Gulf countries must spend $1.6 trillion to develop infrastructure

Investments to the tune of $1.6 trillion (Dh5.88tn) are required across the Arabian Gulf to develop infrastructure to support economic growth and governments need to foot most of the bill, according to a new report.

The study, by Oliver Wyman, said infrastructure development is “one of the key components of the various national development strategies” announced by the region’s governments, with more and better infrastructure needed to support the expected population growth as economies diversify. Although the private sector is expected to contribute $600 billion, “national governments need to bridge the gap”, the company says.

“Gulf countries are actively introducing PPP (public-private partnership) programmes to ensure they reach their strategic and sustainable goals. Currently, the region’s macroeconomic fundamentals are solid and it is clear that the factors driving demand for the improved and established infrastructures will continue to remain in the future. This results in the GCC countries being an interesting geography for long-term private investors looking for healthy and stable returns,” said Jeff Youssef, a partner at Oliver Wyman.

Of the $1.6tn required, $630bn is linked to mega-projects forming part of national visions, such as Saudi Arabia’s Neom, Qiddiya and Amala. However, even the remaining $980bn is 64 per cent higher than the $580bn spent by governments within the past five years.

The need for greater investment is fuelled by the region’s growth. The Gulf’s population has grown 11-fold since 1960 and current birth rates are 50 per cent higher than in countries in the 36-member Organisation for Economic Co-operation and Development. A more affluent population, with a gross domestic product per capita higher than most developed economies, also places greater pressure on resources.

Infrastructure development, however, “has not kept pace with economic advances and the growing population”, the study found.

“Over the past five years, rail, road, and airport infrastructure have attracted around $200bn in funding, but this is not nearly enough. There are plans afoot to substantially improve existing transport infrastructure and to build new infrastructure to meet ambitious economic development targets,” the report said. “The failure to achieve this can impact companies’ supply chains and have implications on international trade, impeding economic growth.”

Looking at current infrastructure plans, about $120bn in private equity and $280bn in private debt is required to build projects, the report said, and a further $130bn in private capital will be needed if the proposed mega-projects materialise.

Although the region has grown its use of PPPs over the past five years, governments need to offer the private sector a clear framework as some schemes have faced delay or cancellation.

The consultancy says governments must ensure PPP laws are clear and in place, that there is a robust pipeline of investible projects, and that they embrace “acceptable risk-sharing” as well as understanding that investors need to make a profit. It also recommends establishing PPP units, such as those already established in Kuwait and Dubai, to “provide investors with clarity and help them navigate the complicated web of approvals and licenses that may be required”.

“PPPs are now emerging as the preferred path to bring private investment projects that are part of the various national development plans for GCC governments,” said Mr Youssef.

Management consultancy Oliver Wyman is part of Marsh & McLennan Companies, a professional services group with annualised revenue of $16bn.

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