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Financing the Gulf infrastructure boom

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With FDI surging and public-private partnerships booming, one of the world’s oldest trading corridors offers increasing opportunities for APAC investors

Significant investment in transport, tourism and social infrastructure illustrates the potential of ambitious, investment-led, economic diversification programmes. This is particularly the case in the Gulf Cooperation Council (Gulf) economies, where inbound foreign direct investment (FDI) more than doubled between 2017 and 2022, and one of its members, the United Arab Emirates (UAE), achieved the highest FDI inflows in its history in 2022.

A significant portion of inward investment to the Gulf is coming from Asia-Pacific and in particular from China, as the latest development in centuries of inter-regional trade and capital flows. A recent report1 by PwC surveyed 118 Chinese companies operating in the Middle East, a third of which are in the infrastructure sector, and found that more than 80 per cent planned to invest or continue to invest in the region over the next three to five years, with the UAE and Saudi Arabia the preferred destinations for investments. “High market potential” was the top reason given by companies.

The most significant reason for the Gulf’s increasing potential for investors is its shift away from hydrocarbon dependence. Governments in the region are diversifying, and whole new areas of development are opening up. “Economic diversification is at the top of the agenda for the region, which is leading to an enormous investment boom in infrastructure,” says Manav Futnani, Global Co-Head of Export Finance, MENAT, HSBC. To fund this boom, many states have brought in business sector reforms to attract private investment.

The boom in public-private partnerships

Major infrastructure projects in the transportation and tourism sectors are benefiting from these new FDI inflows. Another fast-growing area is social infrastructure: hospitals, schools, universities and recreational facilities. This has been supported by new regulations widening the use of public-private partnerships (PPPs). In Abu Dhabi, for example, a new law2 on PPPs was introduced in 2019 to encourage long-term private sector involvement in major infrastructure projects, targeting education, transport and municipal works. In Saudi Arabia, PPPs are a key component of the Saudi Vision 2030, a national transformation programme3 that aims to increase private sector investment to 65 per cent of GDP by 2030.

According to figures published at a recent meeting of the PPP MENA Forum4, which brought together key economic stakeholders across the Middle East and North Africa, PPP projects worth around $4.1tn are currently planned in the region, with 65 per cent in Gulf countries. Healthcare and education are two areas that the Forum singled out for strong growth. “The PPP model is something that has worked for a long time in select sectors in the Middle East,” says Gregoire Bouzereau, Head of Infrastructure Finance, Asia, HSBC. “It was mainly focused on power and utilities – but now we’re seeing it expanded to fulfil much broader infrastructure requirements, with social infrastructure a major recipient, and that is good news for APAC investors.”

The future is bright

A prime example of APAC investment in the Gulf’s social infrastructure sector is the Zayed City Schools project in Abu Dhabi, which involves the design, build, finance, maintenance and transfer of three schools for a total of 5,360 students in a new district currently under construction, which is being built under Abu Dhabi’s new PPP framework and financed by HSBC, Intesa Sanpaolo and The Norinchukin Bank.

For Australian infrastructure investment specialist Plenary Group, which successfully bid for the project together with construction group BESIX, this is its first foray into the Middle East after a history of large and successful PPP projects in Australia and North America. “The Middle East is a region with great potential for social infrastructure PPPs,” says Chi-Ling Looi, CEO, Plenary Asia Pte Ltd. “The governments, by and large, believe in the benefits of the PPP model, which are all about delivering value for money over the life of a concession.”

HSBC, which has a long history in infrastructure finance in its Middle East, North Africa and Turkiye (MENAT) region, was a lead banking partner on the project, providing end-to-end solutions across five product segments, acting as Mandated Lead Arranger, Hedging Provider, Equity Bridge Loan Provider, Social Loan Coordinator, Sole Agent Bank (Facility and Security) and Account Bank.

The transaction highlighted HSBC’s ability to support its clients across regions, and efficiently execute PPP and infrastructure financing transactions. Looi speaks highly not only of HSBC’s expertise and experience but also of its presence on the ground across both the APAC and MENAT regions: the multi-jurisdictional, multi-product landmark deal involved HSBC teams in Australia, Singapore, Hong Kong and the UAE. The project was also the first social loan for HSBC in Singapore.

“The future is bright for PPPs in the Middle East,” Looi explains. “As a result of this project, we’ve opened offices in Abu Dhabi and Dubai. We are excited about the pipeline of potential social and transport infrastructure projects in the region, and we will be very happy to have HSBC support us. HSBC is international with global presence and local expertise. We started in Australia in 2004, expanded into Canada and the US, we've been in Singapore since 2008, we're in the Middle East and we also have an office in London to look at European deals. And in each of these markets, we are talking to HSBC. Their global presence has been really important to us.” With such abundant opportunities for infrastructure and wider investment, the APAC–Gulf corridor promises to continue shining, whatever the global economic weather.

New networks of the global economy is a key theme of the inaugural HSBC Global Investment Summit in Hong Kong, 8–10 April 2024.

At an Inflection Point

One of the benefits of private credit is that borrowers often have close one-to-one discussions with their lenders which can allow dialogue to take place faster and under more flexible conditions.

“At the end of the day we are focused on making sure that if there is stress in the system that we are well covered on our security,” says Muzinich’s Tan.

As Asia continues its recovery post-pandemic, private credit provides a much-needed niche of secured financing.

In many ways, private credit can be seen as a valuable financing tool to complement the public debt markets, and a shock-absorber, adding to financial stability by diversifying credit away from the banks and public markets.

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