Webinar: Investing in Middle East infrastructure and renewables
ME
RenewablesMarket UpdateThe energy transition and budgetary pressures are driving the region's infrastructure and renewables pipeline, especially in the Gulf Cooperation Council (GCC) countries.
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Last week, Dubai reached financial close on the fourth stage of its mammoth 2.8GW Mohammed bin Rashid Al Maktoum solar park, raising debt from an ensemble of 13 international banks. The monumental close is just a glimpse of the robust investor appetite growing in the region.
According to inspiratia's database, 2018 was a banner year, with the closing of Kuwait's US$4.2 billion (£3bn €3.4bn) International Airport Extension in March 2018. The United Arab Emirates (UAE), however, is the top performer in the GCC region, with over US$5 billion (£3.8bn €4.4bn) in total invested volume, mainly across waste-to-energy and health projects. The closing of the 950MW Mohammed bin Rashid Al Maktoum Solar Park – phase four gives the UAE a head start for 2019, with an expected investment volume of US$4.2 billion (£3.2bn €3.8bn).
Annual deal flow in the GCC by country, 2011-2018
Source: inspiratia | datalive
Saudi Arabia's US$6.4 billion (£4.8bn €5.7bn) pipeline arguably presents the most lucrative opportunities, given the country's ambitious energy and economy diversification plans.
Renewables
Interest in GCC renewables has been significantly growing, particularly in the UAE, where installed capacity grew from 144 MW in 2016 to over 580MW by 2018, according to the International Renewable Energy Agency (IRENA).
"Renewables, and in particular solar, are growing at a faster rate than any other form of power generation in the region. So, there is a lot of positivity in the market throughout the region, not just in one country or jurisdiction," said Mhairi Main Garcia, partner at law firm Dentons.
Installed capacity in the GCC by year, 2014-2018
Source: IRENA, inspiratia
Opportunities in small to medium scale projects are also hoped to scale-up in the GCC. As it stands, projects are procured through large centralised tenders – often subject to delays due to the scale of the process – presenting high barriers to entry for local or smaller developers.
Brendan Cronin, Pöyry's head of management consulting Middle East, believes that this challenge can be overcome with the adoption of corporate power purchase agreement (PPA) structures.
"Corporate PPAs are on the rise in the region, and Saudi Arabia is definitely at the forefront of this," said Brendan Cronin.
"Saudi Arabia is definitely seeing some very interesting things in corporate PPAs and are actually opening up the high-voltage section of the market which allows large consumers to directly contract with a developer. There is potential for the wheeling of a power corporate PPA between large consumer and developer. It will be the first in the GCC region," he added.
Desalination presents another interesting trend in the GCC's renewables market in the form of reverse osmosis, the process of purifying saline water by passing it through a water-permeable membrane.
"Reverse-osmosis is as extraordinary or perhaps more extraordinary than PV in terms of the cost fall in the last four years," said Cronin.
"The costs have fallen so much that it is now actually cheaper to build a new reverse-osmosis plant than it is to run a conventional thermal, steam driven process. Oman has led the way with this, moving heavily towards reverse-osmosis and is decommissioning thermal desalination," he added.
This trend will continue in Abu Dhabi with the Taweelah reverse-osmosis plant – expected to cost between US$550 million (£416m €487m) and US$1.2 billion (£908m €1.1bn) – with Saudi Arabia poised to follow suit.
Infrastructure
The budget pressures provoked by the fall in oil prices in 2014 have provided an incentive for GCC governments to move away from public procurement and to seek private capital involvement. This is evident in the number of GCC countries that have opened their regulatory frameworks to public-private partnerships (PPPs).
Thus far, the UAE leads on completed PPP deals in the GCC, having attracted approximately US$10 billion (£7.6bn €8.9bn) of investment in the last five years thanks to its conducive regulatory framework and business-friendly environment. Notable transactions include the US$2.9 billion (£2bn €2.3bn) Dubai Metro Red Line Extension, which closed in March 2018.
Closed PPP deals in the GCC (2013-2018)
Source: inspiratia | datalive
Despite the huge potential of the Saudi economy, a country which has by far the largest GDP in the region, the country is only third in terms of total transaction volume. However, crown prince Muhammad bin Salman's "Vision 2030", which aims for a profound renewal of the country's economy, calls for a much bigger role for private investment. But the pipeline is promising across the GCC.
"What is interesting and probably quite new to the region is social infrastructure being procured on a PPP basis rather than a traditional procurement. We're seeing housing projects, school projects and hospital projects, and those are really dotted across the region," said Main Garcia.
Upcoming social infrastructure PPPs include Qatar's pilot PPP for 45 school projects – announced earlier this month – and several housing projects in Kuwait and Saudi Arabia. The former invited firms to bid for 40 apartment buildings in August 2018, whilst Saudi Arabia in November 2018 signed agreements to build over 19,000 housing units split into five projects.
Islamic Finance
As GCC countries are looking for sources of infrastructure funding, there are few doubts that Islamic finance – which is already thriving in the region – will be increasingly crucial for infrastructure and energy.
The moral economy of Islamic finance makes it particularly suitable to renewables and infrastructure, given its emphasis on the protection of the environment and on social responsibility.
"One can fairly easily see how over time [Islamic finance] will have a better role to play in the Middle East. But as things move, the knowledge and the expertise that one sees in western jurisdictions will eventually come to bear in the projects or initiatives of government that we see in the region," said Qasim Aslam, partner at Dentons.
"So, I think over time there will certainly be more conversations about project bonds and sukuk," he adds.
As the region becomes more familiar with project financing – PPP or otherwise – there will be a greater desire to identify and utilise structures that balance the risks and interest of all stakeholders.
