Saudi private sector: prospects for 2014?

Published December 23rd, 2013 - 01:44 GMT
The private sector is expected to take on a larger role in Saudi's infrastructure projects in 2014 (File Archive)
The private sector is expected to take on a larger role in Saudi's infrastructure projects in 2014 (File Archive)

The private sector is expected to take on a more significant role in the development of the Kingdom’s infrastructure to help ease the pressure on the government, the National Commercial Bank said in its report on Saudi Arabia’s government and private-financed infrastructure projects released Sunday.

The government’s desire to allow private entities to take on a larger share of partnerships reflects the size of the projects that are underway and signals that the government is overburdened with the pressure to meet its growing commitments.

The infrastructure sector has been prioritized by the government as a focal area of investment. The budgetary allocations in the 9th nine-year plan and the 2013 budget signifies the need for improved and expanded infrastructure facilities. Furthermore, the King’s royal decrees announcements in 2011 provided additional injections of expenditures towards infrastructure projects.

The financing landscape is witnessing the use of financing alternatives besides traditional bank lending. The emergence of sukuk and PPPs have given both, government and private entities, the ability to diversify their financial exposure, while still hedging against project risk. These financing alternatives also give government entities, like SEC, the option to redirect available funds to transmission and distribution (T&D), while reallocating expenditures from capital expenses to operational expenses. This helps avoiding mismatches between medium-term financing and long life public-private projects.

Bank credit for construction activities rebounded in 2010 and will continue to grow into 2014. The amount of money being invested into infrastructure projects will encourage commercial banks to increase their lending to construction contractors. With many mega-projects in the pipeline, bank lending will play a critical role in the growth of the sector.

Following the global economic crises the push for non-residential construction significantly grew from 5 percent of nominal GDP in 2006 to an estimated 6 percent in 2013. GFCF is expected to increase its share of GDP over the medium-term as the injection of SR250 billion into the housing market will have a lasting impact on the economy. Another indicator of the growth of government spending into the infrastructure sector is the pace at which construction contracts have been awarded. The value of awarded contracts through Q3’13 indicates that this growth pattern is unlikely to relent as numerous mega-project are still taking place.

The number of mega-projects that are ongoing in the Kingdom has spurred numerous lending opportunities for domestic and international financiers alike. With more than SR597 billion currently used in funding ongoing projects, relatively non-conventional financing options such as sukuk and PPPs have not gained enough traction compared to other countries. Bank lending to con-tractors and government spending have been the most common forms of financing for infrastructure projects.

The mega-project involving the Saudi Arabian Mining Company (Maaden) and Saline Water Conversion Cor-poration (SWCC) to build the $1.5 billion Ras Al-Khair Desalination plant attracted project financing from both, local and international banks. The project secured a $2.5 billion loan from Japan Bank for International Cooperation (JBIC) while another $1.2 billion was obtained from Saudi banks. Another $495 million was secured additional international banks. The SR47 billion Haramain High-Speed Rail Network’s majority financing will be issued from the Public Investment Fund (PIF) although the project will have equity injections along with commercial debt. The issuance of sukuk have been increasing as of late in the Kingdom. Pure project sukuk have not been a frequently used form of raising capital for development and infrastructure projects. However, one of the largest development projects, the Jeddah Rehabilitation Project, is expected to feature sukuk on the financing side of the project, according to Jeddah Development Company.

The SR35 billion project will need to attract the private sector as it is unlikely to garner government guarantees.

GACA’s plans to expand King Abdul Aziz International Airport to increase its annual passenger capacity will likely utilize government issued sukuk to fund the construction. The $4 billion phase one of the project is expected to give investors opportunities to buy approximately $1.2 billion worth of sukuk to finance part of a new terminal through three separate tranches.

The use of public private partnerships (PPP) as a financing alternative has been extensively used in the United States and Europe with a wide degree of success. However PPPs are fairly new to the MENA region and are now in the beginning stages of implementation.

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