Infrastructure funds: If you build it

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.

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