Infrastructure projects face funding challenges

Updated 18 December 2012

Infrastructure projects face funding challenges

A few years ago, the Kingdom moved toward the privatization of several state-owned companies and offered (listed) them in the financial markets. But it took a strategic turn in the process of privatization, toward outsourcing the implementation of massive infrastructure projects to the private sector, as well as their operating and maintaining on the long run. Most ministries and government bodies, no matter what their approaches and efforts were, sought to offer infrastructure projects to the private sector.
Despite the huge momentum that accompanied the state’s initiatives in privatization, in particular, Private Public Partnership (PPP), and the success stories of some of them like Integrated Independent Water and Power Projects (IWPP)), the future of co-financing in the Kingdom is still vague and hung in the balance because of so many challenges.
Structural financial issues in privatization have been identified as one of the reasons for shelving the work in a pivotal project for Saudi economy — landbridge rail project. The $ 6 billion plan was suggested seven years ago. The project, if implemented, would have been an excellent landmark to project the Kingdom’s economic progress on global stage.
It was expected that the project will generate a network of investments, with high economic and financial returns, and subsequent numerous job opportunities and sideline projects that require various high professional and technological skills. There are several other projects in the context of co-financing that had been canceled, or postponed.
It is no wonder that the private sector, locally and internationally, strongly criticized this in view of the large losses, not only in the wasted time, and financial resources of partnerships and the private sector, but also in the cost of the lost alternative opportunities of these huge resources.
Like the proverbial “Once bitten, twice shy,” the cancelation, or stumbling of these projects gave a bad sign for investors. They have refrained from competing for these projects which may never be implemented for fear of losses.
No doubt that the financial crisis, and the political events in neighboring Arab countries had negatively affected the inflow of foreign capital to co-financing these projects, and dismissed reconsidering several deals in this regard, albeit that should not have been the case. The reason is that the plentiful opportunities available in infrastructure projects and the expected huge returns are very attractive once the right legislation and economic frame has been drawn. But the political will at the executive governmental level is absent, with the flowing of massive oil returns, which resulted in a weak desire to make strong efforts for integration — not to mention cooperation — with the private sector.
Co-financing infrastructure projects are effective, and successful if the government was committed to partnerships with the private sector in constructing, operating, and maintaining infrastructure projects in one united partnership that amounts to 50 percent with the governmental party that draws the economic policies, and its independent management until overcoming all bureaucratic obstacles.
The unit of co-financing is charged with the task of developing a legally unified and structural policy for all ministries. After that, detailed specifications would be drawn according to each project, with the supervising ministry, the nature of the project and its term.
The greatest challenge facing the Kingdom and rest of the Gulf states is their inability to redraft and implement the global co-financing models to their needs. Many countries have succeeded in this regard, such as Canada, Australia and Malaysia, which did not only take into account the government’s requirements, but also paid attention to the social, political and demographic requirements, as well as their long-term economic growth strategy.
In spite of the considerable efforts in extending tenders for various infrastructure projects, they are sporadic efforts and mere individual interpretations, which are not contained under one unified umbrella, ensuring their approaches and integrity toward serving the long-term growth strategy of the Kingdom.
The failure in forming a co-financing unit for PPP under the umbrella of financial authorities in the Kingdom has had a negative impact on the economic growth.
Some would say that the Saudi economy expanded by 5 percent in the past year.
However, according to the statistics of the Saudi Arabian Monetary Agency (SAMA), this growth was supposed to be much higher. The statistics have indicated that the rate of the absorption capacity of the Saudi economy has dropped sharply, and increased in recent years due to the distressed privatization projects and the failure of economic policies in turning those projects into income-generating ones, instead of exhausting its budget. Therefore income multiplier has decreased from 3.4 to 0.9 during the last 10 years, showing a massive burning of money with no return on the local income.
The proof for that is that the Kingdom’s GDP still constitutes more than 80 percent, despite all the privatization of sectors and new projects. It either stumbled or didn’t generate the returns expected, because government institutions have done their part of the job. Thus, they became exhausting projects, not investment ones.
Therefore, it is not an option anymore if the Saudi economy is to succeed effectively in large-scale privatization, in particular, in infrastructure projects such as water, power, renewable energy and other industrial projects. It became a necessity demanding all our efforts to develop the optimal approach, and implement it in an attractive way that brings investments, creates jobs and addresses all economic issues.
— Nahed Taher is the founder and CEO of Gulf One Investment Bank.

Iran sanctions shadow falls on smaller German banks

Updated 27 May 2018

Iran sanctions shadow falls on smaller German banks

  • Some German companies plan to press on with Iran dealings
  • German exports to Iran rose 15.5 percent last year

Germany’s biggest lenders have shied away from business with Iran after past penalties for breaching US sanctions, but smaller banks have leapt on opportunities afforded by the nuclear deal rejected by Donald Trump.

There are just months to go until a November deadline issued by Washington after the US president abandoned a hard-fought agreement that loosened business restrictions on the Islamic Republic in exchange for Tehran giving up its pursuit of nuclear weapons.

But some firms plan to press on in their dealings with Iran despite the looming threat of penalties.

“We will continue to serve our clients,” for now, said Patrizia Melfi, a director at the “international competence center” (KCI) founded by six cooperative savings banks in the small town of Tuttlingen in southwest Germany.

The center, which supports companies operating in sensitive markets like Iran or Sudan, has seen demand “rising sharply in the last few years, from firms listed on the Dax (Germany’s index of blue-chip firms), from all over Germany and from Switzerland,” she added.

German exports to Iran have grown since the nuclear deal was signed in 2015, adding 15.5 percent last year to reach almost €2.6 billion ($3.0 billion) after 22-percent growth in 2016.

Such figures remain vanishingly small compared with Germany’s €111.5 billion in exports to the US — its top customer.

Nevertheless, the KCI will “wait and see what the sanctions look like” before turning away from Iran, Melfi said.

Already, firms dealing with Tehran must take great care not to fall foul of US restrictions.

Transactions are carried out in euros, and the KCI does not deal with businesses that have American citizens or green card resident holders on their boards.

What’s more, products sold to Iran cannot contain more than 10 percent of parts manufactured in the US.

One of the most important inputs for the business is “courage among our managers” given the high risks involved, Melfi said.

Germany’s two biggest banks, Deutsche Bank and Commerzbank, avoid Iran completely after being slapped with harsh fines in 2015 over their dealings there, with Deutsche alone paying $258 million in penalties.

DZ Bank, which operates as a central bank for more than 1,000 local co-op lenders, is withdrawing completely from payment services there, a spokesman told AFP.
That left KCI to seek out the German branch of Iranian state-owned bank Melli in Hamburg.

Even that linkage could break if Iran’s biggest business bank appears on a US list of barred businesses as it has before.

Meanwhile, among Germany’s roughly 390 Sparkasse savings banks, business with the regime is mostly limited to producing documents linked to export contracts.
“We will be looking even more closely at those” in the future, a person familiar with the trade told AFP.

Elsewhere in the German economy, the European-Iranian Trade Bank (EIH) founded in 1971 is another conduit to Tehran.

Also based in Hamburg, it for now remains “fully available to you with our products and services,” the bank assures clients on its website, although “business policy decisions by European banks may result in short term or medium term restrictions on payments.”

Neither does the Bundesbank (German central bank) believe that much has so far changed for business with Iran.

“Only the European Union’s sanctions regime will be decisive,” if and when it is changed, the institution told AFP.

Any payment involving an Iranian party would have to be approved by the Bundesbank if things return to their pre-January 2016 state.

German banking lobby group Kreditwirtschaft has called on Berlin and other EU nations to clarify their stance — and to make sure banks and their clients are “effectively protected against possible American sanctions.”

KCI’s Melfi said time is running out for EU governments to act.

“Many firms just want to stop anything with Iran, since they can’t calculate the risk of staying,” she noted.

On Friday for the first time since the Iran nuclear deal came into force in 2015, China, Russia, France, Britain and Germany gathered in Vienna — at Iran’s request — without the US, to discuss how to save the agreement.