Private scheme opens infrastructure market in the Gulf

19 December 2010

Abu Dhabi road project leads the way for governments in the region to open up social infrastructure schemes to the private sector

After a year of slow progress, Abu Dhabi’s Department of Transport (DoT) seems to be finally making progress on the development of the Mafraq-Ghweifat highway.

Bids were submitted a year ago, but there has been a flurry of activity recently resulting in a recommendation to the Executive Council for a contract award.

The project promises to be significant for the whole region. Procured as a public-private partnership (PPP), it is seen by many as a pathfinder deal. If successful, it will pave the way for governments in the region to open up more infrastructure projects to the private sector. The project finance market may then start to move away from traditional favourites, such as hydrocarbon and power projects, to highways, social housing, hospitals and schools.

Already governments in Bahrain, Dubai and Kuwait are working on social projects that they want the private sector to finance and build.

That will be a boost for the region, which needs the development of this type of soft infrastructure as much as it needs new refineries.

These initial projects will undoubtedly face difficulties as they look to carve out precedents for others to follow. Transport, in particular, is an entirely new area for the Middle East, although several other road, metro and airport PPPs are now planned.

The main challenge will be getting lenders comfortable with these projects. Banks prefer energy schemes, for example, because governments guarantee to buy the power. Structuring offtake agreements for a road or housing project is tricky. Getting around this will be key to successfully raising finance for these projects.

Abu Dhabi’s Department of Finance has already scrutinised the economics of the Mafraq project to ensure it works for the government. Making sure it works for the private sector will be just as important.

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