Runaway Train

also imposing spending cuts on the other, but other GCC
countries have no such option as they hold relatively low
reserves. Oman, for example, posted a larger than expected
budget deficit in 2015, at almost 16 per cent of GDP. By the end
of 2017 Bahrain’s debt is expected to reach 65 per cent of GDP,
and, with Bahrain requiring an oil price of USD120 to break
even, it is likely to be some time before the situation there
improves markedly. 3 Across the GCC, the rail industry is one
area that has been negatively affected by such uncertainty
and reduced public spending.
For much of 2016, the price of oil hovered around USD48 a
barrel. This price drop is expected to be maintained in the
long term, due to the development of new technologies, 4
the re-emergence of major producers such as Iran and
Iraq, and the slow economic growth in emerging markets
that traditionally drove up demand. It is therefore vital
for governments to assess their financial models based
on this longer-term low oil price outlook to ensure that
they are not hindered by long-term fiscal deficits so as
to enable the delivery of their ambitious infrastructure
projects and promote GDP growth under a workable
financial structure.
So, what can the region’s governments now do to deliver
their vast social infrastructure programmes in the face of this
long-term understanding of their new fiscal reality? One way
for governments to alleviate this pressure is to reconsider the
size and scope of each project. This sort of ‘value engineering’
was a universal feature of the market in 2016. However, the
core of these projects will always be considered vital to the
public interest, and governments must reconsider alternative
project models to bring them to reality in the current
economic climate. One such model, currently being actively
considered across the region, is private public partnerships
(PPPs), whereby a public project is funded and operated
through a partnership of government and one or more private
sector companies, usually accessing private sector funding.
The attractiveness to governments is that the asset is funded
by the private sector and is therefore ‘off balance sheet’ as
far as government debt is concerned. In addition, it allows
governments to reduce their technical and operational risk
exposure by transferring this risk to the private sector.
Governments must be aware that the PPP model of project
delivery is not all ‘upside’. The asset is not ‘free’ and financing
will require governments to guarantee debt pay-out should
the project collapse. A government will generally also pay
more over the life of the asset than it would have paid
had it self-funded the original build, and may also need to
provide financial security to lenders in regard to its capacity
to pay when it comes to operations. The eventual realisation
by government that it will be required to make such
payments – usually in the form of some sort of availability
or performance fee – in order to make the project viable has
been the stumbling block for many regional PPPs. As noted
above, the heavy capex requirements of most rail projects
Runaway train | January 2017
7