Abu Dhabi, UAEWednesday 17 October 2018

GCC likely to buck trend of foreign investment

Oil is not the only reason for Gulf countries to look forward to more foreign direct investment.
The need for large energy construction projects in GCC countries have made them attractive to foreign investment.
The need for large energy construction projects in GCC countries have made them attractive to foreign investment.

The World Investment Report 2008 of the UN Conference on Trade and Development, which was published last Wednesday and presented by the Gulf Research Center for this region, carries important implications for GCC countries. Worldwide foreign direct investment (FDI) inflows rose 30 per cent last year to reach US$1.83 trillion (Dh6.73tn) and surpassed the last record year of 2000 by more than $400 billion, with developed countries in Europe, North America and Japan dominating inflows with 68 per cent and outflows with 85 per cent. The ongoing international financial crisis is likely to lead to a 10 per cent decline in international FDI this year, but the GCC countries have good chances to buck this trend, as the need for large energy and construction projects as well as favourable reforms in their legal frameworks have made them more attractive FDI destinations. FDI inflows to Qatar alone rose seven-fold in 2007 from the previous year. On the other hand, the role of transnational corporations in financing infrastructure projects was highlighted in the report as a major challenge, which may force GCC countries, with their multibillion-dollar projects, to make delicate policy choices. Last year in the West Asian region Saudi Arabia, the UAE and Turkey attracted more than four fifths of total FDI, which rose by 12 per cent to $71bn. That puts the region only slightly behind China, which attracted $83.5bn, and ahead of Africa, which attracted $53bn. Buttressed by high oil revenues, FDI outflows from West Asia have risen for four years in a row, to $44bn, and here the dominance of GCC countries is even more pronounced as they account for 94 per cent of all West Asian outward FDI. As in Africa and Latin America, energy- and commodities-related investments were responsible for most inward FDI in the GCC countries, while their outward FDI concentrated on telecommunications and financial services, such as the acquisition of mobile licences in sub-Saharan Africa by the UAE-based Etisalat and Kuwait-based Zain. The increase in intra-regional FDI and cross-border mergers and acquisitions, therefore, hints at a growing economic integration of GCC countries and a willingness to take risks. A considerable part of intra-regional FDI was directed towards projects that establish new industries and services in countries from scratch. Infrastructure development in the GCC countries has not kept pace with rapid economic and population growth in many cases. Whether it is electricity blackouts in Kuwait because of a lack of peak load capacity, water shortages in Jeddah because of losses in the pipeline system and insufficient desalination plants, or lorries queuing in front of Dubai's overloaded sewage plant, the GCC countries are in dire need of expanding and modernising their infrastructures. Transnational corporations could help with additional capital injections and transfer of expertise. Some caveats are called for, though: according to the WIR, four fifths of infrastructure FDI in developing countries was concentrated in telecommunications and electricity generation, while transportation and water and sewage treatment attracted 17 per cent and four per cent, respectively. Transnational corporations have been particularly reluctant to invest in the least-developed countries; only five per cent of their infrastructure FDI in developing countries from 1996 to 2006 was directed towards such countries. They also avoided infrastructure provision to poorer segments of society, unless they were offered subsidies or other guarantees of cost recovery. While the GCC governments need to reform their heavily subsidised water and energy prices and switch to a system of direct aid for needy segments of the population, they also must be aware that "build-own-operate" and service contractor schemes can come with considerable price and quality risks, and retention of some sort of control in the provision of basic services is indispensable to guarantee social equitability. Infrastructure investments by transnational corporations can, therefore, complement domestic and public investment, and public-private partnerships can offer solutions - as the experience of the Saudi Ports Authority has shown - but they need to be carefully negotiated, regulated and monitored. To fulfil this task, large-scale capacity building on the level of provincial and municipal governments would be needed - as it is often on the sub-national level that infrastructure projects are implemented. In terms of inward FDI, the GCC countries have the opportunity to attract high inflows not only because of their importance in oil and gas production, but also by improving the regulatory framework for such investments. Their outward FDI has grown significantly during the oil boom and is likely to stay high as long as oil prices do not crash. It could be even larger. Anecdotal evidence suggests that outward FDI of GCC family enterprises often escapes statistical observation, and the predominance of privately held family enterprises hinders the possibility of acquiring additional equity and launching more significant international acquisitions. By giving themselves more corporatised structures in the future and going public, that limitation could be overcome. In such a scenario, the region's sovereign wealth funds might be tempted to invest more of their capital in private domestic companies that aim to expand internationally, as their investments in international capital markets have lost significantly in the recent past. Although sovereign wealth funds in the Gulf and Asia hold only 0.2 per cent of their investments in the form of FDI, such investments by the funds have risen sharply in the past three years - 75 per cent of them in developed countries. The UN Conference on Trade and Development and other international agencies hope that might change, and that sovereign wealth funds will invest more in African and Latin American least-developed countries in the future. Dr Eckart Woertz is the economics programme manager at Gulf Research Center, Dubai