Anyone who has passed through the Gulf of late will not have failed to notice the massive pace of development taking place in the region. Infrastructure projects, commercial schemes and retail developments vie for the headlines as projects become larger in scale. In the infrastructure sector in particular, the unprecedented levels of economic activity in the Middle East coupled with an increasing and youthful population, give rise to the need for additional capacity and modernisation of the region’s roads, rail systems, airports and ports. The opportunities for private sector involvement and public private partnerships, which bring the prospect of efficient infrastructure development, are starting to gather pace.
Before the 1980s, port development was mainly financed by governments. Since then, there has been a global trend towards the involvement of the private sector in port development and a move away from the traditional service port model where a port authority combines regulatory and commercial services to a more mixed public-private orientation. The obvious attractions include the delivery of public sector infrastructure more quickly and efficiently, a reduced demand on public sector budgets, access to private sector financing, the use of private sector skills and an optimum risk transfer to the private sector. Port development programmes based on a public private partnership range from schemes for the part privatisation or full privatisation of individual ports (which, in political and social terms, may be unacceptable to many governments), to concession arrangements, management contracts or variants of any of these.
Private sector involvement
It is only recently, however, that countr ies in the Middle East have opened their port infrastructure to private sector involvement. Other than the pockets of multi-lateral and private funding in relation to captive ports, the source of involvement in these oil-rich nations has traditionally been direct government investment in port infrastructure. Now, in spite of a windfall from oil price hikes, there is a pressure on regional governments to make better use of such revenues. In general, governments in the region are recognising that many of their state-owned entities must be modernised in order to compete internationally. In addition, the population of the region is growing rapidly and this will inevitably burden the social welfare and education programmes. Governments realise that by attracting private capital to the development of physical infrastructure, they can be freed to concentrate resources on social demands, such as health and schooling.
As far as the port sector is concerned, there has been a steady globalisation of terminal operations, dominated by major terminal operators and shipping lines, which have invested in and gained control of a large number of terminals around the world. To beat the competition, global carriers have tried to create integrated transport chains in order to control all stages of the transport chain by securing long-term contracts for dedicated terminals. Therefore, major ports need to modernise and expand, and this costs money. Other drivers for private money in the region’s port development include an explosion in East-West trade, high demand for oil-based export products, healthy regional transhipment trade, strong regional growth prospects and avid investor interest in Middle Eastern free zones. Smaller ports in the Gulf region such as Khor Fakkan, Fujairah and Sharjah also require significant investment in order to improve efficiency and profitability because international shipping lines have seen margins slashed as competition has increased and are therefore looking for cheaper port facilities, which the smaller ports do not always provide.
As the benefit of private sector participation in the provision of infrastructure in the Gulf gains more credibility, governments are becoming aware of the need to underpin such private investment, through the development of a clear framework of laws in respect of property ownership, tax and corporate entities. There is a growing realisation of the need for transparency, unhindered capital movements and a statutory and regulatory basis for any public partnership programme. To date, it has generally been felt that regulatory refor ms in the major infrastructure sectors of the Gulf has been rather slow.
That being said, there is now a growing reform programme in the Gulf that is addressing those investor concerns that have stalled investment in other parts of the world. Deregulation and regulatory reforms, particularly in the water and power sectors, have been significant and will need to be followed by the port and transport sectors in general. In the UAE, for example, Abu Dhabi has established a regulatory and licensing framework to support a Public-Private Partnership programme, and certain agencies are committed to standardised contracts, transparent bidding processes and the benchmarking and market testing of operational services. Dubai’s financial reforms and market liberalisation is well-understood and the enactment of liberal trade business and labour legislation provide investors with the confidence they need to commit large amounts of funds to the region. Jordan has established the Jordan Privatisation Company to facilitate the execution of the country’s ambitious privatisation programme, and Bahrain has started to implement national plans, sector laws and regulators, all aimed at attracting private capital to the procurement of capital assets.
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