Infrastructure's $270bn funding gap requires alternative financing

11 February 2016

Public-private partnerships, government borrowing and private sector participation likely to increase to fill funding gap 

Declining oil revenues and a reduction of growth in deposits at banks will mean Gulf countries struggle to find the funding required to support the region’s substantial infrastructure bill, according to a comment from US ratings agency Standard & Poor’s (S&P).

S&P has projected a gap as large as $270bn until 2019 between capital spending for projects by Gulf governments and project contracts awarded.

“GCC governments will find a growing importance to make a distinction between essential and non-essential schemes in the coming years,” says Karim Nassif, primary credit analyst at S&P.

Nassif says the overall essential schemes cover healthcare, housing and other social infrastructure programmes, but admits that for some economies diversification will be more of a priority.

Furthermore, S&P expects GCC governments will have to look at alternative financing structures, including direct borrowing, more directly through government-related entities (GREs) or “more innovative solutions such as public-private partnerships [PPPs]”, says Nassif. “We have seen PPP structures work well in the power and water sectors. Regional governments may have to look at ways to apply the same principles to other areas such as transport and real estate.”

At the same time, regional governments are cutting investment in areas where they can afford to do so. “Saudi Arabia has reduced its 2016 transport and infrastructure budget by 63 per cent from the previous year,” says Nassif. ”This for us illustrates the challenge Gulf countries will face to pay for infrastructure through traditional sources, including government funding.”

Despite this analysts have projected the region will continue to press ahead with essential infrastructure schemes as Saudi Arabia adjusts to a growing population and countries such as the UAE and Qatar work towards major events such as the 2022 Fifa World Cup and the 2020 Expo.

Although local banks are forced to raise interest rates as liquidity is stretched, the bankability of some of the region’s major schemes will mean GCC governments will find the appetite from both regional and international banks to ensure infrastructure programmes press ahead without a major slowdown, according to Nassif.

Moving forward, regional governments are expected to mix up their financing solutions with PPP, GRE borrowing and private sector participation likely to increase to fill the funding gap currently faced.

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