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Qatar tops GCC infrastructure market

Economic infrastructure is the core internal facility

Price inflation could stymie future growth in Qatar?s construction industry.
Price inflation could stymie future growth in Qatar?s construction industry.

In the GCC region, Qatar and UAE are second and fourth in the Global Infrastructure Investment Index, compiled by EC Harris

Economic infrastructure is the core internal facility of a country that makes business activity possible, such as communication, transportation, distribution, finance and energy supply.

These assets are fundamental to society and economic growth. Due to the long-term, inherently safe, typically large-scale and stable income streams that they offer, it perhaps comes as no surprise that it is a rapidly-growing investment class.

Infrastructure is becoming an important element of an investor’s portfolio. Global investors are increasingly viewing infrastructure assets as an important element of their investment strategy, and are actively assessing opportunities in both developed and emerging markets.

Alongside this, governments recognise that, in order to grow, they must secure investment in infrastructure.

For example, the UK is expected to invest about $320bn on infrastructure by 2020, while the Brazilian government is ramping up its own investment in infrastructure, and is committed to investing $596bn up until 2014.
The location of infrastructure is important to the investment potential.

Infrastructure is fixed, and its performance is inherently linked to the country it serves.

The investment in a country’s infrastructure involves betting on the long-term growth of the economy, the security of the investment and the ease of doing business in the location. Market conditions should balance a focus on the qualities of an asset with the investment and operational strategy, in order to select successful target investments.

Investment in economic infrastructure varies dramatically across the globe. Consequently, investors and asset owners need to be wary of the differing risks and potential opportunities each market presents them with.

“Our Global Infrastructure Investment Index report analyses and ranks 40 countries according to their attractiveness as infrastructure investment locations, and can be used to evaluate the potential opportunities and risks associated with each country,” explained Alistair Kirk, head of infrastructure, industry and utilities: Middle East.

A total of 24 individual criteria contributed to creating an overall country rank. Where a country is positioned on the index depended on its score across each of the criteria. “It is important to note that, although a country may rank low in the index overall, it may well rank highly on an individual criteria,” pointed out Kirk.

For example, a country with higher-than-average GDP growth rates, an improving taxation system and domestic market, will score well in several criteria.

However, if that country has a difficult socio-political environment, with a risk of political instability higher than the majority of other countries, its overall attractiveness as a place to invest in will decrease, resulting in a lower overall index score.

“It is in understanding the nuances of what makes a country an attractive or less attractive investment location that can then lead to agreed approaches to eliminate risk, and develop well-informed investment strategies to ensure a return on investment,” noted Kirk.

According to the latest report, Qatar does not have the biggest domestic market, and household consumption is marginal compared to European and North American countries, but GDP per capita is very high, plus the country has strong long-term growth prospects.

With a $100bn infrastructure programme due to be implemented by 2022, it will see vast infrastructure developments. Alongside Qatar, Saudi Arabia and the UAE offer a good economic environment; while Saudi Arabian households consume more, the UAE has greater GDP per capita and greater population projections.

Its current infrastructure is very good, and both have similar levels of government transparency and legal frameworks for settling disputes. However, the UAE does have a more open and regulated government, and benefits from lower levels of political and social instability compared to Saudi Arabia, hence putting it in fourth place.

What should investors look out for when investing in Qatar? “Qatar presents us with some issues around the ability to deliver infrastructure, including the logistics of importing materials and access to labour,” said Kirk.

“However, infrastructure creation is happening, and there is much potential if logistical risks are managed and well thought through, and appropriate strategies are put in place from the outset to help mitigate these risks.

One potential concern is an inflation rise, which will inevitably increase as more investment is made into the market. This can be mitigated if it is built into the investment plan from the outset.”

New-build investments are prevalent, such as Doha Port, the New Doha International Airport, the national rail project and the Doha Metro, all of which show there is a real flow of investment into this economy over the coming years.

The Qatar Investment Authority, a sovereign wealth fund, leads in investing locally and internationally in order to diversify the economy. In addition, Qatar is currently stable, and is favourably encouraging private investment, including foreign capital.

As the population rate continues to grow in Qatar, it will become heavily reliant on infrastructure investment. Reportedly, the Qatari Government has allocated 40% of its budget between now and 2016 to infrastructure projects alone.

At the same time, the country is increasingly recognising the value of private investment in infrastructure assets, with the size of Qatar’s infrastructure investment projected to range from $140bn to $200bn over the next decade.

“If these potential risks can be worked through appropriately, Qatar could provide a promising return on infrastructure investment, as it does have good investor protection,” said Kirk.

Where are the opportunities for investment? The research reinforces the maxim that investment in infrastructure in any country requires a tailormade approach that reflects the macroeconomic climate, which best responds to the individual challenges and takes advantage of the competitive edge within each market.

For the higher-ranked countries, where the risks are typically lower, there will be strong competition for the best assets, yields will fall and opportunities are driven by rapid growth and available funding.

“We recommend to investors an acquisition and ownership strategy that focuses on developing creative and innovative solutions to find value.

This will typically involve developing new revenue sources or a focus on reducing costs for major capital programmes through a deeper examination of the long-term need for that asset,” said Mathew Riley, global head of infrastructure, industry and utilities.

“For lower-ranked countries, where the attractiveness is relatively lower due to political interference or infrastructure policy transparency, we often find these are high growth GDP regions. This calls for an acquisition and ownership strategy that focuses on bringing greater certainty to the business plan.

This might mean more thorough testing of the basis for growth and carrying out risk-scenario modelling with more viable options,” said Riley.

The business plan for each infrastructure asset still needs to be fully tested in relation to the specific market, but the matrix provides investors and operators with a tool to assess the appropriate strategy to adopt in order to maximise return.

Markets can be broadly classified into four groups for infrastructure investment, each of which demands a different investment strategy in order to secure a return:

1. Cash-rich, asset-poor
Where infrastructure is the enabler for new and growing economies to develop, these types of countries have historically been viewed as higher-risk countries to invest into. A good example is Qatar, which has a very high GDP per capita, but assets are currently under development.

2. Cash-poor, asset-rich
These countries are typically suffering from ageing infrastructure that needs replacing but, due to economic constraints, there are limited government funds available to do so. A good example is Greece, which has a poor economic outlook and limited government funding to help restore and invest into its current infrastructure.

3. Cash-rich, asset-rich
There is much less risk involved when investing in countries that have good infrastructure, available cash flow, and where the outlook is deemed safe due to predictable income streams. A good example is Singapore, where the current infrastructure is advanced, and the future economic outlook remains positive.

4. Cash-poor, asset-poor
Countries suffering from the burden of both poor infrastructure and poor economic outlook are often viewed as a higher risk investment.

A good example is Pakistan, where investing in current infrastructure would be viewed as a high risk, in part influenced by its poor economic outlook, but also by its low levels of government transparency and lack of investor protection within the legal system.

The EC Harris Global Infrastructure Investment Index used data sourced from the World Bank, The World Economic Forum, the Heritage Foundation and other global indexes. Countries were selected using a multi-layered approach, which took into account a range of factors, such as current and future GDP growth rates. The aim was to get a good mix of OECD and non-OECD countries, with 40 countries
selected for inclusion.

Five key themes frame the index, encompassing scores from 24 individual indicators. Each indicator was weighted to reflect its importance as a decision making tool for infrastructure investors. These themes were, namely: economic, infrastructure, business environment, risk and financial environment.

The indicators selected were chosen to build a conceptual model of what an ‘attractive location’ for investors interested in infrastructure looks like.

Top Ten most attractive countries for infrastructure investment
1 Singapore
2 Qatar
3 Canada
4 UAE
5 Sweden
6 Norway
7 Malaysia
8 The Netherlands
9 Australia
10 Chile

Countries in the upper quartile of the index are more attractive to invest in as they are typically countries with good growth prospects, are relatively easy to start a business in, have a supportive business environment and represent low financial risk. They present a relatively safe long-term investment option.

There are opportunities for those looking to invest in improved asset performance and asset utilisation by unlocking value, as well as for those looking to maximise greater efficiency from their current and new build infrastructure assets.

Creating added value around income generation, innovation, certainty and lifecycle cost reduction is paramount in these markets.

Qatar’s foreign investment hits a new high of $44.98bn in 2012
Qatar’s foreign investment hit $44.98bn (QR163.8bn) in 2012, which was $32bn more than the previous year, the Al-Sharq daily has reported.

“Compared to the previous year, Qatar’s foreign investment was fast-paced, and it grabbed potential opportunities in real time. All key investments were made after well-calibrated assessments,” local business analyst Nasser Suleiman Haidar was quoted as commenting.

The news follows Spanish company Ferrovial completing the sale of 10.62% of Heathrow Airport Holdings (formerly BAA) to Qatar Holding LLC for $779.9m after obtaining approval from European Union competition authorities.

In 2012, Qatar invested in Singapore, France, Italy, the UK, Switzerland, the US, Vietnam, Iraq, the netherlands. Turkey, Bulgaria, Germany, China and Malaysia.
Sectors invested in ranged from hotels and resorts to petchem, power plants, oil companies, banks and finance to roads and transportation.

Qatar’s 2012 investment splurge began with significant deals in the hospitality sector in Paris and Singapore in January, which was quickly followed by a major deal with a Vietnamese petrochemical plant.

In February, Qatar Holding, the foreign investment arm of the Qatar Investment Authority (QIA), bought the headquarters of Swiss banking group Credit Suisse in London.

In May, Qatar entered into a deal with Turkey and Bulgaria for a highway mega project connecting the two countries, as well as taking a key stake in German company Siemens.

Facts:
- $100bn Qatar’s infrastructure spend up to 2022
- 40% Of Qatar’s budget allocated to infrastructure
- $44.9bn Qatar’s foreign investment in 2012

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