Suha Najjar, Founder and CEO of Akkadia Partners, explains why investment in Middle East infrastructure is win-win.
The last decade has seen a transformation in the ownership of the world’s infrastructure. Much of it now resides in the hands of investors, with global interest from the private sector having grown exponentially since governments started offering up publicly-owned assets after the 2008 financial crisis. The rationale for this privatisation process was to support the funding of new projects, in light of a newly found dearth of liquidity. As successful privatisation deals have increased in number around the world, investors have recognised that the opportunity to build, own and operate key infrastructure assets is both profitable and socially beneficial—and have developed an appetite to match. Middle East countries have been comparatively slow to tender state-owned assets as public-private partnerships (PPPs), but that is beginning to change, and with this new tide comes new opportunity.
THE ASSET CLASS
Infrastructure, as an asset class, has rapidly grown in popularity. It has a low risk profile, as it is an essential service guaranteed by the government, making it much easier to fund through debt. It also tends to be highyielding.
Infrastructure assets are resilient to economic and political volatility, while increased government spending creates opportunities for investors to invest in assets that will deliver attractive and stable returns. Perhaps most importantly, the pipeline of opportunity is almost unlimited—with demand in both the developed and developing world only set to grow.
Due to growing demand for public services and facilities, infrastructure assets are usually offered by the government through long-term concessions. These have routinely proved to be fruitful to all parties. For the government, it is a way of building state-of-the-art infrastructure assets, using private money when it is not feasible to deploy public funds, while maintaining a level of state ownership.
For investors, high returns are almost always achieved, due to the stable nature of infrastructure and the guarantee of increased demand. The greatest beneficiaries of such arrangements are, to an extent, the ‘end users’, who are offered services and facilities that might never have materialised if backed by state budgets alone.
THE MIDDLE EAST OPPORTUNITY
By global standards, private participation in Middle East infrastructure remains limited, with governments leading investment in new assets or major projects. To an extent, this is because there has traditionally been a relative lack of investible assets, but that theme is beginning to change, and the PPP model is starting to gain some traction in the region.
Governments seeking improved liquidity or greater private sector participation in the national economy— such as in the case of Saudi Arabia’s National Transformation programme— are now seriously looking at flagship infrastructure sales. And investors are taking notice. The private sector could and should be poised to play a greater role in funding infrastructure projects across MENA. The establishment of well-capitalised infrastructure funds, for a start, would create the opportunity for both private and sovereign investors to invest in assets through specialised vehicles.
Such funds would likely attract considerable attention from the Middle East’s abundant and substantial sovereign wealth funds, looking for new opportunities as they seek to diversify income away from equities, bonds and energy. Compared to most countries in the region, Jordan has been something of a leader on the PPP model, across sectors including telecoms, power and transportation.
For example, the European Bank for Reconstruction and Development (EBRD) recently signed an MoU with the Jordanian government on an infrastructure investment programme worth more than EUR 2.8 billion, to boost the country’s economic growth and resilience, and support Jordan’s efforts to upgrade existing and develop new sustainable infrastructure across sectors. Deals of this kind serve to highlight the considerable opportunity that exists for investors in a region where infrastructure is growing rapidly and needs to be both financed and operated.
The PPP model has already proved its worth in global markets, and there is no reason that it shouldn’t in the Middle East. In the past, the absence of available or appropriate assets has been a barrier, but that is rapidly changing. We know the investor appetite is there, and now is the time to satisfy it. According to G20’s Global Infrastructure Hub, the world economy needs to invest an average of $3.7 trillion a year until 2040 to keep pace with accelerating economic, environmental and demographic change. Nowhere is that change accelerating more aggressively than in the Middle East—and therein lies the opportunity for participation and highly attractive returns, to the benefit of all stakeholders.