Finding funding for GCC infrastructure projects
Mihir Shah, KPMG discusses the infrastructure funding issue
Mihir Shah, KPMG discusses the infrastructure funding issue.
Can we do more for less and how do we spread the funding pool? This is the question that sovereigns, including public and private sector organisations across the hydrocarbon-dependent GCC region are trying to answer.
According to Standard & Poor (S&P), GCC governments may need as much as $560bn to finance government deficits between 2015 and 2019. Saudi Arabia alone is expected to account for 60% of this deficit according to S&P and, according to the IMF, the deficit could be as high as $900bn over the 2016 to 2021 period. The magnitude of the projected deficit and the limited possibility if any, of a dramatic rise in oil prices anytime soon, underscores the enormity of the challenge and the need to explore all possible sources of financing to bridge the infrastructure investment gap.
Individual GCC member countries are adopting different tools and strategies to bridge the funding gap in the infrastructure sector. It is likely that a majority of funding will be found through a mix of asset and debt-based funding. Nearly all the GCC sovereigns tapped the international and or local debt markets during 2016: Saudi Arabia’s record $17.5bn bond sale in October, Qatar’s $9bn bond sale in May, Abu Dhabi’s $5bn in April and Oman’s $3bn in June, reflect the increasing use of sovereign bonds to fund the deficit gap.
On the back of lower hydrocarbon revenue and continued capital spending across a major programme of infra investment, Qatar’s government expected a budget deficit of QAR46.5bn (approx. $12.7bn) in 2016, its first in 15 years. QNB expects the government to run a budget deficit of around 5.4% of GDP in 2016, down from a surplus of 1.2% in 2015. An increasing population – Qatar’s population grew 8.3% y-o-y in October 2016, reaching 2.6m – and commitment to a large infrastructure investment cycle will continue to put pressure on the state’s resources in the lead up to the 2022 FIFA World Cup.
The deficit scenario is translating into various challenges as far as the domestic infrastructure sector is concerned. Lower hydrocarbon revenues have caused a reduction in public sector deposits in the domestic banking system, tightening liquidity and increasing the inter-bank rates and credit default swaps, resulting in an overall increase in cost of funding.
The overnight Qatar Interbank Offered Rate (QIBOR), while having stablised from a high of 1.66% in May 2016, is again seeing an upward trend, increasing from 0.74% in July to 0.98% in September 2016. So too, an increasing cost of financing will have a direct negative impact on the ongoing viability of various infra projects, especially those being developed with a public private partnership (PPP) model. Similarly, payment delays across various projects are having a negative and cascading impact on every participant within the infra value chain – from the main contractor to the lowest level of sub-contractor. This in turn is likely to further accentuate the already tight liquidity conditions within the local banking market.
Despite the present challenging fiscal environment, Qatar’s commitment to fund and complete all infrastructure projects connected to FIFA World Cup 2022 stands firm. The Emir, HH Sheikh Tamim bin Hamad Al Thani underlined this commitment in his speech to mark the opening session of the Advisory Council. Unlike other GCC members, Qatar is relying mostly on debt to fund the budget deficit – avoiding drawing down existing reserves. Qatar’s $9bn bond sale in May this year, followed by multiple domestic government bond sales, has meant that the local debt markets have been buzzing with activity during 2016. However, apart from tapping the bond market, the government is actively working to enhance the role of the private sector and its participation in the overall economic development of the country and setting up a PPP framework is one such initiative. PPP should encourage higher levels of private funding into the domestic infrastructure market. While these initiatives are much needed, it will be critical to ensure that projects are structured in a manner that ensures bankability and encourages banks to offer long-term maturities.
Aside from bonds and project finance, other alternative sources of financing being explored include attracting funding from long-term institutional investors like pension funds and insurers. Export Credit Agencies (ECAs) have also been a credible source of funding large infrastructure investments in the region historically.
However, generally, while Qatar’s economic environment is challenging, thanks to the government’s strong commitment to its infrastructure program, coupled with Qatar’s top-notch credit rating and various development initiatives, funding the infra programme should not pose any challenges. In contrast, it will create opportunities to foster economic diversification which is core to Qatar National Vision 2030.