Infrastructure assets are typically characterized by their capital intensive and long term nature. Historically, such assets were funded and managed by the state. Today, however, the role of the state as the provider of public services is increasingly being questioned. Both in terms of whether the private sector can provide such services more efficiently and effectively than the state and also in terms of how the costs for these services and assets should be borne. These factors have led to a greater involvement by the private sector in the provision of infrastructure through public private partnerships, BOT and BOO schemes, as well as other forms of joint ventures and concessions.
Demand for infrastructure is set to continue to expand significantly in the coming decades creating a large number of investment opportunities. These opportunities are attractive for a number of reasons.
1. In today’s current economic climate of capital readily available at low interest rates, the search for yield is driving institutional investors away from stocks and bonds and towards alternative investment products.
2. Pension funds are beginning to think of infrastructure as a substitute for long duration fixed income products, and some, such as CALPERS and Ontario Teachers Pension Plan, are even directly investing into this asset class. Investments like toll roads and water systems offer a steady, stable income stream that grows as economies expand, and which is protected from volatile economic cycles.
3. The low historic correlation of infrastructure investments versus other investment classes has also encouraged the entry of both institutional investors and pension funds into this asset class.
4. The rise in global population mainly in the developing world, and the ageing of the current infrastructure in the developed world, is expected to create billions of dollars of demand for new infrastructure services. The rise of the middle class and expectations for better living standards are heightening demand for electricity, water and transportation, and other components of infrastructure.
5. The continuing desire of governments to push the funding burden to the private sector will also create new investment opportunities, especially in countries where public financing is limited. Alternative players such as private equity and sovereign wealth funds represent a significant new source of capital for these investments.
A report published in 2007 by the Organization for Economic Cooperation and Development estimated that $65 trillion would be required for roads, railways, electricity generation, transmission and distribution, telecommunications and water services over the next 25 years. Of this amount, about $33 trillion is estimated to be for the needs of emerging markets.
As countries in the MENA region scramble to modernize their economies, broaden their industrial base beyond the traditional sectors, and provide jobs for rapidly growing populations, unprecedented levels of infrastructure spending are foreseen. According to one estimate, infrastructure investment in the GCC alone could reach $700 billion by 2010.
Like in the West, across the MENA region there is an increasing realization that infrastructure needs cannot be met by the public sector acting on its own. Normally countries with few natural resources and strained public finances may choose to invite private investment in infrastructure mostly to obtain additional financial resources. However, despite the petrodollars pouring in, these countries are increasingly realizing the benefits of inviting private sector participation in infrastructure projects, which also allows them to obtain efficiency gains through new models of corporate organization and management, as well as benefit from the latest technological developments.
Early examples of private investor participation in the infrastructure sectors of MENA countries have been encouraging. Some of these have taken the form of public sector disinvestment but many others have consisted of some sort of PPP. For example, Jordan, Morocco, Saudi Arabia, Tunisia and United Arab Emirates have all attracted large private investment flows into their infrastructure sectors. The main areas of activity have been telecommunication, petrochemicals and power generation.
Infrastructure development in the Middle East is far outpacing most other regions. With the windfall in revenues from petrodollars and the increased levels of spending on infrastructure and world scale projects, the MENA region has seen a number of funds being set up over the last 18-24 months. By some estimates $10 billion has been raised by private equity firms for infrastructure and related investment during this period.
The definition of infrastructure in the region is generally broader than the Western definition of infrastructure, mainly relating to toll roads, transportation such as ports and rail, power utilities — industries where you normally have long-term arrangements. The sector mandate for the IDB Infrastructure Fund included airlines, natural resources such as forest projects, pulp, paper and agribusiness, as well as financial services relating to the development of Islamic Finance. Similarly in the recently launched Growth and Infrastructure Fund by Abraaj Capital, social infrastructure and soft infrastructure like education and healthcare has also been included.
The challenge for these funds, with their relatively high target return benchmarks, is to find the right investments at the right price. Already in the power sector we have seen high investor interest driving up prices and driving down yields. Increased competition from non-fund players such as the large private groups and eventually regional pension funds with lower performance targets could also cause problems for these new funds. However what is certain from the global experience is that private money will continue to flow to infrastructure assets in the region.
EMP has been investing in infrastructure in the MENA region since 2001 with considerable success. EMP Bahrain is the Manager of the $730 million Islamic Development Bank (IDB) Infrastructure Fund, the first private investment vehicle of its size to focus on infrastructure development in the member countries of the IDB. By the end of 2006, the Fund was fully committed to 11 investments in Turkey, Saudi Arabia, Malaysia, Oman, Jordan, Guinea, Pakistan and Bangladesh. The Fund’s portfolio includes investments in the transport, power, petrochemicals, telecommunications and metal and mining sectors.
EMP Bahrain is a subsidiary of EMP Global, an international private equity firm serving as the principal adviser or manager with funds under management of $6.1 billion. EMP Global has invested in infrastructure for over 10 years through its funds in Africa, Latin America, Asia, Eastern Europe and more recently the IDB Infrastructure Fund. The IDB Infrastructure Fund’s approach to investing has been a little different from other private equity players. It prefers to partner up with leading industry players and technical partners taking large minority stakes. EMP provides strong corporate governance standards, financial and technical assistance and strategic guidance to its portfolio companies.
Junaid Jafar is a general partner at EMP.
