UNCTAD’s Report on FDI and Implications for GCC Countries

25 September 2008

By Dr.Eckart Woertz

Gulf Research Center

The World Investment Report (WIR) 2008 of the United Nations Conference on Trade and Development (UNCTAD) which was published on September 24 and presented by the Gulf Research Center for the Gulf region, carries some important implications for GCC countries.  Worldwide FDI inflows surged by 30 percent in 2007 to reach $1,833 billion and surpassed the last record year of 2000 by more than $400 billion, with developed countries in Europe, North America and Japan dominating inflows with 68 percent and outflows with 85 percent. The ongoing international financial crisis will likely lead to a 10 percent decline in international FDI in 2008, but the GCC countries have good chances to buck this trend, as the need for large energy and construction projects as well as favorable reforms in the legal framework have made them more attractive FDI destinations. FDI inflows to Qatar alone rose sevenfold in 2007 compared to the year before. On the other hand, the role of transnational corporations in financing infrastructure projects has been highlighted in the WIR as a major challenge going ahead, which puts the GCC countries with their multi-billion projects in this field face to face with some delicate policy choices.

In 2007, in the West Asian region, Saudi Arabia, the UAE and Turkey attracted more than four fifths of total FDI which rose by 12 percent that year to $71 billion. This puts the region only slightly behind China which attracted $83.5 billion and ahead of Africa which attracted $53 billion. Buttressed by high oil revenues, FDI outflows from West Asia have risen for four years in a row now to $44 billion and here the dominance of GCC countries is even more pronounced as they account for 94 percent of all West Asian outward FDI. Like in Africa and Latin America, energy and commodities related investments were responsible for a majority of inward FDI in the GCC countries, while their outward FDI concentrated on telecommunication and financial services, like the acquisition of mobile licenses in Sub-Saharan Africa by UAE-based Etisalat and Kuwait-based Zain. The increase in intraregional FDI and cross border M&A, therefore, hints at a growing economic integration of GCC countries and a willingness to take risks as a considerable part of intra-regional FDI was directed towards greenfield developments, i.e. projects that establish new industries and services in a country from scratch.

Infrastructure development in the GCC countries has not kept pace with rapid economic and population growth in many cases. Whether it is electricity blackouts in Kuwait due to a lack of peak load capacity, water shortages in Jeddah because of water losses in the pipeline system and insufficient desalination plants, or trucks queuing up in front of Dubai’s overloaded sewage plant – the GCC countries are in dire need of expanding and modernizing their infrastructure. Transnational corporations (TNC) could help with additional capital injections and transfer of know-how. On second thought, some caveats have to be given, though: according to the WIR, four fifths of infrastructure FDI in developing countries was concentrated in telecommunication and electricity generation, while transportation and water and sewage treatment attracted less attention with 17 percent and 4 percent, respectively.

TNCs have been particularly reluctant to invest in least developed countries (LDCs); only 5 percent of their infrastructure FDI in developing countries over the period 1996-2006 was directed towards such countries. Equally they shun infrastructure provision to poorer segments of society unless they are offered subsidies or other guarantees of cost recovery. While the GCC governments need to reform their heavily subsidized water and energy prices and switch to a system of direct aid to needy segments of the population, they must be aware that “build-own-operate” and service contractor schemes can come with considerable price and quality risks, and a retention of some sort of control in the provision of basic services is indispensable to guarantee social equitability. Infrastructure investments by TNCs can, therefore, complement domestic and public investment, and public-private partnerships can offer solutions, as the experience of the Saudi Ports Authority has shown, but need to be carefully negotiated, regulated and monitored. To fulfill this task, large-scale capacity building on the level of provincial and municipal governments would be needed – as it is often on this sub-national level that infrastructure projects are implemented.

In terms of inward FDI, the GCC countries have the opportunity of attracting continuously high inflows not only because of their importance in oil and gas production but also by improving the regulatory framework for such investments. Their outward FDI has grown dramatically in the wake of the current oil boom and is likely to stay on elevated levels as long as oil prices do not crash. It could be even larger; first, anecdotal evidence suggests that outward FDI of GCC family enterprises often escapes statistical observation, and secondly, the predominance of privately held family enterprises hinders the possibility of acquiring additional equity and launching more significant international acquisitions. By giving themselves more corporatized structures in the future and going public, this limitation could be overcome. In such a scenario, the region’s Sovereign Wealth Funds (SWFs) might be tempted to invest more of their capital in such private domestic companies that aim at international expansion, as their investments in international capital markets have been plagued by hefty losses in the recent past. Although SWFs from the Gulf and Asia hold only 0.2 percent of their investments in the form of FDI, such investments by SWFs have risen sharply over the last three years; however, they were concentrated up to 75 percent in developed countries. UNCTAD and other international agencies hope that this might change and that SWFs will invest more in LDCs in Africa and Latin America in the future.