Fund in Saudi Arabia Looks Beyond Oil as a Consortium of Government Funds Focuses on U.K. Gas Distribution Networks

September 12, 2016 by SWC Editors

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Last week, two government funds in countries struggling with low oil prices splurged in an effort to kick-start their economies. One of Abu Dhabi’s sovereign wealth funds, Mubadala Development Co., has released its half-yearly results. And last week’s theme of infrastructure deals reappeared as a consortium of government funds angled for a majority stake in U.K. gas distribution networks.

Big Middle-Eastern Construction Projects: If You Built It, Will They Come?

The collapse in global oil prices two years ago and the lack of any significant price recovery has hit many oil-producing countries hard — and Saudi Arabia has proved no exception. To shore up ailing economic growth in the wake of collapsing revenue from oil exports, the kingdom has entered into an economic diversification program to shift away from its dependence on oil.

Although economic diversification has been discussed for some time in Saudi Arabia, the recent crash in oil prices has made it an increasingly pressing issue. In 2005, the Saudi government launched the King Abdullah Economic City (KAEC), located to the north of the major cities of Jeddah and Mecca, as a residential community to house workers for its various diversified — and crucially, non-oil-related — business districts. KAEC’s developers intended for the project to become a full-fledged metropolis of two million people by 2035. Over the past decade, however, KAEC’s growth has been muted. At the end of 2015, the new city supported just 5,000 people and 120 companies.

Now, faced with a squeeze on hydrocarbon revenue due to low energy prices around the world, the Saudi government appears keen to reinvigorate the KAEC project to better serve as engine for the country’s diversification. Saudi Arabia’s repurposed sovereign wealth fund, the Public Investment Fund (PIF), is reportedly negotiating to buy a stake in the project. 

Should PIF move forward with the acquisition, the move may help boost the project’s fortunes. But  Saudi Arabia’s current plans to enhance its economic diversification are still a work in progress. KAEC’s developers are currently working on a so-called Industrial Valley, which will include a progressive logistics and manufacturing hub with direct transport links to the project’s port. The port — also named after the deceased King Abdullah — has access to the Red Sea’s busy shipping lanes, which connect to the Mediterranean in the north via Egypt’s Suez Canal. KAEC will also encompass the Hijaz Downtown district, a central business district for commercial office space and retail outlets.

If Saudi Arabia needs regional inspiration for large construction projects, its policymakers need only to look toward the city of Dubai (the capital of the Emirate of Dubai), and its skyline, cluttered with cranes.

Dubai’s never-ending expansion appears to be back on track. Dubai Holding, a subsidiary of Dubai’s state investor, the Investment Corp. of Dubai, has unveiled plans for an entire new district in the city, which will be known as Jumeriah Central. The project comes with a $20 billion price tag. The first phase will encompass a $6 billion construction program, including 2,800 hotel rooms and 3,000 apartments. Dubai is hoping the new district will attract foreign investment to the region and further boost the emirate’s services sector through Jumeriah Central’s new hotels, restaurants, retail outlets and other entertainment and leisure attractions.

Officials making the announcement stressed that Jumeriah Central — located between some of Dubai’s premier attractions, including luxury hotel Burj Al Arab and Palm Jumeirah, a palm-frond-shaped artificial archipelago in the Persian Gulf — will be built in phases and only in response to market demand. Authorities are keen to avoid repeating past mistakes: A debt-fuelled construction splurge in Dubai left the emirate’s finances in a parlous state when the global financial crisis hit.

Abu Dhabi’s Mubadala Releases Half-Yearly Financial Results

Mubadala Development Co. — one of Abu Dhabi’s sovereign wealth funds, which will soon merge operations with state-owned investor the International Petroleum Co. — posted a loss of AED 4.43 billion ($1.2 billion) in the six months to June 30, 2016. Mubadala’s loss came on the back of lower commodities prices and diminishing financial returns.

Mubadala’s total assets stood at AED 233 billion on June 30, down from AED 246 billion as of 31 December, 2015. The 5.3 percent decline in assets over this period was due to depreciation of assets and the fund having tapped some of its principal capital to repay some corporate debt.

All’s Fair in Love and Bidding Wars

Canadian pension funds are fond of U.K. infrastructure assets. Last month’s announcement that an investor consortium that includes Canadian pension fund manager Canada Pension Plan Investment Board (CPPIB) is bidding for a majority stake in the gas infrastructure owned by the U.K.’s electricity and natural gas network operator, National Grid, came as no real surprise — after all, the potential sale wouldn’t be the first time that National Grid had sold off assets to Canadian pension fund managers. In 2004, a consortium containing the Ontario Municipal Employees Retirement System (OMERS) and the Ontario Teachers’ Pension Plan (OTPP) paid $2.66 billion for two of National Grid’s six gas-distribution networks.  Now, National Grid is offering a 51 percent stake in its remaining four networks with an asking price in excess of £10 billion $13.3 billion. CPPIB is joined in the consortium bidding for this stake by sovereign wealth funds from Abu Dhabi and Kuwait.

However, despite the precedent set by Canadian investors, the consortium containing CPPIB is by no means a shoo-in for this latest sale by National Grid. U.K. assets have become more attractive recently thanks to the tumbling British pound in the wake of the U.K.’s decision to leave the European Union in its so-called Brexit referendum. Competition is expected to be fierce — a rival consortium comprising China’s sovereign wealth fund, China Investment Corp., and German global insurance giant Allianz is also bidding for the stake.

In an attempt to get an edge on its rivals, the CPPIB consortium has approached Philip Aiken, a former board member of National Grid, to lead its bid. Aiken stepped down as a National Grid board member last year and is currently a non-executive director of Cambridge, U.K.-based software firm Aveva and Melbourne, Australia-based mining company Newcrest Mining. 

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