The raw statistics are still very impressive. More than a trillion dollars of what can broadly be catagorized as infrastructure projects are underway in the Middle East, a staggering two-thirds of them in the business-friendly UAE. That is great news for global contractors of every shape and size. Yet private sector investors from overseas mainly find themselves sidelined. Abu Dhabi’s public-private partnership power stations are a rare exception to that general rule, so were the Dubai off-plan skyscraper towers that are now coping with the aftermath of massive overbuilding.
Global trend reverses
Besides, the global trend is no friend to private investors in infrastructure. Amid the global explosion of public sector debt these PPP schemes were a way of shifting infrastructure off the balance sheet for governments. It looked for a while as though more could be accomplished with less money. That illusion has gradually been exposed as a sham. Borrow money to pay for anything and you add to the cost through interest payments. There is no such thing as a free lunch.
Public sector accountants around the world have been picking over the results of some early PPP schemes to discover just how much these things have cost. If you don’t just pay for a light bulb but its lifecycle cost then the costs can be quite staggering. Abu Dhabi appears to have abandonned plans to extend private finance into the highway sector. Then again those public sector entities that would like to get into PPP like the Dubai Electricity and Water Authority are not seen as so bankable as in the past, and in any case seem to have no trouble in issuing bonds for reasonable yields these days.
Why should Oil States with good cash flows from hydrocarbon sales, and they were exceptionally good last year, raise the cost of infrastructure investment by involving the private sector? The answer used to be in the supposed cost savings that private sector involvement in almost any kind of project would bring. In the light of recent experience there are big questionmarks over these alleged gains while the cost in terms of bank interest is only too clear.
Arab Spring
The Arab Spring protests in the region have not helped much either. The poorer countries of the region that might have considered PPP projects with the support of their wealthier cousins are clearly not is a position to embark on such projects. The banks won’t take the risk. As ever bankers are only too prepared to lend to those who do not need the money. Besides the private sector too is a bit more leery about involving itself with the public sector in the Gulf than it used to be before the global financial crisis.
The Dubai debt debacle just over two years ago was a wake up call to the private sector about the nature of risk with public sector partners. How reliable is a loan guarantee from a government or para-state entity? Even with Abu Dhabi there was a six-month freeze on major projects last year for a cost review that came out of the blue. That said PPP deals can still get done. The $675 million Dubai tram financing last month, for example, although only with a public sector guarantee from France and Belgium.
Push up the perceived risk on a public-private infrastructure project and the cost of the money will go up, that makes the project less viable. Its not a virtuous circle likely to encourage the private sector to invest in the Middle East’s infrastructure boom.
