Abu Dhabi creates a blueprint for Gulf infrastructure

20 May 2009

Privately-financed roads are the final frontier for Middle East infrastructure. Abu Dhabi is preparing to break the mould and blaze a trail for others to follow.

The apparently endless stretch of desert and sabkha between Abu Dhabi city and the Saudi Arabian border is the unlikely setting for the most ambitious effort yet to mobilise private capital and expertise in the cause of modernising Middle East infrastructure.

Later in 2009, bids are due for the contract to finance, build and operate 372 kilometres of new highway between Mafraq and the Ghweifat border post that will be one of the most vital arteries in the GCC road transport system.

Nobody in the region has attempted to attract private finance investment into road transport. To use a highway that will be longer than Britain’s 311-km M1 motorway to test the concept looks positively heroic.

But Abu Dhabi’s Department of Transport is confident it can work, as MEED’s Middle East Road Infrastructure Projects 2009 conference was told on 17 May. The planning has been thorough and exceptional steps have been taken to attract bidders. Five consortiums have been shortlisted and they will be soon be asked to present full proposals.

The good news for the five contenders is the Department of Transport does not require the bank loans in bids to be fully underwritten at the time proposals are submitted. With credit in short supply, up to 30 per cent of the financing will probably be in the form of equity, but 51 per cent of that is being reserved for Abu Dhabi investors.

This is in line with the local equity proportion previously provided in Abu Dhabi’s privatised power, water and wastewater projects.

Critically, there will be no need for tolls or other forms of user-based tariffs. The transport department has decided to pay the concessionaire in instalments based on availability. This means the road-use risk, the most demanding part of financing a new highway, has been eliminated from the transaction.

The bid evaluation process is complex but transparent. Bidders will have to quote an annual unitary charge for the 25 years of concession and this estimate will be conditioned by a technical evaluation of the proposals.

High expenses

The winner will be paid monthly starting from the day the contract is signed. Bidders have also been given the option to submit up to three alternatives that reflect variations in the amount of lighting and landscaping.

The prize is enormous. The construction costs are estimated to be about $2.5bn. But the operation and maintenance expenses over the life of the contract are likely to be at least twice this figure. Some estimate that the concession might be worth up to $10bn.

The scale of the project has raised questions about why Abu Dhabi has decided to seek private finance instead of opting for a conventional procurement option.

The answer is that the emirate is determined to showcase a new approach to project delivery that could change the face of the Gulf construction industry.

With unprecedented amounts to be spent on Abu Dhabi’s major projects in the next 10 years, the emirate is becoming acutely conscious that previous methods of maintaining infrastructure are no longer relevant. And by developing a long-term estimate of the expense of building a highway that takes into account maintenance as well has health and safety factors, Abu Dhabi will gain a proper measure of the project’s true opportunity cost.

If it works for the highway, the model could be applied to other Abu Dhabi public projects. And if it succeeds in Abu Dhabi, a new blueprint for privately-financed Middle East infrastructure will be defined for others to emulate.

The ball is now in the private sector’s court. Buffeted by the credit crunch and project and payment delays in some Gulf markets, bidders might be tempted to say no. But for those who like the idea of changing the face of Middle East infrastructure finance and execution forever, this must be the ultimate challenge.

The plan is for the contract to be awarded this autumn and work to begin early in 2010. The clock is running. It is going to be an interesting summer for everyone involved. I wish them all the best of luck.

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