Middle East FDI: Infrastructure Boom


By Gilly Wright

The Arab Spring dissuaded many companies from investing in the Middle East-North Africa region, but foreign investment is now returning on the back of a wide array of major planned infrastructure projects.

Ongoing political turmoil, such as the civil war in Syria and political uncertainty in Egypt, continues to dampen economic activity in the Middle East. According to the World Banks 2014 Global Economic Prospects report, economic growth in the Middle East North Africa (MENA) region averaged 2.8% in 2013, half the estimated growth rate in 2012, let alone that of the boom times of 2005 to 2007, when the region was a favored destination for inbound foreign direct investment.


The region had a bad financial crisis, states Matthew Alabaster, a UAE-based partner at PwC. Poor investment decisions were exposed, asset prices declined sharply, and new investment from both local and international capital dried up.

The Arab Spring then had an additional adverse impact, Alabaster points out. PwC estimates that Egypt, for example, lost roughly $26 billion of FDI between 2009 and 2012 as a result of the global financial crisis and the Arab Spring. And with no perceived resolution to the political problems, international commercial capital is still staying away.

The Arab Spring was a wake-up call for Gulf Cooperation Council (GCC) governments, says Alabaster, as it highlighted the need to focus on job and wealth creation in order to avoid social unrest and to reinvest oil proceeds in infrastructure projects.

The upshot is that now is a good time for international companies to take a second look at MENA: Government spending in wealthier countries has increased as a result of the Arab Springinvestment in hard and soft infrastructure is a priority, says Alabaster. The focus of government-led investment has shifted onto domestic priorities to drive the economic diversification agenda harder and, in the short term at least, to [quell] dissent.

According to Alabaster, the proportion of state funds being invested outside the GCC has fallen. Expo 2020 is a visible sign of the confidence that has returned to Dubai, and by implication, the rest of the GCC.

PwC expects countries like Qatar to focus more on home-based infrastructure projects than trophy assets overseas, while across the region countries are expected to pursue investment opportunities in healthcare, transportation, education and affordable housing.

If you are an international business with interests in healthcare, Alabaster advises, then you should be looking hard at this region and, in particular, Saudi Arabia. All of the countries here understand the need for diversification, and in Saudi, a country of 30 million people with incredibly high youth unemployment, everything is shown in sharp relief. Its a strategic imperative for Saudi Arabia to get a balanced economy where as many Saudis, particularly Saudi youths, are participating in that economy directly.


The World Bank estimates that the Middle East needs approximately $100 billion worth of infrastructure investments per year for the next 15 years. The International Finance Corporation (IFC), the private-sector investment arm of the World Bank Group, invested $3 billion in the region in 2013. Mouayed Makhlouf, IFC director, MENA, maintains that although FDI has historically been low in the region, opportunities are increasing as economies open up and the investment climate improves.

While the MENA region witnessed a surge in FDI inflows (albeit from a low base) in the early 2000s, he says, FDI flows in MENA continue to lag those of other regions and, more recently, have dramatically declined. For instance, FDI inflows represent only around 1% of GDP in MENA countries, compared to 3% in Asia, Latin America or Eastern Europe and Central Asia. FDI inflows in MENA remain heavily concentrated in the real estate, mining, and oil and gas sectors, he notes, while the manufacturing sector, which is central to job creation, attracts only around 20% of inflows.

The jobless rate is currently 10.9% in the Middle East, with youth unemployment a worrying 27.2%. According to the International Labour Organization, MENA economies suffer from specialization in sectors that generate low employment growth and from a lack of structural transformation towards highly productive industries.

The brightest spot in the region for both FDI and project finance opportunities is the GCC, which has been on a stable recovery path. Most of the Middle Easts FDI by number of projects, value and jobs created in the past decade went to the GCC countries, especially Saudi Arabia, UAE and Qatar.

To future-proof themselves from economic shocks, be it from oil prices or political instability within the greater Middle East region, the GCC is gradually weaning itself off its dependence on oil. Everyone knows what the main challenges of the region are, says Makhlouf. Political and security volatility are at the forefront and are the most unpredictable challenges. Economic vulnerabilities are also a challenge right now, and they are especially compounded by economic uncertainties in global and emerging markets.

Additional challenges include large infrastructure gaps, low access to finance and a lack of adequate regional and global integration. Many governments in the region are realizing that these challenges need to be addressed urgently and are beginning to implement reforms, says Makhlouf.

Of the countries that are diversifying, Makhlouf singles out Iraq and the UAE, which is already well diversified. Saudi Arabia and Oman are trying to diversify by investing in financial services and renewables. There are opportunities for investors in countries like Libya, if the economy opens up and the government embarks on a diversification strategythere could be huge investment opportunities in infrastructure, telecoms, tourism, business hotels and services. But the environment for the private sector, most importantly security and investment climate reforms, will be critical to make this happen.

In February, Saudi Arabia launched the worlds largest mining project. Worth $9.5 billion, the Waad Al-Shamal mining industrial city includes construction of a number of factories, a 1,000 megawatt power plant and a main road, and is part of the Saudi governments plans to bring sustainable development and economic diversity to the kingdom.

The North-South Railway will link the northern border region with other areas of Saudi Arabia. A number of other transport projects are plannedcreating opportunities for foreign investors in construction and such associated sectors as residential and commercial real estate.

Saudi Arabia has $61 billion worth of infrastructure projects due to be completed in 2014 alone and is second only to Qatar in terms of the amount of infrastructure investment opportunities it offers.

Qatar looks set to attract substantial FDI between now and the soccer World Cup in 2022, with plans to spend $205 billion between 2013 and 2018 on a range of projects, including transport, housing, electricity and water generation.

Contracts for the first phase of the Qatar Rail projecta 216km metro line in Dohaworth $8.2 billion, were awarded last June to companies including South Koreas Samsung C&T and French construction firm Vinci. Due for completion in 2019, the metro project is expected to cost around $45 billion to build. Other opportunities for foreign investment include 40 major projects, which are either being executed or mapped out in Oman. They include plans to build a new town in Duqm (transforming the coastline into a major industrial hub with a port, dry dock, airport, refinery, industrial zone, fisheries, a harbor and tourism area).

Although around $40 billion worth of these projects is already in development, more than $50 billion worth of major projects is still in the design or initial study phase. The Oman Power and Water Procurement Company, for example, plans to float a request for qualifications by the third quarter of this year for companies interested in building a $1.5 billion proposed power project.


Although there are no recently published statistics to support his assertion, PwCs Alabaster believes that Asian (particularly South Korean, Chinese, Japanese and Indian) investors into the Middle East have taken over from North American and European investors. Asian economies fared better in the global financial crisis, and Asian companies are often prepared to be more strategic in their pricing and terms of business and, in a general sense, are much more flexible in terms and conditions of contacts they are prepared to take, Alabaster explains. In a nutshell, they are easy to do business with and dont come armed with teams of lawyers before they sign contracts.

He warns any foreign companies looking to invest in the region that increased competition has changed attitudes in the Gulf. If you come into town assuming you have the best products and you know what you are doing and that your customer doesnt know what they are doing and nobody is as good as you are, then you are not going to do business here. That attitude is no longer appropriate, as there are increasing numbers of local people here who can do things. And there is competition from the East, as well.

The Arab Spring has accentuated official and unofficial policies to buy local. And local companies, Alabaster notes, are getting stronger and stronger all the time. To remind themselves of the capabilities that exist in the region, Alabaster says, foreign investors would do well to remember what the Gulf states have achieved in a relatively short time. Both Dubai and Abu Dhabi were built in 20 years, which as far as Im aware, chides Alabaster, is roughly the same period that a new runway for Heathrow airport was debated.

Such rapid growth has enabled GCC countries to become one of the worlds fastest-growing consumer markets, and it will continue to grow as a trading hub, well situated as it is between Europe and Asia. Retail and consumer products, business services and real estate, hospitality and construction are, as a result of this growth, top FDI choices in the region.

At different ends of the retail spectrum, Dutch retailer SPAR opened its first shop in the UAE in 2011, and is now looking to expand convenience stores across the region, while Dubai is planning to develop the worlds largest shoppingmall as part of a huge tourism and retail project.

But the GCC lacks industries that employ large numbers of people. To have a diversified economy, says Alabaster, government capital is required to generate industries that are not natural in this part of the world. Agriculture is very difficult, but they would love manufacturing to be a bigger part of the economy, and there are government funds and incentives to try and drive that.


In Saudi Arabia the National Industrial Clusters Development Program, which aims to attract carmakers to the kingdom, is already paying dividends. Jaguar Land Rover signed a letter of intent with the Ministry of Commerce and is discussing building a plant to produce 50,000 Land Rovers a year as of 2017.

Anything energy intensive is a good fit for Saudi Arabia, says Alabaster, and both Jaguar and Land Rover cars have a natural market in the Middle East, so it makes a lot of sense as long as they structure it properly.

There are a number of comparative advantages for carmakers in Saudi Arabia, including the existence of support companies that provide materials to the car industry. Saudi Basic Industries is a world leader in polymers and plastics, a material increasingly used by carmakers. Not surprisingly, Ford, GM and Chrysler are also in talks with the Saudi government.

MENA has also witnessed a surge in water and renewable energy investments. Approximately 100 projects, worth $32.7 billion, were initiated in 2013.

Within the infrastructure space, an important sector with investment opportunities is renewable energy, says IFCs Makhlouf. Many governments have issued aggressive targets in this sector, which means great prospects for investors in a thus-far-nascent market.

The IFC has helped mobilize $300 million of investment in renewable energy in MENA over the past 18 months and views renewables as a great opportunity, as the region is blessed with abundant wind and solar energy.

Despite the prevailing short-term vulnerabilities, we believe that the fundamentals of MENA remain strong, primarily due to its strategic location, a demographic dividend (a young and fast-growing population) and substantial investment potential in different sectors, says Makhlouf. MENA, which has a population of about 400 million people and abundant natural resources (60% of the worlds oil wealth and around 40% of its gas reserves), offers significant investment opportunities for those with a long-term investment horizon and a high-risk appetite.

It is a diverse, strategically located region with strong trade links to Europe, Africa, and Asia. It also has a large domestic market with an expanding middle-class consumer base, concludes Makhlouf, stating the case for both market-based FDI and large-scale infrastructure project finance opportunities.