UK: Funding Ports In The Gulf

Originally published August 2005

The authors are based at Masons Galadari, Dubai

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.

It is only recently however that countries 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 is has generally been felt that regulatory reforms 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 PPP 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.

And the investors are there. There is increased liquidity and growing capital markets activities across the region, bolstered by the growth of long-term Islamic bond financing. Huge oil-driven capital surpluses are being reinvested in the region and there is a growing army of private equity firms wishing to take part in private sector debt and equity offerings. The banking sector has become increasingly stable and this has led to an increase in private investment activity.

Areas of concerns linger of course. Apparent hurdles to greater private investment remain including weak institutional/regulatory frameworks, conflicts among differing government bodies and a need to change attitudes to private/public risk allocation. And the cultural changes that emanate from state privatisation should not be overlooked. Privatisation of state assets, particularly ports, traditionally result in new management practices and efficiencies and a reduction in employees. This area needs to be managed carefully. For the ports sector in particular, transport and logistical costs for exporting commodities from the Middle Eastern region are significant and are perceived to be linked to underlying bottlenecks including an underdeveloped intermodal transport system, inconsistent customs procedures and the increased costs of compliance with the ISPS Code. Further, transhipment hubs have been squeezed of late by regional competition. Bigger container carriers mean that transhipment hubs may need to relocate to ports on a more direct route with the least diversions between the Far East and Europe. Cargo transit through the Gulf adds time and higher insurance rates and new regional mega ports such as Salalah are strategically located and may offer cheaper viable alternatives. Further shipping patterns to the Indian Subcontinent are being affected by India's port development, and this may have a knock-on effect to the fundamentals of Middle East container traffic.

However in general the outlook for the port sector in the Gulf looks promising and with reforms to support private capital inflows into the sector, there will be reason to feel confident about the future. Regional terminal operators like DPI Terminals (DPI) have sought to export home-grown success at ports Rashid and Jebel Ali through a raft of acquisitions and long-term concessions in and around the Middle East and further afield. DPI which is already involved in free zone operations and/or port management in Djibouti, Jeddah and Fujairah has recently been appointed as preferred bidder for the 30-year concession to manage and develop terminal operations at Aden with a proposal for US$370m worth of investment in new equipment, infrastructure and management systems in a bid to increase capacity to 3.5m TEUs. Developments in Iraq also need to be monitored. The Iraqi Ports Authority's development plans include 60 new berths at the ports of Umm Qasr, Al Zubair, Abu Fulus and Maqal, to be developed over the next five to 10 years at a cost of around US$1 billion, although the source of funding remains unclear. And other Gulf states such as Kuwait and Oman have significant new port and associated investment planned at Bubayan and Al Duqm. Whatever the lingering concerns may be, the future for port development in the Gulf looks positive.