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(originally published by Booz & Company)


Filling the Gulf States’ Infrastructure Gap

If the GCC governments take such steps, banks will be more eager to take advantage of the hospitable environment. That won’t immediately bring the return of big investment pools, but banks would at least provide short-term financing, helping to initiate necessary projects that are ready to break ground but cannot secure long-term loans. For global and regional banks, this approach would reduce their overall risk while offering solid opportunities for a return on investment. And for smaller banks, whose ability to participate in financing for large-scale projects is limited even in the best of times, this could be a chance to gain exposure to the infrastructure sector, while diversifying their current lending operations.

In recent years, the ratio of private to government expenditure in GCC countries has been below the Organisation for Economic Co-operation and Development (OECD) average, suggesting strong potential for more private-sector involvement in infrastructure development. GCC governments have already made efforts to encourage that investment, privatizing government assets and completing initial public offerings of public-sector infrastructure companies. For example, in July 2008, the Abu Dhabi government put out to bid the first private road development project in the Middle East, an estimated $2.5 billion undertaking that will traverse the stretch of desert and flatlands between Abu Dhabi city and the Saudi Arabian border. And power plants in Saudi Arabia, the UAE, Bahrain, and Qatar — traditionally government-owned facilities — have been recently offered to international investors. These efforts, coupled with the difficulty of obtaining financing from traditional banking sources during the current credit crisis, represent an opportunity for the growing number of private equity and infrastructure funds operating in the GCC to step in.

Private-sector developers should select specific projects based on their potential for financial performance and competitive advantage. It would be foolhardy, for instance, to back an electrical plant in a locale that already has many utilities, or to support a project to build roads on a route with a high-speed rail line. The returns would be less than desirable. But for well-chosen projects, private infrastructure developers willing to demonstrate their commitment to the region will not only build market share, they will also reap the benefits of debt recapitalization once the credit markets ease.

To finance infrastructure projects, the private sector should consider tapping into the capital markets, which are generally less expensive than bank loans. For example, developers could float so-called private finance initiatives, which can raise funds through the sale of reasonably stable long-term corporate bonds, a relatively unknown instrument in the Middle East. For cases in which bank lending is unavoidable, developers may need to find ways to give extra reassurance to lenders in order to secure credit, such as securing sovereign guarantees or putting their own balance sheets on the line.

In many ways, the GCC nations are suffering less from the global economic crisis than much of the rest of the world. The region’s sovereign wealth funds made good use of oil revenues when prices skyrocketed, diversifying their assets across industries and around the world. A relatively young and affluent population keeps demand fairly high for local products and services, from consumer goods to telecom service. In a number of sectors, GCC companies are better capitalized than their global peers. While the U.S. and Europe fell into recession, growth merely slowed in the GCC region.

All in all, the region is poised to recover quickly and to continue its climb toward becoming an economic superpower once the crisis ends. Its deficient infrastructure, however, could derail these aspirations. It will take a large degree of political will and financial creativity for local governments as well as private builders and banks to overcome the obstacles to infrastructure development in the Middle East. Failure to do so may jeopardize future growth.

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  1. Walid Fayad, “Growth Is Inevitable,” Utilities Middle East, July 5, 2009: One of the authors discusses why he believes there will be progress in the Middle East utilities infrastructure.
  2. Clive Harris, “Private Participation in Infrastructure in Developing Countries: Trends, Impacts, and Policy Lessons” (PDF), World Bank Working Paper no. 5, 2003: Assesses the impact of privatization on infrastructure projects and offers ways to ensure that these types of projects succeed.
  3. Fadi Majdalani, Alessandro Borgogna, Walid Fayad, and Tarek El Sayed, “Weather the Storm and Prepare for the Future,” Booz & Company white paper, June 2009: The paper on which this article is based provides in-depth analysis of the best roles for all stakeholders in developing GCC infrastructure.
  4. Infrastructure Journal website: An extensive database with news and analysis related to global infrastructure projects.
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