Construction work on the BD43 million ($114 million) Isa Town flyover and interchange, one of Bahrain's busiest roads, has been halted because the project's contractors have allegedly not been paid.
South Korea's construction giant Sungwon Corporation claims it has been unable to pay over 500 workers involved in the building work for the last three months.
The company claims that the Works Ministry has yet to pay BD2 million, which it says is delaying the progress of work scheduled to end in July next year.
Why are funds not available for infrastructure projects like this?
One reason is that the number of infrastructure projects in the GCC countries has increased at unprecedented rates. From 2002 to 2008, GCC governments awarded approximately $720 billion worth of projects.
Yet spending has not always kept pace with economic and population growth: Kuwait still lacks capacity for peak load electricity production, Saudi Arabia and other GCC countries face water shortages, the UAE is experiencing overloaded sewage plants and congested highways and Bahrain is looking into options to import electricity from neighbouring countries by drawing on a regional power grid.
"GCC countries have not been spared from the global financial crisis and economic recession, with sharply reduced oil prices, decreased liquidity, and falling share prices on regional stock markets, which have impacted infrastructure developments in two ways," says Walid Fayad, a principal at Booz & Company.
The global economic downturn and sharp decline in oil prices are significant challenges for GCC governments working to build the infrastructure required to support future economic growth and social development.
Lower oil prices threaten the fiscal health of GCC governments, potentially impairing their ability to spend on infrastructure; and the tight credit markets and disruptions in the loan syndication market limit the availability of long-term financing for it.
Given the GCC's rapid growth, countries need to prioritise investment in their infrastructure.
Governments, banks, and other stakeholders must collaborate to prioritise sector investment and provide or attract financing to enable infrastructure development to continue, says a report by Booz & Company.
Governments should prioritise projects that focus on long-term strategic objectives and establish the right legal and regulatory framework to attract and foster private-sector investment; and market its attractive growth prospects to global investors and developers.
"Governments can also support the creation of dedicated infrastructure investment vehicles within the region and structure deals that facilitate easier debt and private financing," says Fadi Majdalani, another partner at Booz & Company.
Banks, lending institutions, and private-sector investors should avail of the significant growth opportunities in GCC infrastructure project financing. An array of investment vehicles is available to facilitate this.
GCC governments continue to rely on oil exports for the bulk of their revenues despite recent diversification. High oil prices allowed GCC governments to fund major development activities, including infrastructure, even while generating comfortable budget surpluses.
Spending on infrastructure had risen to as much as 30 per cent of the budget in some countries.
Sovereign wealth funds (SWFs) and government-owned investment companies (GOICs) may step in to finance infrastructure projects as other pressing requirements compete with it for funding.
"It's important that SWFs and GOICs take a profit-driven approach when they participate in infrastructure development. They would also benefit from a broad effort to rationalise the current large number of funds and companies," says Fayad.
In recent years, loans granted by banks for PPP infrastructure financing rose to unprecedented levels, often fuelled by governments' willingness to back them. These totalled more than $48 billion in GCC countries in 2007-2008.
High oil prices and increased liquidity drove growth in local bank deposits from governments and wealthy individuals, allowing banks to extend infrastructure loans. Infrastructure funding demand however rapidly outpaced local banks' available funds, requiring participation from foreign banks. In Saudi Arabia, the UAE, and Qatar - European, Asian, and US banks have provided most of the debt financing.
"In this new era, credit and loan syndication markets are disinclined to pursue long-term project finance deals and banks are reluctant to underwrite loans for large infrastructure projects, fearing the syndication overhang in a world of constricted liquidity," says Majdalani. The cost of debt has also risen, affecting the financial viability of many projects.
Developers are having difficulty securing competitive underwritten loans, and, should the crisis persist, they will be more reluctant to commit to new projects.
Because of this, a wave of planned infrastructure projects relying on syndicated infrastructure loans will probably be set aside, retendered, or delayed.
