AsianInvestor Qatar report: Infrastructure

AsianInvestor Qatar report, July 2013

Qatar is in the midst of a period of infrastructure development on a scale and timetable rarely seen elsewhere. Perhaps only Dubai and Shenzhen have ever sought to build so much so quickly, but with the twin drivers of a swiftly increasing population and the 2022 FIFA World Cup, Qatar has little choice.

“An estimated US$140 billion is expected to be committed to infrastructure over the next five years,” says Shashank Srivastava, head of the Qatar Financial Centre. “Adding in the investment necessary to host the 2022 FIFA World Cup, project spending over the next decade may exceed US$200 billion.” That matches independent estimates: MEED, a Middle East research group, said earlier this year that US$220 billion of construction projects were either planned or underway, and expected the award of infrastructure projects worth more than £16 billion (US$24 million) in Qatar this year. MEED reported in February that the top 20 megaprojects in Qatar had a combined value of $193.4 billion with $22.7 billion worth of work already awarded (and therefore that 87% of that project spend was still to be awarded).

Part of this, as discussed in a separate article, is about the World Cup; the tournament will require 12 stadia, 90,000 hotel rooms and the infrastructure to support 400,000 fans. But that’s not the whole picture. “Preparing for the World Cup is a small part of this infrastructure development,” says Sandeep Nanda, Doha-based investment advisor to the Qatar Investment Fund, a London-listed fund which invests in Qatari equities. “Building stadiums is one thing, but it’s the build-out to the city to be able to support the population base which has completely changed things in terms of tracking where Qatar’s going to be. It needs to have a developed infrastructure that can support a population of, say, three million people. It’s about that much more than about stadiums for 2022.”

Nevertheless, the World Cup does set a clear deadline for the development of other infrastructure, and is one of the reasons for its remarkable pace. Whereas in other circumstances a new train line or road could be allowed to drift by a year or two, that’s not an option when the whole world will be watching.

To illustrate what’s happening in non-World Cup infrastructure development, it’s worth looking at two specific projects: the $45 billion Lusail development, and the $35 billion Qatar Integrated Rail Project.

Lusail is nothing less than an entire new city, being developed by Qatari Diar Real Estate Investment Company, a subsidiary of the Qatar Investment Authority. Its CEO, Eng. Essa Mohammed Ali Kaldari, has called it “one of the world’s most visionary single developments” that “represents nothing less than the hopes and aspirations of the people of Qatar”, and there is no doubting its scale: 38 square kilometres, including four exclusive islands and 19 multi-purpose districts, accommodating 200,000 residents and 170,000 employees, as well as visitors in 22 hotels.

As for the railway project, that involves creating a full national rail infrastructure at once where none at all existed before, and will include passenger and freight railways linking Ras Laffan in the north with Mesaieed in the south via Doha; a high speed airport link, including a link to Bahrain across a causeway; a four-line metro network in Doha; and a light rail network in Lusail. According to Qatar Rail it will be operational by 2019 and the complete system will be in place by 2026. Development is already underway; as recently as June 6, Qatar Rail announced the awarding of four design and build contracts for the Doha Metro Project for QR 30 billion. One of them involves a 13km twin bored tunnel and seven underground stations.

Those are just the two biggest examples: others include local roads and drainage schemes, the Barzan Gas Development, highways in Doha, Lusail and Dukhan, the New Doha Port, the Ras Laffan Complex and olefins project, a transmission project, Doha Festival city, the Inner Doha Resewerage system, Education City and many others besides.

As infrastructure development has grown, it has come to represent an important part of the economy. According to the Economic Statistics and National Accounts Department of the Qatar Statistics Authority in Doha, by 2011 infrastructure sectors contributed 26.9% of the total Qatar economy. “The key driver of the inclusive growth of the State of Qatar is its rapid infrastructure development,” said Sheikh Hamad Bin Jabor bin Jassim Al Thani, President of the Qatar Statistics Authority, in a statement in 2012. “It is a critical enabler for economic growth and contributes significantly to human development, and the attainment of the Millennium Development Goals.”

Several things drive infrastructure development in Qatar. The most obvious in necessity: no country can grow as fast as Qatar has without a pressing need for new infrastructure development. One sees it when driving around Qatar, firstly in the scale of cranes and construction apparatus all around, and secondly in the sheer number of ring roads around Doha to drive on. One used to get around on the A, B and C ring roads, and later D and E; F is now under constructions and there are plans for G. The Pearl development brings with it enormous needs for infrastructure, and the existing two-lane highway is now being expanded quite dramatically to eight.

The second is the sheer wealth of the state. As discussed elsewhere, it has the highest GDP growth rate – recent and forecast – in the Gulf, which in itself is one of the world’s fastest-growing regions, and the world’s highest per capita GDP according to the IMF. Natural gas reserves give it a continuing well of guaranteed income for many years ahead, sufficient to fund much of the infrastructure development Qatar needs.

The third is that, even if funding is required, Qatari banks are liquid and well-capitalised. Qatar’s banks accounted for 43.3% of all profits posted by the Qatar stock market’s constituents in 2012. Qatar is overbanked – 18 banks for a country with a population of less than two million – and infrastructure development may provide an outlet for capacity.

One can begin to see the region’s banks taking part in infrastructure development in Qatar: Al Khalij Commercial Bank extended QR1.66 billion of contract financing facilities to a joint venture between Midmac Contracting and Yuksel Insaat for a Lusail project in May, for example. This is a relatively small amount, and also a relatively small part of the project – the construction of a 5.2 km section of highway and an interchange supporting the broader Lukoil project – but represents the ways bank finance is involving itself with private sector development.

This is also how fund managers, and ordinary investors, can find ways to play the infrastructure theme. “I’m not a private equity investor, but all the companies in the local markets do get impacted one way or another,” says Nanda at QIF. “If you’re a bank you are impacted; if you’re an insurer, you insure the development from the first day once it’s built; if you are a real estate company you get involved with the on-the-ground development. You can access the infrastructure development story through companies listed on the stock exchange.”

Infrastructure also fits in with Qatar’s ambitions as a knowledge economy. The Institute for Infrastructure Studies was launched in Doha in May with considerable UK backing; its co-founders are Ian Kennedy and Anthony Holmes, both directors of the infrastructure project delivery firm British Consulting. The Institute itself is global rather than local in its scope, but the decision to locate a global infrastructure think tank in Doha is significant in itself.

Kennedy tells Asian Investor the decision to set up in Qatar came about as British Consulting worked on a contract on the new airport. “It became obvious to us that the infrastructure development getting done in the Middle East is very significant – $1.3 trillion in the next five or six years – and that within that, Qatar is very much a shining light,” he says. “Positioning the think tank, we wanted it to be in an area of significant infrastructure development.”

In the Gulf generally, there is always the danger of creating overcapacity. The Institute for Infrastructure Studies, for example, this year put out a report on Gulf airports, noting that four existing and planned major airports in the region – Abu Dhabi, Dubai International, Al Maktoum and New Doha International – between them had a planned capacity of 340 million passengers by 2020. The institute forecasts that transfer passenger traffic by then will actually only be 126.21 million passengers per year. “If the capacity scheduled to be constructed in these airports is completed, then current traffic projections suggest that by 2020 capacity will exceed demand significantly,” the report says, although the problem appears likely to be most acute in Dubai.

Nevertheless, the opening of the new Doha Airport, now called Hamad International Airport, due later this year, will be a landmark for Qatar. Originally due to open on April 1 but now more likely to open later in the year, the airport project has been costed at $15.5 billion and has not been without controversy, with Qatar Airways alternately blaming Bechtel and German-Emirati joint venture contractor Lindner Depa Interiors for delays, and LDI claiming it was denied full access to the project site for several months. But it will be a world-class facility when open, with a related benefit to airport operator Qatar Airways in its efforts to become a world-leading airline with a brand matching Emirates.

Beyond the airport, engineering consultants have done well but construction companies and contracting businesses and other suppliers have, to date, been somewhat disappointed with progress, though they are generally too smart to say so publicly; there is a degree of hope that 2013 will be the year during which that moves forward, and the June 6 announcement on metro contracts supports that view.

“Over the last year there were a lot of projects which were announced but not awarded,” says Nanda. “The planning council were willing to delay a lot of things in order to ensure they get it absolutely right. But in the last three months a significant number of projects that were on standby have been awarded, and agreements signed.” Looking out of his window at Qatar Insurance Company, he can see he empty plot of land that has been encircled for one of the first new stations to be built. “A lot of projects which were in the pipeline have been awarded and have already got bulldozers on the ground.”

Will we ever see public-private partnerships take off? Surely they’re unnecessary in a country with so much wealth. “There are two elements to this,” says Kennedy. “Qatar is in a unique position in that it has a ridiculous amount of money because of the sheer resources it has got. So from that perspective it would be more cost-effective for Qatar to fund its own infrastructure, because it has the money, rather than going to the capital markets and borrowing, which would attract a rate of interest. It could also invest in PPP structures, but that involves asking private sector companies to raise debt on your behalf, and as they have a poorer credit rating, you pay more for the money.” So, looked at from a cost perspective, PPPs make no sense.

But that’s not seeing the whole picture. “Qatar is of the view that it wants to position itself as a centre of infrastructure funding. It is quite keen to develop PPP structures as a financial centre, and so in the next couple of years you will see some projects done as PPPs.” As with so many things in Qatar, its not just about the money, but a vision of what the country wants to be.