Infrastructure projects face funding challenges

A few years ago, the Kingdom moved toward the privatization of several state-owned companies and offered (listed) them in the financial markets. But it took a strategic turn in the process of privatization, toward outsourcing the implementation of massive infrastructure projects to the private sector, as well as their operating and maintaining on the long run. Most ministries and government bodies, no matter what their approaches and efforts were, sought to offer infrastructure projects to the private sector.
Despite the huge momentum that accompanied the state’s initiatives in privatization, in particular, Private Public Partnership (PPP), and the success stories of some of them like Integrated Independent Water and Power Projects (IWPP)), the future of co-financing in the Kingdom is still vague and hung in the balance because of so many challenges.
Structural financial issues in privatization have been identified as one of the reasons for shelving the work in a pivotal project for Saudi economy — landbridge rail project. The $ 6 billion plan was suggested seven years ago. The project, if implemented, would have been an excellent landmark to project the Kingdom’s economic progress on global stage.
It was expected that the project will generate a network of investments, with high economic and financial returns, and subsequent numerous job opportunities and sideline projects that require various high professional and technological skills. There are several other projects in the context of co-financing that had been canceled, or postponed.
It is no wonder that the private sector, locally and internationally, strongly criticized this in view of the large losses, not only in the wasted time, and financial resources of partnerships and the private sector, but also in the cost of the lost alternative opportunities of these huge resources.
Like the proverbial “Once bitten, twice shy,” the cancelation, or stumbling of these projects gave a bad sign for investors. They have refrained from competing for these projects which may never be implemented for fear of losses.
No doubt that the financial crisis, and the political events in neighboring Arab countries had negatively affected the inflow of foreign capital to co-financing these projects, and dismissed reconsidering several deals in this regard, albeit that should not have been the case. The reason is that the plentiful opportunities available in infrastructure projects and the expected huge returns are very attractive once the right legislation and economic frame has been drawn. But the political will at the executive governmental level is absent, with the flowing of massive oil returns, which resulted in a weak desire to make strong efforts for integration — not to mention cooperation — with the private sector.
Co-financing infrastructure projects are effective, and successful if the government was committed to partnerships with the private sector in constructing, operating, and maintaining infrastructure projects in one united partnership that amounts to 50 percent with the governmental party that draws the economic policies, and its independent management until overcoming all bureaucratic obstacles.
The unit of co-financing is charged with the task of developing a legally unified and structural policy for all ministries. After that, detailed specifications would be drawn according to each project, with the supervising ministry, the nature of the project and its term.
The greatest challenge facing the Kingdom and rest of the Gulf states is their inability to redraft and implement the global co-financing models to their needs. Many countries have succeeded in this regard, such as Canada, Australia and Malaysia, which did not only take into account the government’s requirements, but also paid attention to the social, political and demographic requirements, as well as their long-term economic growth strategy.
In spite of the considerable efforts in extending tenders for various infrastructure projects, they are sporadic efforts and mere individual interpretations, which are not contained under one unified umbrella, ensuring their approaches and integrity toward serving the long-term growth strategy of the Kingdom.
The failure in forming a co-financing unit for PPP under the umbrella of financial authorities in the Kingdom has had a negative impact on the economic growth.
Some would say that the Saudi economy expanded by 5 percent in the past year.
However, according to the statistics of the Saudi Arabian Monetary Agency (SAMA), this growth was supposed to be much higher. The statistics have indicated that the rate of the absorption capacity of the Saudi economy has dropped sharply, and increased in recent years due to the distressed privatization projects and the failure of economic policies in turning those projects into income-generating ones, instead of exhausting its budget. Therefore income multiplier has decreased from 3.4 to 0.9 during the last 10 years, showing a massive burning of money with no return on the local income.
The proof for that is that the Kingdom’s GDP still constitutes more than 80 percent, despite all the privatization of sectors and new projects. It either stumbled or didn’t generate the returns expected, because government institutions have done their part of the job. Thus, they became exhausting projects, not investment ones.
Therefore, it is not an option anymore if the Saudi economy is to succeed effectively in large-scale privatization, in particular, in infrastructure projects such as water, power, renewable energy and other industrial projects. It became a necessity demanding all our efforts to develop the optimal approach, and implement it in an attractive way that brings investments, creates jobs and addresses all economic issues.
— Nahed Taher is the founder and CEO of Gulf One Investment Bank.