The cumulative investment required in infrastructure development in the Gulf from 2019-2023 is about $1tn, excluding large mega projects, said a report by global management consulting firm Oliver Wyman.
If mega projects such as Neom, Al Hareer City, Qiddiya, Amala, and others materialise within the currently defined timelines, an additional $600bn of investment will be required, bringing the total required investment over the five-year period to around $1.6tn.
The Gulf region has a lot going for it – be it strong economic growth, a young population, the right fiscal conditions and political stability, said Oliver Wyman’s recent publication ‘The Arabian Gulf Economies’. Whether it can cash in on this momentum going forward will depend on whether its infrastructure can keep up, and that depends in no small measure on its governments’ success in attracting and retaining investment from overseas.
Factors driving demand for infrastructure
Three factors are driving the need for infrastructure in the Gulf, including hard infrastructure like transport and utilities, and social infrastructure including health and education systems. The three factors are: strong economic growth, rapid population growth and a young population.
Firstly, the region is expected to remain a bright spot in the global economy, with its GDP forecast to increase 5.9% per annum from 2018 to 2023, said the report. The Gulf region witnessed strong economic growth for over two decades, with its cumulative GDP increasing from $280bn in 1998 to $1.6tn in 2018.
Secondly, a defining theme in the Gulf in this period has been the rapid growth in population, which is now 11 times what it was in 1960 and has doubled in the last 20 years to reach 56m in 2018.
Thirdly, the socio-economic strand impacting the demand for infrastructure is the relative youth of the Gulf’s population – four in 10 people living in the region are under the age of 35, and only 3% of the population is over the age of 65.
Investment in hard infrastructure – including electricity, ports and roads – underpins strong economic growth and is essential for it; while investment in social infrastructure – including hospitals and education – is imperative given the young and rapidly growing population in the Gulf.
Where is the money?
Governments recognise that more capital must flow into both hard and social infrastructure, but are constrained by funding limitations. National governments cannot meet the expenditure by themselves. It is estimated that GCC governments will only be able to fund about $300bn of the overall requirement from their budgets, leaving a massive funding gap even if state-owned enterprises and sovereign wealth funds step in to support investment.
This means that private investment on a scale hitherto not seen in the region is required to bridge this gap, Oliver Wyman said in another report titled ‘Private investment is key to unlocking long-term capital for Gulf infrastructure’. That in turn means that national governments must step up efforts to attract investors to a region that still presents tangible impediments to private participation in infrastructure provision and delivery, and one in which the PPP frameworks are still in their nascency.
Given that the needed private funding is more than what investors are currently likely to be willing to invest in the region, it is possible that some of the planned projects will have to be delayed or postponed due to funding shortfalls unless significant steps are taken.
But simply opening the door is not enough as Gulf countries are not alone in seeking to supplement public with private investment. Indeed, not only is there competition from outside of the Gulf, individual countries within the region must also provide the best possible environment and conditions for private capital.
Private investors are discerning and will make investment decisions based on various factors, chief among which is government support for private capital. M