Funding the GCC’s infrastructure: is it time for Public Private Partnerships?

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Even so, last year turned out to be a milestone for Kuwait’s projects market, with an unprecedented KWD 9.7bn ($32.2bn) worth of contracts awarded during the year, 20% more than the year before. Over half of the contracts signed were related to the oil and gas sector, as Kuwait attempts to reach its oil production target of 4m barrels per day (b/d) by 2020. Big ticket oil related projects figured prominently in the spend. In mid-year, for instance, Kuwait awarded the long-delayed New Refinery contract at Al-Zour for KWD3.9b and the contract for the development of the Lower Fars Heavy Oil production facility in the north of the country for KWD1.2bn. Meanwhile, in the transportation sector, the authorities also awarded the KWD1.3bn contract to build the New Terminal Building at Kuwait International Airport.

Looking ahead, this year is also expected to be a bumper project finance year. The government is slated to sign deals worth KWD16.7bn ($55bn) before year-end. This is set against a difficult macroeconomic background where Kuwait is expected to record its first budget deficit in 16 years, of KWD4.7bn (11.6% of GDP) by the close of FY2015/2016. The government, for its part, has shown no sign of cutting capital expenditure, stressing that development projects are to move ahead irrespective.

Elsewhere, cuts are more evident. For its part Standard & Poor’s says that spending on transport and infrastructure in Saudi Arabia was cut by 63% this year. Available funds from projects “such as the Riyadh Metro and Jeddah’s King Abdulaziz International Airport fall to SAR23bn in 2016 from SAR63bn in 2015” reports Karim Nassif, S&P’s Dubai based analyst. Nassif says that GCC governments will now borrow more to finance their fiscal deficits, “partly so that they can support ongoing strategic projects that cannot easily find financing. Strategic projects in our view include those that the governments consider essential for diversification, along with health care, social housing and utility related projects.”

Saudi Arabia tapped the markets twice last year, and says Nassif, “throughout the Gulf, sovereign issuance increased to $53bn in 2015 from just $14bn in 2014.” This has its uses alongside the usual funding requirements of capital goods projects, he says. It creates a yield curve and helps establish the region’s capital markets, he avers. However, he cautions that it also has its downside. “It can have the effect of crowding out issuance by corporate entities. It will be interesting to see how this plays out over the next year or two.”

Nassif says that as GGC governments begin to pile on debt (albeit in moderate amounts), set against a difficult global market, the cost of funds will begin to rise. Already, says Nassif, “we have seen increases of as much as 75 basis points (bps) in spreads over the last few months across the Middle East and North African region. We believe the market has touched an inflection point and think the cost of funds will become more expensive and the environment for bank lending might become more difficult.”

Moreover, given the ratings agency’s expectations for continued weakness in deposit growth in the banking sector, it thinks that banks will become more selective in their balance sheet allocations, particularly towards longer-tenor lending facilities.

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