Partnership building: Moves to attract the global private sector

Although there is still another decade before the World Cup kicks off in Doha in 2022, the country is rapidly implementing a massive investment programme that seeks to transform Qatar into a global centre for sports and business. While the bulk of these construction projects will be financed with public resources, Qatar’s approach looks to leverage the active participation of private multinational companies. This is in line with explicit goals of the National Development Strategy 2011-16 to diversify economic growth away from public investment and facilitate knowledge exchange from experienced global players to build local capacity. The World Cup, in particular, has opened up a wealth of opportunities for international partnerships. Major international players will most likely win the big stadium and infrastructure projects, but local contractors also stand to benefit substantially from smaller projects and ancillary services. In mid-January 2012 Atkins, a UK-based engineering and design consultant, was awarded a three-year contract worth over $107m by the Qatar Ministry of Municipality and Urban Planning, to support the delivery of its transportation and infrastructure programmes, including planned road, rail and metro developments associated with the World Cup.

BUILDING LINKAGES: Under the Transport Master Plan for Qatar programme, the country is on course to see the implementation of the first Qatari rail network, as a private-public partnership (PPP) between German railway company Deutsche Bahn, along with its subsidiary, DB International, and the Qatar Railways Development Company, now gathers momentum. The New Doha International Airport, currently under construction, was awarded to US engineering company Bechtel, which is providing engineering, project management and construction management services. The airport project, which will cost around $14.5bn, is set to be completed in 2012 and open in 2013, reaching full operational capacity by 2015. However, the booming construction sector in Qatar is driving up the competition for tenders and reducing margins across the board, particularly as projects in other parts of the region dry up and regional and global economic and political turmoil drives investors away from other countries. Fitch Ratings, the international credit ratings agency, forecasts that: “Contractors in the Middle East will see increasingly tight profit margins in 2012 as competition for deals heats up amid a slowdown in construction in some markets. … With the recently increasing competition, contractors have started to go for lower margins.” A recovery in Abu Dhabi and Dubai will help reduce this pressure, but the sheer volume of projects emerging from the GCC region is likely to continue driving down investor margins.

FACILITATING PARTNERSHIPS: Local players have also voiced some concern about increasing global competition and many are calling for laws to require international companies to source 30% of construction material locally, according to the Qatari Businessmen Association. The argument for these laws suggests that encouraging greater local participation in the construction sector will help enable Qatari companies to compete directly with international firms in the future. Furthermore, local companies are compelled to reinvest within the country whereas foreign companies can repatriate any revenues.

Current regulations already encourage joint ventures between foreign and local companies. Construction companies in the country are generally registered under the Commercial Companies Law, which requires foreign investors to partner with local companies and to be a minority holder in any joint venture. There are, however, a few exceptions to this rule. Furthermore, the Ministry of Business and Trade can also grant exceptions under specific circumstances.

EFFICIENCY GAINS: Many major construction projects are being structured as PPPs. While the country has no scarcity of investment capital, this approach could help ease the burden on the state and drive efficiency gains in project implementation. A recent report on PPPs in Qatar by Markab Advisory estimated that these gains could translate to a staggering $30bn, or 25% of national GDP, in economic benefits.

EARLY ADOPTER: Qatar was an early adopter of the PPP model in the power sector and could use lessons from that process to inform broader engagement with private enterprise. The GCC region more broadly does not have much experience with PPPs outside the power sector, but Qatar’s accelerated investment plan offers a unique opportunity to develop this expertise. According to the Markab report, other benefits of a broader PPP engagement could include: greater transparency and accountability in project implementation; the opportunity to develop a home-grown PPP programme; the potential to serve as a regional centre for infrastructure finance; and, most importantly within the context of the World Cup, the ability to accelerate the pace of infrastructure development in the country.

Applying the PPP model to building stadiums for the World Cup may also have the added benefit of transferring risks of generating revenue from stadiums after the event to the private sector. Sharing this risk would protect the state and also help ensure investments are productive and sustainable. Furthermore, private investors are more likely to focus on the functionality of the stadiums and avoid wasteful investments.

The Ministry of Business and Trade has already set up a PPP directorate to guide this process. The Qatar Financial Centre Authority would also likely play an important role in developing the PPP model in Qatar by enabling a solid regulatory environment that caters to global companies and financing institutions.

PPP CHALLENGES: Despite the multitude of benefits, partnering with the global private sector does not come without risks. Qatar is not immune to global financial pressures and international banks are still highly risk-averse given the recent financial crisis. Furthermore, partnering with local companies presents multinationals with a number of challenges, including ensuring a supply of manual and skilled labour to support the construction activity. However, Qatar has shown it can effectively manage large-scale projects that include private participation and has proven to be a steady partner to the global private sector.

GDP growth in Qatar is likely to slow this year to an estimated 5.1%, with the risk of lower oil and gas prices due to falling global demand. This should allow the country to press ahead with its modernisation and diversification strategy under the Qatar National Vision 2030. The World Cup has enabled the government to accelerate the development of major transport and other infrastructure projects that will improve the investment climate and help spur economic activity.

By focussing on the future Qatar is ensuring steady growth. This is particularly important as new investments in the oil and gas sector plateau over the coming years. The World Cup serves as an important focal point that pulls together this strategy and provides a deadline for the construction of transport and other infrastructure. Encouraging the participation of multinational companies will help to share risks and costs, and bring in international expertise to projects on the ground.