Gulf firms anticipate growth in private project finance as low oil prices squeeze budgets

PwC surveyed more than 130 project owners and developers across the region, from a range of sectors including urban development, social infrastructure, energy, 'mega events' and transportation. It found that 65% of survey respondents expected to spend less on capital projects and infrastructure this year, and that the slowdown was likely to continue for at least another 12 months.

However, around 90% of survey respondents expected interest in private sector finance to grow or be of "critical" importance over the next year, while 58% of respondents expected to see collaboration between the private sector and government on public private partnerships (PPPs) over the next 12 months. Dubai passed a new law to encourage greater use of the PPP model where "economically, technologically and socially feasible" late last year.

"The capital projects and infrastructure sector finds itself bearing the full impact of 'lower for longer' oil prices, and we think this will continue for another 12 months," said Chris Scudamore, a capital projects expert at PwC. "This is a significant contrast from our last survey - two years ago the industry grappled with capacity constraints driven by high volumes of spending and projects, now, it's the opposite."

"After the frantic pace of spending in the past few years, a slowdown in activity will give organisations the opportunity to prioritise projects and address internal issues. But, given the increase in cancellations and delays, we also believe it creates an environment where we will see disagreements and disputes continue to rise," he said.

The survey found that 62% of respondents had been involved in a dispute recently or expected to be involved in one in the next 12 months, driven by payment delays and project cancellations as a result of shrinking budgets. Three quarters of respondents had already been impacted by funding constraints, while more than 60% expected spending to fall still further in the coming year.

PwC found that, despite the spending cuts, few projects been cancelled outright. This suggested that "governments have so far been reluctant to abandon some of their infrastructure ambitions and are instead focusing on getting better value for money and more efficient spending". 'Mega' projects, including Dubai Expo 2020 and the 2022 World Cup in Qatar had also been relatively unaffected by the downturn, given the nature of these commitments, PwC said.

"Where there is change there are also opportunities," PwC said in its report.

"Mega events must continue, economic diversification away from oil and gas by investing in infrastructure must continue, improving the lives of citizens by investing in social infrastructure must continue. If all these projects must continue, then new methods of financing and delivery will be required," it said in its report.

Survey respondents suggested that the anticipated growth of PPP models of funding would benefit projects in the region: 44% said that use of the model increased the likelihood of a project being delivered on budget; while 38% said that it increased the likelihood of a project being delivered on time. However, PwC warned that the weakening fiscal positions of Middle Eastern governments could discourage private investment in the region.

In its annual survey of the Gulf Cooperation Council (GCC) construction market, published at the end of 2015, Pinsent Masons, the law firm behind Out-Law.com, found a surprising lack of interest in PPP. Among survey respondents, 67% of the industry said that it was not currently involved in, or expected to become involved in, PPP projects in 2015, the firm said at the time.

"This was a surprise, on account of the fiscal challenges facing many countries in the region," Dubai-based infrastructure expert Sachin Kerur of Pinsent Masons said at the time.

"These arrangements could offer a favourable solution for numerous major infrastructure and construction developments, and there have been legislative changes made to make them more accessible and attractive. It may well be that the private sector still believes more reform is needed before PPPs become mainstream," he said at the time.