Bridging the infrastructure capacity gap
2 April 2024
The Middle East and North Africa (Mena) region faces a massive infrastructure gap, with estimates of the shortfall ranging from $75bn to $100bn annually.
This translates to a cumulative need for $2-2.5tn in infrastructure investment alone by 2050. Bridging this funding gap will require a drastic increase in the level of investment.
In 2020, the World Bank stated that Mena countries needed to spend at least 8.2% of GDP to meet their infrastructure goals through to 2030. However, it had been averaging a spend of just 3% over the prior decade – mostly from public sector funds, alongside multilateral and bilateral debt financing.
In the intervening years, the additional fiscal constraints imposed by the pandemic and global economic shocks, such as food price inflation, have further hindered regional public spending on infrastructure.
In 2023, the ICD-Refinitiv OIC Infrastructure Outlook valued the region’s outstanding funding gap for infrastructure development at $994bn. The gaps included a $685bn shortfall in investment in road infrastructure; a $111bn funding gap in the water sector; a $65bn gap in telecoms; $47bn in rail; $34bn in port infrastructure; $27bn in electricity network investment; and $25bn in airport infrastructure investment.
This funding gap has real, material impacts on economic prosperity and the prospects for economic growth. The shortfall in investment in road infrastructure, for example, is estimated to cost the Mena region a staggering 5.5% in GDP a year due to inefficiency and accidents, according to the World Bank.
A 2020 study in the Review of Middle East Economics and Finance found that manufacturing firms in the Mena region faced the most severe durations of power outages a month of any region, at 64 hours a month. The perceived value of the business losses due to these power outages was estimated to be around 4.8% of total sales.
Meeting the region’s annual investment needs could generate about 2 million direct jobs and 2.5 million direct, indirect and induced infrastructure-related jobs, according to the OECD.
This is critical when half of the region’s population is under 24 years old, and 29% are not in employment, education or training, as per the OECD figures.
Another very tangible infrastructure gap is water capacity. The current annual water shortage in the Mena region is about 42 cubic kilometres, but by 2050, this is projected to grow fivefold to 199 cubic kilometres a year under average climate scenarios and potentially up to 283 cubic kilometres a year under drier conditions.
These examples highlight the need for substantial investments to bridge the infrastructure deficiencies, ensure the conditions for economic growth, and enhance overall sustainability in the Mena region.
To address the challenges, a comprehensive and multi-faceted approach is needed to incentivise the private sector to support regional infrastructure investments. This includes governments establishing clear policy directions and regulatory frameworks to attract private capital mobilisation.
This funding gap has real, material impacts on economic prosperity and the prospects for economic growth
Technological adaptation
In parallel with the need for governments to proactively improve the conditions for investment, the delivery of future infrastructure requirements also anticipates the adoption of emerging technology.
The goal of many countries to achieve net zero by 2050 also layers further complexity onto existing infrastructure challenges. Regional efforts such as the Middle East Green Initiative and the Circular Carbon Economy framework nevertheless demonstrate the region’s commitment to achieving its net-zero targets.
Reaching net zero will entail building infrastructure that is not just bigger and better, but smarter. At the Global Infrastructure Initiative Summit hosted by McKinsey in Dubai in February, disruptive thinking and technology were identified as vital to the industry’s evolution to meet the needs of a net-zero future.
Industry leaders called for a nuts-and-bolts overhaul of the industry from the bottom up, with more sustainable alternatives to even centuries-old staples such as Portland cement and rebar. The digitalisation of the industry and the advent of machine-learning and AI also hold huge potential for cutting waste and designing more organic, efficient structures.
The summit highlighted that solving future infrastructure requirements will also likely necessitate overcoming technology hurdles and bringing costs down through research and development, much like the costs of solar power or reverse osmosis desalination have come down in the region.
Alistair Green, a senior partner in McKinsey’s global infrastructure practice, pointed to the technologies that “are not at conviction, yet: the technology hasn’t even really been proven outside of the lab – like flow batteries, which are an alternative to lithium-ion batteries that can be used for grid-scale storage of long duration, energy storage. This is a technology problem that we’re actively investing in researching in order to bring the costs down.”
Strategy& and engineering consultancy Dar recently reported that sustainable construction technologies can potentially reduce lifecycle emissions from the Mena region’s $2tn construction pipeline through to 2035 by 50%-60% for planned projects. Simple changes can be highly effective, such as incorporating dynamic facades into building designs, which can deliver energy savings of up to 55% in hot countries.
The key is the level of innovation, not the level of technology. In the right application, a low-tech solution may be more efficient. If a low-tech solution is scalable, it is also likely to be more cost-efficient.
In the arid Ait Baamrane region of Morocco, a 2015 project by the NGO Dar Si Hmad has created the world’s largest operational fog-harvesting system, providing potable water using a system of shore-side nets that capture and condense the fog rolling in off the ocean. Launched after a decade of research, the system yields approximately 22 litres of water a day for each square metre of net. It demonstrates that infrastructure does not need to be expensive or complex to have a positive sustainability outcome.
The most pressing need for the Mena region is to improve the attractiveness of its infrastructure investment opportunities
Accessing finance
Without sufficient finance, the effectiveness of infrastructure development, including technological innovation within the sector, will be throttled. The most pressing need for the Mena region is to improve the attractiveness of its infrastructure investment opportunities.
Many governments, especially in the Gulf, have been focused on encouraging the private sector through better and wider public-private partnership (PPP) arrangements, with mixed results. Some countries have struggled to deliver PPP frameworks with sufficient commercial appeal and bankability, a problem usually linked to unattractive risk allocations on the private sector side.
Nevertheless, the mobilisation of PPPs and the creation of more transparent and efficient regulatory frameworks around them are routinely identified as vital for attracting and mobilising private capital.
The delivery of more sustainable infrastructure with a view to net-zero targets also brings the potential to tap into green finance, including green bonds and sharia-compliant sukuk. Projects targeted towards carbon neutrality open themselves up to more diverse avenues of potential finance, including international climate mitigation and adaptation funds.
Multilateral development banks, such as the Asian Infrastructure Investment Bank, support initiatives like the Catalyst Mena Climate Fund 2, which works to mobilise private capital for infrastructure projects focused on renewable energy, sustainable utility schemes and green hydrogen capacity.
Governments in the region are also taking steps to mobilise climate finance by issuing green sovereign bonds and sukuk to fund clean transportation, waste management and green building schemes.
The UAE’s infrastructure development is guided by the Green Agenda 2030 policy framework. Under this aegis, UAE banks, including Mashreq Bank and First Abu Dhabi Bank, have pledged to mobilise $270bn in green financing by 2030 for environmentally impactful projects.
Infrastructure financing schemes are an important step towards drawing more private sector liquidity into the infrastructure industry, but it is also just a start compared to what will be required to deliver the region’s infrastructure needs.
Deep regional inequality also needs to be addressed. While countries such as Saudi Arabia and the UAE may currently be meeting the World Bank’s 8.2% of GDP infrastructure spending targets, the region’s hydrocarbon importers will likely need far more outside assistance.
For the region as a whole to thrive, countries will also need to work together and synergistically to deliver holistic infrastructure roadmaps. Just as the GCC is working together to deliver the Gulf Railway, the Levant and North Africa must work together to develop their shared infrastructure.
Only through cooperation and joint initiatives will the Mena region stand to bridge its infrastructure gap.
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Read the November 2024 MEED Business Review
1 November 2024
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Veolia to develop Rabat water desalination plant
31 October 2024
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Saudi Binladin to receive $6bn loan
31 October 2024
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PIF and Google to set up Jeddah AI hub
31 October 2024
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Abu Dhabi bullish on green hydrogen
31 October 2024
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Read the November 2024 MEED Business Review
1 November 2024
Download / Subscribe / 14-day trial access The GCC is abuzz with merger and acquisition (M&A) activity. In the first six months of 2024, 10 of the highest-valued M&As in the Middle East and North Africa (Mena) region took place in the GCC, and the UAE and Saudi Arabia recorded a combined 152 M&A deals worth $9.8bn. The November issue of MEED Business Review takes an in-depth look at how the ambitions of regional governments to diversify away from oil and gas and embrace newer areas of the economy is driving this M&A boom.
We also examine how the Mena M&A market is being boosted by energy deals, such as those being pursued by UAE energy giant Abu Dhabi National Oil Company (Adnoc). In October, the firm received the necessary approvals to complete its purchase of a 50% stake in chemicals producer Fertiglobe from Dutch-listed OCI, taking its total shareholding in the business to 86%, and also secured agreement from German chemicals firm Covestro for a takeover worth €14.7bn ($16.1bn). The latter looks set to be the biggest M&A deal involving a Mena company this year and could even be among the 10 biggest M&A deals in the world in 2024.
The latest issue also includes detailed analysis of the region's project finance market. Major deals such as the $6.1bn financing for Neom Green Hydrogen Company, which closed in 2023, demonstrate that the GCC is a global project finance hotspot, and the region looks set to retain this title thanks to the use of project finance structures across a widening array of sectors, from infrastructure to green energy. And while public-private partnership (PPP) activity has eased back in the Mena region since last year, the number and value of contracts finalised in the first nine months of 2024 means this year is set to be one of the most active for PPP deal-making so far this century.
This month's exclusive 17-page market report highlights how Abu Dhabi is forging an investment policy that aims to capitalise on all future eventualities. The UAE govenment has raised its growth forecasts and is targeting artificial intelligence (AI) opportunities, while the country's banks are reaping the benefits of good fundamentals. Adnoc is on an upstream spending spree and is also developing its downstream portfolio. At the same time, the country's infrastructure sector is on an upward trajectory, water PPP activity is rising, UAE utilities are ramping up capacity procurement, and the construction sector is strengthening through consolidation in the middle of another boom.
Meanwhile, in this month's issue, the team examines how Kais Saied has been appointed for a second term as Tunisia’s president after winning 90.7% of the vote in the country's October election, and assesses the impact that the continuation of the Ukraine war will have on the reopening the oil export pipeline that runs from Iraq to Turkiye.
We also look at the GCC railway projects that are drawing global attention, learn why the transmission and distribution sector is heading for a record year and discover how Libya is preparing for its first licensing round in more than 15 years.
The November issue is also packed with exclusive interviews. Kingdom Holding’s CEO, Talal Ibrahim Almaiman, confirms that Saudi Arabia's ambitious project to build the world’s tallest tower is back on track; Thomas Altmann, Acwa Power’s executive vice-president for innovation and new technology, explains how the Saudi firm is tapping AI to help it win projects; and Tomaz Guadagnin, Engie’s managing director for Flex Gen in Asia, Middle East and Africa, discusses why the French utility developer and investor plans to only bid for projects that align with its strategy and 2045 net-zero target.
We hope our valued subscribers enjoy the November 2024 issue of MEED Business Review.
Must-read sections in the November 2024 issue of MEED Business Review include:
> AGENDA:
> Acquisition with a view to transition
> M&A market boosted by energy deals> CURRENT AFFAIRS:
> Tunisian election reconfirms Kais Saied as president
> Ukraine war to weigh on Iraq-Turkiye oil pipeline talksINDUSTRY REPORT:
GCC project finance
> Region remains global project finance hotspot
> PPP activity eases back but remains strong> JEDDAH TOWER: World’s tallest tower is back on track
> INTERVIEW: Acwa Power taps artificial intelligence
> REGIONAL RAIL: GCC rail projects draw global attention
> INTERVIEW: Engie sticks to a selective projects approach
> POWER: Transmission and distribution sector heads for record year
> LIBYA: Libya mulls offering development blocks in licensing round
> UAE MARKET REPORT:
> COMMENT: UAE economy defends gains
> GOVERNMENT: UAE ups growth forecasts and targets AI opportunities
> BANKING: UAE banks reap the harvest
> UPSTREAM: Adnoc’s upstream goals drive spending spree
> DOWNSTREAM: Adnoc curates vast downstream portfolio
> POWER: UAE utilities ramp up capacity procurement
> WATER: UAE PPP activity rises
> CONSTRUCTION: UAE construction consolidates
> TRANSPORT: UAE infrastructure sector is on an upward trajectory> MEED COMMENTS:
> Hard negotiations ahead for Dubai Metro's Blue Line
> Race to build world’s tallest tower restarts
> World Cup stadiums attract international contractors
> Adnoc crafts burgeoning chemicals portfolio> GULF PROJECTS INDEX: Gulf Projects Index continues tentative climb
> SEPTEMBER 2024 CONTRACTS: Region records 55% increase in value of deals signed
> ECONOMIC DATA: Data drives regional projects
> OPINION: Biden leaves a mixed legacy
> BUSINESS OUTLOOK: Finance, oil and gas, construction, power and water contracts
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Veolia to develop Rabat water desalination plant
31 October 2024
French water, waste and energy services firm Veolia has signed a memorandum of agreement with the Moroccan government to develop a seawater desalination plant in the North African state.
Veolia said in a statement that the water desalination plant, located near Rabat on the Atlantic coast and catering to the Rabat-Sale-Kenitra and Fes Meknes regions, can treat up to 822,000 cubic metres a day (cm/d) of seawater.
The project is one of close to two dozen deals involving French entities that were signed and announced on 28 October during French President Emmanuel Macron's visit to Rabat.
Veolia said the project will supply drinking water to regions "particularly affected by drought".
The project will be structured as a public-private partnership (PPP), with Veolia involved over 35 years in the construction, financing and operation of the plant.
The combined population of the four regions the plant will cater to is roughly 9.3 million.
Veolia said the initiative is part of the Moroccan national energy strategy, launched by King Mohammed VI, which aims to "strengthen water supply security and face the challenges of climate change".
First IWP
Morocco's first independent water project (IWP) in Casablanca is expected to reach financial close before the end of the year.
A developer team led by Spain's Acciona won the contract to develop the Casablanca IWP in November last year.
In addition to Acciona, local firms Afriquia Gaz and Green of Africa comprise the consortium that will develop, invest in, build and operate the project.
The proposed Grand Casablanca seawater reverse osmosis (SWRO) project has a design capacity of 548,000 cm/d.
The build, operate and transfer contract is for 30 years, including a three-year construction period and 27 years of operation and management. According to industry sources, the contract is valued at €800m ($875m). The team submitted a bid of MD4.48 ($cents43.89) a cubic metre ($c/cm) for the contract.
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Saudi Binladin to receive $6bn loan
31 October 2024
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Saudi Arabia’s National Debt Management Centre (NDMC) has announced that it has completed arranging a syndicated loan facility for the Ministry of Finance to support the revival of local contractor Saudi Binladin Group.
In an official statement, NDMC said that the loan facility, amounting to SR23.3bn ($6bn), has been secured with several local and international banks.
The move is in line with the Ministry of Finance’s announcement in July, which outlined its plan to take steps to improve the Saudi Binladin Group’s financial capacity.
According to local media reports, the government initiative includes a series of arrangements to settle the firm’s outstanding amount with banks, provide loans to the firm and potentially increase the government’s stake in the company.
The cash injection into the firm will also enable it to improve its financing for various other projects in the kingdom.
The appointment of Saudi Binladin Group on 2 October to complete the 1,000-metre-plus-tall Jeddah Tower in Saudi Arabia further solidified the case for enhancing the cash-strapped firm’s ability to complete its ongoing projects, including the construction works on two mosques in Mecca and Medina.
“The support is part of the continued government backing provided to the construction and building sector in recent times. This initiative aims to ensure the completion of essential projects and to create attractive investment opportunities within the sector,” the report added.
In 2019, Saudi Arabia formed the Binladin International Holding Group (BIHG). The firm is owned by Istidama, an investment arm of the Saudi Arabian Ministry of Finance. The remaining 63.78% is owned by the Binladin Company for Development & Commercial Investment. Its subsidiaries include Saudi Binladin Group.
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PIF and Google to set up Jeddah AI hub
31 October 2024
Saudi sovereign vehicle, the Public Investment Fund (PIF), and US-based technology firm Google Cloud have announced a strategic partnership to establish a new global artificial intelligence (AI) hub near Dammam in the kingdom's Eastern Province.
The new AI hub could contribute up to $71bn to Saudi Arabia's GDP over the next eight years, generating thousands of skilled jobs, a Saudi Press Agency (SPA) report said citing research conducted by London-based Access Partnership.
The partnership, unveiled at the 8th Edition of the Future Investment Initiative (FII8), envisages Saudi Arabia as "a leading destination for AI innovation, catering to both local and global enterprises and startups".
The AI hub aims to enhance the Saudi workforce by implementing AI programmes for millions of students and professionals, aligning with the national goal of increasing the information and communication technology (ICT) sector by 50%, SPA said.
The collaboration will allow customers access to Google Cloud's advanced technology to "drive growth across various industries and improve the delivery of AI applications".
The partnership is contingent upon obtaining regulatory approvals and will focus on joint research initiatives for Arabic language models and AI applications tailored to the Saudi market.
The endeavor will be supported by Google Cloud's investment in custom silicon, incorporating state-of-the-art tensor processing units (TPUs) and graphics processing units (GPUs), along with the Vertex AI platform, designed for developing generative AI applications.
Yasir Al-Rumayyan, PIF governor, and Ruth Porat, president and chief investment officer of Alphabet and Google, signed the agreement.
MEED understands the partnership will also focus on enhancing Arabic-language capabilities in Google’s generative AI model family, Gemini, by integrating additional Arabic datasets.
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Abu Dhabi bullish on green hydrogen
31 October 2024
Abu Dhabi is looking at three green hydrogen technology tracks as the UAE capital pushes ahead with an ambitious plan to become a global clean hydrogen production hub and capture up to 5% of global demand by 2033.
"The first track is ammonia; the second is liquid hydrogen (LH2); and the third track is liquid hydrogen organic carriers (LHOC)," said Mohammad Abdelqader El-Ramahi, chief green hydrogen officer, at Abu Dhabi Future Energy Company (Masdar).
"We plan to transport our hydrogen products in the shape and form that they are going to be used [by offtakers]," El-Ramahi told MEED during the inauguration of steelmaker Emsteel's pilot green hydrogen project in Abu Dhabi on 28 October.
On behalf of Abu Dhabi Inc., Masdar is mandated to develop green hydrogen projects within the boundaries of the emirate, according to Abu Dhabi's low-carbon hydrogen framework developed by the Energy Department.
It will have a majority share in all green hydrogen projects developed in Abu Dhabi, in addition to developing renewable energy – or green electrons – required to produce roughly 1 million tonnes of green hydrogen within a decade.
The same law, which took effect at the beginning of the year, designates Abu Dhabi National Oil Company (Adnoc) as a co-investor in low-carbon hydrogen generated from fossil fuels with carbon capture, utilisation and storage (CCUS).
Masdar has already signed preliminary agreements with some of the biggest energy firms and offtakers as well as potential investors and developers of projects that will be set up in the so-called hydrogen valleys that are planned in Ruwais and Khalifa Economic Zones Abu Dhabi (Kezad).
Read: Firm to build $272m UAE hydrogen equipment plant
Abu Dhabi envisages different low-carbon hydrogen production technologies to be collocated in these valleys to drive system-wide cost optimisation, including sharing infrastructure and facilities.
"Abu Dhabi and Masdar welcome strategic long-term partnerships and foreign direct investments by major players in the energy transition sectors…that bring the best value to enable the lowest levelised cost of hydrogen," said El-Ramahi.
"We also welcome co-investors and technology providers that can participate in consortiums to ensure reliability, business continuity and the lowest levelised cost of hydrogen or ammonia."
So far the list of Masdar's potential green hydrogen partners includes Ireland-headquartered Linde, France's TotalEnergies, UK's BP, Austria's Verbund, and Japan's Mitsui, Osaka Gas, Mitsubishi Chemical, Inpex and Toyo Gas.
"These projects will be developed via public-private partnerships (PPPs). We encourage these long-term partnerships to promote low-carbon hydrogen in Abu Dhabi on a macroeconomic level, which will also open doors for us to invest internationally because our mandate covers not only Abu Dhabi but globally."
El-Ramahi says Masdar's ambition aims to leverage its existing footprint and legacy in developing renewable energy globally to "explore new frontiers, and there is not a better chance in such exploration than these long-term partnerships based on mutual benefits and reciprocity".
Masdar is understood to have invested over $20bn in roughly 30GW of renewable energy capacity across 40 countries to date and aims to reach a gross capacity of 100GW by 2030.
Nascent sector
El-Ramahi is aware of the challenges plaguing the nascent industry. Few projects have reached financial investment decisions globally and across the Middle East and North Africa region, three to four years since the first megaprojects targeting demand centres in Asia and Europe were announced.
These projects' average gestation period has taken at least four years and the onus will be on Masdar to figure out a way to shorten this.
"We need to be rational from the sector readiness perspective. Readiness to develop such capacities, supply chain, logistics, technology, robustness, business continuity and reliability [takes time]. This sector is very nascent … at the beginning of the launch of this sector a couple of years ago, people rode the wave and overpromised," El-Ramahi noted.
"Now with an understanding of the reality on the ground, many people are pulling away, which sometimes resonates negatively with decision-makers, but green hydrogen is real and low carbon hydrogen is the future."
Despite this, the executive is adamant that green hydrogen is the most important driver and enabler of net-zero and decarbonisation, adding "Very few people know that electricification alone can address no more than 30% of our decarbonisation (needs), even if we install all sorts of renewable sources".
Inevitable future fuel
Describing green hydrogen as the inevitable future fuel, Masdar's strong Abu Dhabi government backing will be key to executing its mandate, notwithstanding potential rivalries with its GCC peers – particularly Oman and Saudi Arabia – and Egypt or Morocco further afield.
"History is made by achievements, not by promises," El-Ramahi said. "We have already overachieved… proving to the world that we can make commercial projects happen on the ground and Abu Dhabi has always been a pioneer and first-mover in the energy sector."
Abu Dhabi intends to replicate its success in the energy sector's previous four waves – oil and gas in the 1960s; liquefied natural gas and anti-flaring in the 1970s; renewable energy in the 2000s; and nuclear energy in the 2020s – in the so-called fifth wave comprising low-carbon hydrogen
"We have made very rational steps in the past, our strategy does not endorse merely pouring money [on projects] or hiding subsidies … we don’t do that."
Build and they will come
Given an extraordinary political will, Masdar and Abu Dhabi look set to develop or acquire what it takes to realise its ambition to become a global green hydrogen hub.
"We are working with the Ministry of Industry and Advanced Technology to attract manufacturing companies and technology providers here in Abu Dhabi. This is in line with the government's decision made over a decade ago to transform into a knowledge-based economy, and we have been developing human capacity and attracting technology providers since then.
"It's not about putting money on the table or under the table in the form of subsidies … we do business realistically, and transparently, and we want to compete against our own achievements on the ground," El-Ramahi concluded.
Related read: Decarbonising steel is hard to resist
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