t seem to have made the impact one would assume in such a dynamic market,” says Jesdev Saggar, managing director, Deloitte in Dubai. FUND CHALLENGES
The definition of infrastructure in the region is broad, and different sectors present different challenges for funds. In the realm of utilities such as water and energy, services are subsidised. Private investors may find it difficult to work in an environment where revenue streams are determined through government mechanisms and not market forces. “As for other types of infrastructure, rail for example, there is no precedent to build on. Demand projections and so on are highly speculative, except in a few cases,” says Said Hirsh, a former Middle East specialist at Capital Economics who is now an independent analyst. Hirsh also points out that with the huge lead times on many contracts, sometimes over a decade, and uncertainty about when and how projects will be completed – the much-delayed Hamad International Airport in Qatar is a prime example – returns on major infrastructure projects may be unattractive. That said, an uptick in infrastructure-focused funds in the Mena region could benefit governments in the longer term. In countries that have recently emerged from revolutions or periods of instability – Egypt, Tunisia, Libya and Iraq – private capital could replace state spending and help cash-strapped governments save money. Even in the Gulf, where countries such as Saudi Arabia, Qatar and the UAE are pumping billions into infrastructure, private sector involvement could inject a sense of urgency into projects that have stagnated. “Governments can transfer development and performance risks associated with new infrastructure projects to the private sector, [while] the involvement of an experienced fund manager generally reduces the time and cost of developing new infrastructure and creates the proper incentives to improve services and maximize efficiency,” says Benjamin Allen, partner at law firm SJ Berwin in Dubai, in a research note. But though Mena infrastructure funds are similar to private equity or real estate funds, they may be less easy to explain to investors. Infrastructure funds tend to be structured similarly to private equity funds, with ten to 12-year fixed terms and blind pools, which allow the manager to draw down investor capital for any purpose consistent with the fund’s investment policy. UNATTRACTIVE PROSPECT
“As infrastructure investing picks up steam in the Mena region, fund managers and investors would do well to learn from the private equity industry and adopt structures and terms that have worked well in a similar context,” he says, adding that adjustments may be needed to account for the longer holding periods of certain infrastructure assets. But Sagar, at Deloitte, remains sceptical, not because infrastructure funds are an unattractive prospect, but because access to them remains limited. Mena governments are not known for speedy reforms. A desire to control infrastructure projects and not surrender power to international funds may prevent governments from opening up opportunities in the sector. “There are few opportunities to invest in primary infrastructure, for example hospitals, schools, transport, energy and waste, except for public private partnerships, which are few and far between. This limits the penetration of funds to those who are only focused on these sectors,” he says. ©2013 funds global mena

Executive Interviews

INTERVIEW: Totally mega

Jun 13, 2018

In 2016, global consulting firm PWC forecast the emergence of five global ‘megatrends’ in the next two decades. Stephen Anderson, its Middle East clients and markets leader, talks about their...

INTERVIEW: Protecting the investment

Nov 23, 2017

Rasmala’s trade finance fund recently passed $100 million in assets. Doug Bitcon, head of credit strategies, explains why he has to be hands-on.

Roundtables

MENA ROUNDTABLE: ‘The story is about reforms’

Jun 13, 2018

Our cross-industry panel discuss the positive backdrop in Egypt, the Dana Gas controversy and the potential index upgrades of Saudi Arabia and Kuwait. Chaired by George Mitton in Dubai.

SOUTH AFRICA ROUNDTABLE: Airline syndrome

Jun 13, 2018

Our panellists tell us that instead of launching competing national projects, African countries should work together for the sake of a bigger capital market. Chaired by George Mitton in Cape Town.