Why is it essential to push private-sector potential in Middle East

After witnessing sluggish growth rates for the past few years, Middle Eastern nations finally have something to cheer about as the new financial year promises an economic rebound.

Most rating agencies and international organizations forecast the regional GDP growth to recover to 2.3 percent on an average in 2018-19, as opposed to just 0.6 percent in the current fiscal. Meanwhile, an Oxford Economics report says GCC economies are set to enjoy their fastest expansion in three years with 2.7 percent growth, while the International Monetary Fund (IMF) predicts overall non-oil growth to pick up to 2.6 percent in 2018.

While improving global crude oil prices ($55-$70) certainly have a role to play in the positive outlook, the private sector’s expanding footprint amid the massive diversification exercise currently underway is lending much-needed economic stability and opening up new revenue streams for the governments across the region.

According to the latest Purchasing Managers’ Index (PMI) survey, the non-oil private sectors of Saudi Arabia and the UAE, the Arab world’s two largest economies, have registered steep expansions in output and new orders, alongside burgeoning export demand growth in 2017. The UAE’s index rose to 57.7 in December, with the private sector posting the sharpest expansion in new business since January 2015, while Saudi Arabia’s PMI measure was 57.3, signaling a strong increase in output and expansion of the private sector non-oil economy. In response to the rising output requirement, private firms have been hiring additional staff and creating new jobs in the economy. 

“The role of the private sector has been on a rapid upward trajectory, primarily targeting consumer-driven sectors such as retail, logistics and industrials. Governments and the private sector are turning into trusted partners…driven by economic diversification, with a particular focus on transportation, power and water, manufacturing and energy where projects worth more than $1 trillion are in the pipeline,” says Anthony Hobeika, CEO, MENA Research Partners.

Expanding role

Among all of the GCC countries, Saudi Arabia has ambitious plans to impart more responsibilities to the private sector for its economic revival.

Under the Vision 2030 and National Transformation Program, Riyadh has begun the process of privatizing utilities and offer stakes in state-run organizations to create new opportunities for the private sector and raise $200 billion for economic and social development. Authorities have conducted detailed valuations and identified 16 entities as top priorities for a sell-off and more than 100 opportunities for pursuing public-private partnerships (PPPs). Its plans for privatization also include selling a five percent stake in Saudi Aramco, the world’s biggest producer of oil, later this year, and handing over all airports to private players.

Oman has almost completed the transfer of its waste management infrastructure to international operators. Its finance ministry recently said it would sell some state companies in 2018 and is considering privatizing parts of the state-owned energy infrastructure.

Meanwhile, the ‘Kuwait Vision 2035’ stresses the role of the private sector in supporting the country’s economy and framing more effective policies for attracting foreign investments. Kuwait is also planning to create private and public sector investment programs worth $115 billion in four years and aiming at reducing the official contribution in projects to 30 to 40 percent by 2035, though it has yet to make progress in enlarging the scope of private players’ contribution to the economy.

The Bahrain Economic Development Board in its quarterly economic report gave the entire credit of 4.7 percent growth of its non-oil economy to activity in the private sector hotels and restaurants, social and personal services, financial services sector, transportation, communications and real estate being some of the main growth drivers in the Gulf nation.

As part of the expansion of the UAE’s private sector, Abu Dhabi National Oil Company (ADNOC), the second biggest energy giant after Aramco, has privatized its distribution businesses by selling ten percent stakes through an $851-million IPO. ADNOC’s CEO Sultan al-Jaber has said the state firm could float up to 30 percent in the unit in future.

Other UAE state companies, such as Emirates Global Aluminium, are due to list this year. At the recently held Global Manufacturing and Industrialization Summit (GMIS), the first global gathering of top stakeholders in the industrial sector, UAE Federal Minister of Economy Sultan bin Saeed Al Mansouri said the UAE was seeking to attract $70 billion in new industrial investments by 2025.

“Development across the region is encouraging, but it’s obvious that a lot of work is still needed to attract foreign direct investment and facilitate greater participation in the local economies.
Sovereign wealth funds and private investors can work together to help smoothen the transition and fund economic transformation,” says Tarek Fadlallah, CEO, Nomura Asset Management Middle East.

Growing partnerships

Bitten hard by the “new reality” of the low growth era as well as tightening budgets, governments have ramped up efforts to involve the private sector in financing, building and operating public infrastructure projects. Authorities are framing regulatory frameworks as per their respective visions to encourage PPPs in aviation, housing, education, healthcare and other sectors.

According to the Dubai-based Middle East Economic Digest, the value of PPP projects across the Middle East region has more than doubled to $185 billion in a year. Kuwait tops the list with PPP projects worth $44.4 billion, followed by Libya ($36 billion), the UAE ($27.6 billion) and Saudi Arabia ($17.5 billion). Saudi Arabia plans to increase private-sector investment in the GDP from current 40 percent to 65 percent by 2030.

Even though shrinking revenues and rising fiscal deficits have forced governments to defer and cancel projects to control expenditures, future projects worth approximately $100 billion are in the planning stages and are expected to be awarded in the next five years. Analysts believe infrastructure corporate financings and capital markets have emerged as viable financing tools for conventional projects.

“Gradually, some of the traditional government-funded projects will be replaced by greater private-sector participation in GCC infrastructure. With governments placing a greater onus on sharing the burden of infrastructure spending with the private sector through PPP laws in Dubai and Oman, capital markets can provide funding that is suited to PPP-based projects,” says Hadi Melki, Managing Director, S&P Global Ratings.

Analysts see the UAE and Saudi Arabia increasingly presenting compelling new opportunities for investors and market participants, and becoming key markets in the region. Many are of the view that the Saudi Vision 2030 and the UAE Vision 2021 will promote many significant infrastructure projects that aim to catalyze business activity in specific sectors in this region.

Saudi Arabia, one of the main driving forces behind diversification drive in the GCC, is pursuing PPPs for the construction and operation of metro projects in Makkah, Jeddah, Damman and Madinah. Saudi Railways Organisation President Rumaih Mohammed Al-Rumaih has indicated a PPP could be utilized for the proposed $7 billion Landbridge project connecting Jeddah and Riyadh. The government previously opted to build the line itself in 2011 after a financial agreement with a consortium was not achieved, but there has been little progress. Saudi Arabia also recently awarded a bus tender in Makkah.

The PPP model is also being used for the extension of the red metro line in Dubai to the Expo 2020 site. Bahrain’s tourism investment projects are valued at more than $32 billion, of which $10 billion of funding is through the PPP mode and another $15 billion is purely from the private sector. Oman has increased the private sector’s participation in investment programs to 60 percent in 2017 from 52 percent in 2014, the Sultanate’s finance ministry said.

Promising sectors

Since there’s a special emphasis on building infrastructure across the Middle East, the construction market has registered a phenomenal growth year on year. According to MENA Research Partners, a leading research company in the region, the construction market in the GCC clocked 30 percent growth rate in the current financial year, with $130 billion of completed projects as compared to $100 billion in 2016-17. In the run up to the World Expo in 2020 and other mega events in the region, projects worth $2.6 trillion, equivalent to 160 percent of the GCC’s GDP, are being pursued in the regional construction market.

Clean energy is another sector that is expanding exponentially as the region requires 483GW of generation capacity by 2035 to meet the burgeoning power demand.

The focus on solar and wind power generation, especially in the UAE, Saudi Arabia and Egypt, has opened up new avenues for the private sector. Solar power is expected to add nearly 61 GW in the Middle East by 2035 and photovoltaic solutions companies have attracted nearly 90 percent of green project investments in the region.

The GCC’s population is projected to reach 65 million by 2030 and a third of it will be under the age of 25, spurring new investment opportunities in the region’s education sector, according to a new report by Strategy&. A large number of players are entering into the region’s private education market.

“Investors want to add schools to their portfolio with long-term commitment of 20 years or more. In the low oil price environment, while investments have shriveled across many sectors, schools have kept some investors going during difficult times,” says David Allison, CEO of SSAT Middle East, an educational consultancy.

Tourism is another resilient sector that has grown exponentially over the years and propelled the growth of hospitality and retail segments along. The UN World Tourism Organization forecasts the region to host 195 million international tourists almost triple the present volume of 72 million by 2030. Riding high on the increasing tourist inflow, the GCC hospitality industry is expanding with more than 550 projects currently underway to accommodate the growing arrivals of tourists in this part of the world.

The mega-mall development is also gaining pace. Existing malls and upcoming ones will push the region’s retail market to become a nearly $300 billion industry in 2018-19. The region’s hypermarkets and supermarkets, especially the ones in the UAE and Saudi Arabia, dominate the retail space with their high per capita transactions being almost at par with those of developed nations. Despite weaker market sentiments, this corporate segment has seen increased capital flow and enhanced footfall of shoppers in the region.

Digital revolution

McKinsey Middle East Digitization Index forecasts the UAE, Qatar, and Bahrain to be among the top countries in the world with 100 percent smartphone penetration, comprising 160 million digital users by 2025, who could contribute up to 3.8 percent annually in GDP amounting to approximately $95 billion. To create an economy out of this digital-savvy population,
the Middle East nations are going digital, be it with the creation of smart cities, the automation of services or the use of artificial intelligence (AI) or data analytics. They are creating an ecosystem for technology companies to be on a firm footing and reap benefits of the Fourth Industrial Revolution.

According to the Mena Annual Venture Report 2017, regional start-ups secured $475 million in funding last year. The region has emerged as a perfect launch pad for new cost-effective fintech solutions and the growth of tech start-ups. Nearly 500 start-ups in the region are growing in a very supportive environment.

Meanwhile, the pace of fintech innovation in MENA, especially in the GCC, has been rapid over the past couple of years, primarily on the back of investors’ unmoving confidence in start-ups. The Middle East has amassed more than $100 million in fintech start-up funding in the past ten years. As many as 105 fintech start-ups were launched in 2016 and at least $50 million of funding is expected to reach them by the end of 2017-18, up from $18 million in 2016-17, according to a report by Wamda Research Lab and Payfort.

“We are witnessing a start-up revolution taking place in the Middle East, especially in the GCC. In the UAE, entrepreneurship and start-ups will play a crucial role in creating new jobs and help absorb a large chunk from among the 100 million new jobless people in the Arab world,” says Dawood Alshezawi, President, AIM Start-up, an initiative of the UAE Ministry of Economy to connect promising start-ups with investors and business partners.

Among all GCC nations, the UAE has the most ambitious digitalization plans, with all sectors pushing to create a new economy and a smart society. The UAE is the first country in the world to put forth a clear artificial intelligence strategy, with the appointment of the first AI minister. Abu Dhabi aims to become the capital of the Fourth Industrial Revolution and is preparing to launch an industrial strategy that will include numerous new projects.

Saudi Arabia, which granted citizenship to an AI robot Sophia last year, has announced a $500-billion technological wonder, Neom a combination of Latin and Arabic words meaning ‘new future’ that is forecast to be bigger than Dubai. This futuristic city will give a big boost to the private sector, with its liberal international trade center, a world-class business hub with advanced manufacturing, biotechnology and media industries. It will also present the finest example of machine learning, augmented reality, data mining, analytics and cognitive computing.

At the same time, Kuwait is building Saad Al-Abdullah City, the country’s first smart city in partnership with the Korean Land and Housing Corporation for smart device users and is inviting private players to construct such smart cities in other areas.

“The whole region is moving towards digital transformation through elements of the Fourth Industrial Revolution. It therefore becomes important for governments in the region to provide the right kind of environment and stimulate the investment required in digital infrastructure,” says Dr Khaled Biyari, CEO, Saudi Telecom Company Group, which is helping the government to
deliver broadband services to more than two million homes in the kingdom.

In hindsight, the years of low growth have helped nations to renew their economies and diversify into unchartered territories. In this foray, the private sector has emerged as a trusted partner to attain these ambitious targets and lend stable, long-term, sustainable economic development.

Private players in the real estate, energy, transport and construction sectors are helping to create world-class assets and infrastructure and aiding the growth and expansion of investments in different areas. Those in retail, tourism and hospitality are driving the consumer demands. Digital sectors are building a knowledge-based economy and creating future jobs.

All of this signals that the private sector has finally come of age and its role is only going to get bigger in the future. Promising times lie ahead.