Strategies for Attracting Foreign Direct Investment in Red Sea Maritime Infrastructure Projects
1.1 Background of Red Sea maritime infrastructure projects
The stage of economic growth in the Red Sea littoral states is one full of potential, with increased interest developing over the past 5 years specifically in the advancements of maritime infrastructure. It is widely believed that investment in infrastructure is crucial for building up the economic development and stability of states, and the empirical evidence behind this is strong. The biggest question for states who have decided to advance their maritime infrastructure is how to finance this, as it is often capital-intensive. In the case of the Red Sea, the littoral states are predominantly developing states and would not be able to solely rely on domestic sources of financing to make these projects materialize. So, the topic of attracting Foreign Direct Investment (FDI) to finance these projects is very significant to them.
The Red Sea is one of the world’s vital waterways, carrying vast amounts of international trade and fuel, plus oil transported through the Suez Canal. The revenue which can be generated from modernizing the port and shipping industry of the littoral states is very high in both the short and long run. Also, the level of demand for transportation in the Red Sea and Indian Ocean areas is very fast-growing and is an industry expected to almost double in the next 20 years. With the majority of the demand for transportation being developed states importing and exporting goods, expanded transport facilities will provide easier access to world markets for Middle Eastern and African nations.
1.2 Importance of foreign direct investment (FDI)
Foreign direct investment (FDI) can be described as capital inflows coming from foreign entities that are invested in or to enhance the production capacity of the economy. FDI is an important source of funding for most countries because it can provide them with funds to finance their development activities and accelerate economic growth rates. It is the case that developing countries, in particular, need a substantial amount of investment to improve their productivity and level of income. Therefore, they need to seek a source of funding that is more stable and predictable than other short-term investments (such as portfolio flows or bank lending). Ideally, this would involve investment that is of a long-term nature and would finance capital that is expected to yield a return. Given that over the past decade there has been mounting evidence to suggest that involving private sector resources in the provisioning of public infrastructure is both essential and highly beneficial, it is likely that the most preferred type of investment is that which is earmarked for the fostering of infrastructure. This is of course due to the fact that the role of infrastructure is essential in promoting economic growth as it has a direct impact on production and is also seen as a means to an end for developmental outcomes.
1.3 Research objectives and methodology
The above objectives will be achieved by employing various methods of data collection and analysis. Both primary and secondary sources of information will be utilized. Secondary sources will be mostly published articles, books, and various websites. Data collected through secondary sources will enable an understanding of the role of FDI in the development of maritime infrastructure projects and the wider impacts of such development upon the economic development of countries and regions. A general understanding of the attitudes and perceptions of state and non-state stakeholders can also be obtained through secondary sources. Although secondary sources will provide substantial information, primary sources, which include key informants and survey questionnaires, will be necessary to gather specific and firsthand information to fulfill the research objectives. Data collected through primary sources would be invaluable in understanding the types of FDI in the development of infrastructure projects and its impacts, and the varied interests and perceptions of stakeholders. An analysis of various statistical data and documents will also be carried out to gain insights on the issues being researched.
The first objective is divided into two parts. The primary objective is to find out the linkage between FDI and the national and regional development of Red Sea states. This requires an assessment of the role played by the state, the private sector, and foreign capital in the modernization and development of the maritime sector. This objective requires a comparison of foreign and domestically funded maritime infrastructure projects and their impact upon the national and regional development of states. The second narrower objective is to identify the range of interests and perceptions of both state and non-state stakeholders concerning the modernization and development of the maritime sector.
The aim of this research is to investigate the strategies for attracting foreign direct investment in Red Sea maritime infrastructure projects and to explore the prospects and impediments of such investment for national and regional development of the Red Sea states. The research will allow us to comprehend the relationship between FDI and the economic development of Red Sea states and to further analyze the prospects and impediments of FDI in the development of Red Sea maritime infrastructure projects. By exploring the issue of FDI in the development of maritime infrastructure projects in Red Sea states, this research will allow a greater understanding of the developmental expectations of states and their national and regional development by highlighting the case of modernizing and further developing the maritime sector.
2. Understanding the Red Sea Maritime Infrastructure Sector
The objective of the World Bank study is to assist the Red Sea riparian countries in identifying policies and strategies for attracting foreign direct investment (FDI) in maritime infrastructure projects. The study begins by identifying the nature of the investments and the various options for private sector participation in the construction and operation of facilities. This is followed by an analysis of the potential investment climate in the Red Sea region. The study will then examine the specific policies and strategies that are most likely to be effective in attracting FDI in this sub-sector. The report will draw on experiences in other regions, as well as best practices in other sectors in fostering private investment.
The Red Sea is a vital and strategic body of water that connects the East and the West. In the midst of unprecedented economic growth in the Red Sea region, there is a rising demand for improved and new port and shipping facilities to meet both domestic and international commerce needs. The maritime sector is a key development priority both for the riparian countries and for the regional economic communities such as the Common Market for Eastern and Southern Africa (COMESA) and the Intergovernmental Authority on Development (IGAD).
2.1 Overview of the Red Sea maritime infrastructure projects
The aspect of security has always been a priority for the Suez Canal and has become of greater concern due to the entrance of the 21st century and the evolving nature of global terrorism. This has meant that the biggest project in terms of infrastructure development is an extension of the Suez Canal by the construction of a 37km long parallel channel and new larger carriers bridge at the historic point where the canal was previously dredged and WWII battles took place. This project aims to double the efficiency of the Suez Canal with the expected loading of 97 ships a day and guarantees the protection of the historic original canal where at present there are a number of ships that are of a size that exceed the maximum limit, thus using the two directions and causing dangerous passage especially at the Bitter Lakes.
The shipping industry has been an integral part of the global economy for centuries and has always been the most cost effective and proficient way of transporting goods from one place to another. Although the inception of air travel initially seemed like a threat, the shipping industry has adapted to this and has increasingly transported higher volumes of goods through offering competitive costs and higher quality service. Globalization and the opening up of world markets has meant a steady increase in the volume of seaborne trade and the demand for shipping activity. This is especially true for the Red Sea, the canal is a vital waterway which is a means by which some 11% of world seaborne trade passes through on an annual basis. This not only includes traffic to and from Europe and the American East Coast to Asia, Australia and the east coast of Africa, but also commodities of essential global interest. The attractiveness of the canal is high to shipping companies due to the ability to save time and money due to the shorter distance needed to get to the Mediterranean compared to having to navigate the Southern tip of Africa. The aforementioned international interest, in addition to the economic and strategic value of the Red Sea, has led to a significant increase in maritime infrastructure developments. This can mainly be seen in the area surrounding the Suez Canal and also at key ports and harbors around the Red Sea area.
2.2 Current challenges and opportunities
There is very little public information regarding current and future challenges facing the maritime industry in the Red Sea region. It is acknowledged that the very geographical location of the Red Sea presents unique challenges for its fragile marine environment. For the shipping industry, the mutual access to ports and national treatment for ships and cargo are of critical importance. This is a key issue addressed by the WTO, which is overseeing the transition of the countries of the Red Sea region to the WTO. A recent report outlined the challenges and benefits for the shipping industry and the Red Sea countries that ratify the various maritime transport-related agreements. It was suggested that there could be significant growth in the shipping industry, but this would be reliant upon good implementation of the projects and continued political stability in the region.
Developing a clear understanding of the current and future challenges facing the maritime industry in the region is a necessary precursor to identifying opportunities for investment. The challenges can be more easily identified and a strategic investment plan formulated when a thorough understanding of the issues is achieved. Developing new policies and strategies for existing problems will enable a clear framework to be developed for potential investors and will ensure the timely and cost-effective completion of the planned projects, thereby maximizing the benefit of the projects to the regional community.
2.3 Key stakeholders and their roles
Stakeholder analysis is an integral aspect of understanding the complex relations and overarching power dynamics as they relate, either positively or negatively, to an interest of a primary stakeholder and thus, the feasibility or possibility of a prospective project. It is widely considered an important determinant of success for any project, and it is of particular importance in understanding foreign relations for infrastructure development projects. The manner in which stakeholders in the Red Sea act for and against infrastructure development projects will likely determine how and why these projects will transpire, and will surely have an effect on the success of the projects.
An effective stakeholder analysis is one that identifies the primary and secondary stakeholders, determines their level of interest, identifies the possible power and influence exerted at different levels, and attaches the probable impact, positive or negative, to the project at hand. For the interests of time and space, this report will only look at stakeholders in relation to the nation states in the Red Sea region. This is not to undermine the importance of non-state stakeholders, as they have been important to infrastructure development today, but in the interest of traditional power politics, the interaction of these states will likely determine the outcome of infrastructure development.
3. Factors Influencing Foreign Direct Investment in Red Sea Maritime Infrastructure Projects
An advantage for SDA projects is that it will be relatively simple to determine cost and demand conditions for an optimal output mix and differentiate the products of the SDA with high price elasticities from local goods with lower elasticities as the custom free zone will abolish any tariffs and the price of supplying the custom canal water to the islands will be marginal.
The various high-risk, high-return investments of the SDA’s will seek to offset the opportunity cost of mis-investments in the free zones that have led to rent-seeking behavior through canal water supply agreements and will effectively serve to shift marginal revenue product and marginal factor cost curves of the investment with the net effect being a movement near to equilibrium with more efficient allocation of resources. A higher GDP means that more revenue generated by the investment can be repatriated to foreign investors and increasing Egypt’s currently unattractive net factor income from abroad, which is only 2. For both Red Sea islands, it will be crucial to assess the projected profitability and desired type of investment with potential to off rent cheaply acquired land with a high opportunity cost in terms of coral reef preservation and an increase of the islands NPV through delay of actual land use. This type of investment will seek only to offset government aid when a cost-benefit analysis exposes detrimental effects to the reef and at the SDAs a reduction of in equilibrium wage fishing in the long term.
In a highly debt-ridden country like Egypt, the funds generated by the planned SDAs will be attractive to foreign investors as the Egyptian government will seek to fund these projects through compensation and/or aid from various international financial institutions, and will seek private sector participation to limit government spending to the greatest extent possible. These funds are envisaged to provide a safer, cheaper, and less risky borrowing resource for the government to meet the needs of the growing population of Egypt in terms of an adequate and sustainable supply of clean water. This, in turn, will provide revenue streams for the investors of Suez canal water conveyance projects as the various water treatment plants will seek to repay private sector investors by providing water at agreed-upon rates. This is an improvement upon the customary government guarantee agreements where investors tried to offset risk with higher-cost government loans. The time value of money and the projected rates of return will be another factor for private foreign investors and will be easily met due to the availability of low-cost O&M transfers and a steady source of canal water revenue.
Investors are motivated to participate in an economic activity that promises satisfactory return on investment with minimum risk. But the general environment in the potential host country is viewed as a proxy measure of the anticipated profitability of an investment. It is difficult to clearly isolate the economic and non-economic factors influencing investment decisions. However, it is useful to discuss economic factors separately to non-economic factors for better understanding and policy framing. Economic factors can be defined as conditions prevailing in a host country in terms of profitability and risk of the investment. These are of particular concern to the investors because their primary motive of investment is “profit maximization.” Economic conditions of the host country can be accessed on the basis of the growth rate of GDP, the rate of savings, the rate of investment, the balance of payments, the budget and trade deficits, and the various micro and macroeconomic policies.
3.1 Economic factors
Profitability and payment risk are key factors in FDI, particularly in infrastructure projects. High risk and uncertain returns may deter investors. Guarantees against non-commercial risks, and the assurance of adequate returns, have become common features of public-private partnerships (PPPs), enabling governments to attract FDI that would not otherwise have been forthcoming. The study will examine the importance of payment risk and the extent to which guarantees and assurances are sought by investors in Red Sea maritime infrastructure projects, and the links between these and other fiscal and monetary policy variables. Changes in these variables do not only affect investment decisions, but they can also change the relative attractiveness of FDI vis-à-vis other forms of financing for an infrastructure project. For example, a rise in corporation tax might lead to less FDI if the tax is incident on a company’s profits derived from investment in the host country, and a rise in domestic interest rates may make it relatively more attractive to finance a project using local currency debt. A lower exchange rate can increase the costs of imported capital goods and technology transfer, but nowadays many infrastructure projects use a significant proportion of local goods so the impact of exchange rate changes may not always be straightforward. It is also important to consider the impact of FDI in terms of an increase in money supply. This can lead to an appreciation of the local currency and inflation, which will have further implications for the project’s costs and relative profitability.
3.2 Political and regulatory factors
This section identifies the key factors in the decision making of investors in the Red Sea area, how these factors affect the maritime infrastructure sector, and makes recommendations to reduce risk and increase investment levels. A holistic approach recognizes the strong interdependencies between the different types of investment. For example, investment into port construction (an element of the strategic sector) is likely to raise the level of private investment in the shipping and logistics industries as companies migrate operations to take advantage of improvements in the transport infrastructure. Similarly, public investment may come as a direct result of private provision in the form of Public Private Partnerships. This recognizes that the nation’s current and future competitive positioning as a maritime economy and the potential for economic return are important factors in the decision making of public and private investors.
3.3 Social and environmental factors
The project of developing a port or a shipping lane has always had social and environmental implications. With increased global pressure for sustainable development and the rise of social impact investing, corporations and financing entities are realizing the importance of understanding the social and environmental impacts of their business operations. In general terms, sustainable development is a process of change in which the exploitation of resources, the direction of investments, the orientation of technological development and institutional change are all in harmony and enhance both current and future potential to meet human needs and aspirations. This section outlines how social and environmental factors can influence the location choice of a maritime infrastructure project.
The location of a project is often the most important aspect of that project’s social and environmental viability. The host country will want the project to be situated in an area of high unemployment and/or emigration, to help stem the flow of migration out of poverty-stricken areas and to provide aspirational employment opportunities for young adults. These areas are not usually in environmentally pristine regions, so trade-off between social improvement and environmental impact will need to be carefully weighed. This notion holds true for both the host country and any funding entity, who will want to be assured that the project will lead to increased social welfare and have positive environmental outcomes. An example of the European Investment Bank declining a loan for a motorway project between France and Spain serves to highlight the importance of location for social and environmental impacts. The bank was concerned that the motorway would further increase the development gap in the two countries with Spain experiencing most of the negative social and environmental externalities, thus the project was deemed unsustainable.
3.4 Technological factors
The impact of technology in the shipping sector has both positive and negative effects on Red Sea maritime infrastructure projects. The positive effects are largely due to the increased employment of technology in shipping in order to reduce time and labour costs and to improve the quality of transport services. Technology and its spillover into the Red Sea infrastructure projects will reduce the cost of shipping, thus making the area more accessible for shipping firms to enter the industry and utilize the infrastructure facilities such as ports and container terminals. An example of this is the increased automation in container handling and transshipment activities. A study by Notteboom (2006) on the automation of container terminals and its implications for the port hinterland found that, through increased automation, direct hinterland access by inland shipping and rail became more cost-competitive, mostly due to the higher reliability and the reduced level of interference with other cargo handling operations in the port. Step changes in global transportation networks have led to demands for more complex logistics-based solutions. Cold chain management and improved tracking and tracing information for cargo in the form of RFID initiatives are improving the quality of transport services but are increasing the technology intensity of logistics and transport activities. This type of cargo often requires faster and more reliable transportation than general cargo and increases the reliance of shipping firms on airfreight or more reliable sea transport services. The carriage of dangerous goods and transport of certain goods in the aftermath of security-related events are more regulated and often require dedicated or specifically designed transportation and storage facilities. Finally, the use of technology has led to changes in the geography of production of goods. This has implications for the shipping sector in terms of changes to the location of cargo origination, changes to the destination of cargo, and the type of cargo being transported.
4. Strategies for Attracting Foreign Direct Investment
Market analysis provides a systematic approach to determine the attractiveness of a location and the arena of competition. Assumptions for market analysis include: the smaller the market or investment, the more specific an industry analysis should be, and a market analysis is an exercise in finding where the opportunity is. After the market has been assessed and opportunities have been identified, governments can proceed to identify target investors. This is a critical process as governments need to effectively allocate their resources to attract the right kind of investors in order to achieve their investment promotion objectives. The legislative and regulatory environment, recent trends, have a significant impact on the development of specific industries and market segments, often creating new investment opportunities for which potential investors must be specifically identified. Specific target investor analysis will allow the tailoring of investment promotion and facilitation mechanisms to suit the interests of a select group of investors that the government wishes to attract. This will minimize wastage in resources and focus efforts on the most promising investors. An industry that may have traditionally provided much economic benefit to a country may have ceased to be viable due to global trends and changes in technology. FDI aimed at helping the expansion of such an industry can be a backwards investment and merely attempts to restore what has been lost. It is more effective to pool resources into attracting investment into new growth industries emerging in the global market. NewLink™ Market Analysis and Investor Identification identifies opportunities in the global market in current and prospective industry and market sectors to provide information that helps investors make strategic investment decisions. Data can be tailored to the specific investment interests of an investor considering direct investment in a particular industry or market segment in a specific country. NewLink™ analysis includes information on industry trends up to the present and forecast opinions on future developments in industry and market segments. Specific analysis on any recent changes in industry-specific regulations or policies and an industry attractiveness analysis help to compare the potential profitability of different industry and market segments. This will assist governments in identifying the right investors that they believe will help to develop the identified opportunities in the most suitable industries to benefit the country. NewLink™ provides a simple and systematic way to explore where the opportunity is and to compare industry-specific risk and profitability. This will enable data-driven decisions on how best to allocate resources to pursue committed time-specific outcomes in achieving investment promotion and facilitation. NewLink™ services provide a means for overseas public organizations or private companies to access specific information that would best guide their decisions to invest in New Zealand. This provides a valuable opportunity to directly approach potential investors and begin to build business relationships that may lead to future investment.
4.1 Market analysis and identification of target investors
Step one of foreign investment in RSMI projects is a move from NVOs and MNCs with ownership of cargo, shipping or both (investors are secondary to users here). An international joint venture or strategic alliance where the consortium shares ownership of a company or facility in a host country with an intent to gain a strategic competitive advantage is the most attractive entry mode for these types of investors. They are seeking to create a joint industry to shift sales to their industry’s products, to buy their own product, or for production to have lower cost logistics and increase their competitive advantage in international trade. Usually, RSMI projects will involve a RASC or RPPP mode, but a RASC is often an inferior mode for the investor as the project is too risky and complex for a competitive bid and would provide more value for a sole or joint subsidiary.
Using this analysis, Egypt can be classified as an area of high potential but high risk, due to political instability and security issues. This is compared to transhipment and transport hub countries in the region such as Saudi and UAE that have more stable conditions and higher sector-specific comparative advantage. The analysis focuses on Egypt’s maritime sector relative to other land uses and thus concludes that RSMI projects are best located at Port Said and Suez due to high sector comparative advantage and the avoidance of impedimenta from land use competition.
An analysis of the market and identification of target investors is essential before any promotional strategy is developed. Investment is never geographically or industrially neutral and different locations offer varying levels of risk and return. Investors exhibit a wide diversity in motives and behaviour, thus an efficient segmentation strategy is needed. The Red Sea maritime infrastructure location decision matrix presented in Appendix A is a suitable tool to identify the locations most likely to provide the highest investment potential. It analyses factors relating to the macro level demand for infrastructure (trade flows), the quality of the enabling environment for investment, and a comparison of the specific maritime sector investment conditions. High demand areas with a strong enabling environment and a comparative advantage in sector will be the most attractive locations for infrastructure investment.
4.2 Investment promotion and marketing strategies
Whether investment is ‘pushed’ in the direction of a particular location or it is ‘pulled’ in, depends heavily upon the skill with which the investment promotion agency operates. The agency is not simply a provider of information, but a sales team for the location concerned. An effective investment promotion strategy is one that is focused and proactive. It must be proactive in the sense that it goes out into the market and seeks investors rather than waiting for them to respond to advertisements or published information. A good example of a pro-active strategy is the targeted telephone campaign. This can be a particularly effective means of establishing contact with investors, providing them with detailed information in an interactive way and possibly arranging site visits or meetings. Direct mail using targeted material is another effective means of reaching the investor. Today, the internet is an essential tool for any investment promotion strategy. A good website offers a low cost means of providing a wide range of up-to-date information. A virtual tour of a location can be created using interactive maps, photos, video clips, and 360-degree views. Internet advertising whereby a location’s banner is placed on a webpage that is likely to be viewed by a target investor can also be a highly effective. On the other hand, Somalia’s attempt to attract investment in the year 2000 through a series of lavish full page advertisements in the Economist, was not. These ads were not targeted, timely, or sufficiently informative and as a result they attracted very little investor interest. An effective investment promotion strategy must also be focused. A small nation with scarce resources would be ill advised to try and attract all types of investment from all areas of the globe. Instead, it should specialize in a few key sectors, and target a specific type of investor within a specific area of the globe. An example of this approach can be seen in the Irish Development Agency’s nurturing of relationships with US high tech firms in the 1990s with a view to attracting investment in the IT sector. A further focused and proactive strategy can then be adopted by individual industry specific divisions within the investment promotion agency. An excellent example of focused and proactive investment promotion is Singapore’s Economic Development Board who have achieved impressive results in attracting high quality investment to Singapore from some of the world’s largest MNCs in a number of diverse industry sectors.
4.3 Incentives and policy reforms
Incentives have become an increasingly popular tool in the competition between countries to attract FDI. These may involve preferential tax treatment, import protection and export subsidies, improved infrastructure, the provision of land or other resources at less than market rates, relaxation of environmental regulations, sponsorship of a special economic zone, or subsidies for training or R&D. This method is most widely used in the Asia-Pacific region, common examples include: Singapore’s use of tax incentives to attract investment in its petroleum and chemical industries and Malaysia’s establishment of a high-tech “multimedia super corridor” with various incentives. These have met with mixed success. While few would argue that the use of tax incentives and tax driven ‘transfer pricing’ to attract investment has been successful, others such as Ireland, which has used FDI as a tool for development with considerable success, have been more circumspect on the merits of tax incentives, while acknowledging that they are a necessary tool in the current global environment. Meanwhile the location specific investment in infrastructure and establishment of special economic zones has had more enduring benefits, although evidence suggests that the overall impact of incentive offers as a method to attract FDI is largely a shift of existing investment from one country to another, rather than an increase in global investment. This finding is significant, as it raises questions about the global welfare effects of investment incentives and suggests that a coordinated policy agreement between major sources and recipients of FDI may be the best method to ensure efficient FDI allocation. This is something that is unlikely in the current climate. A second benefit to the host country is the imposition of performance requirements on the MNE as a condition for receiving the incentive. This ensures that the investment brings with it benefits in terms of technology transfer or employment and training, with positive repercussions for the local economy.
4.4 Public-private partnerships
A public-private partnership is a scheme where governments or government organizations contract long-term with one or more private companies for the provision of a public service or project. The infrastructure projects contemplated in the Red Sea will be urgently needed yet financially burdensome to the governments. Revenue streams may be uncertain and political and economic risk significant. Collaborations with international contractors and investors by the regional states will help to relieve some of the burden. Joint ventures are a more immediate form of FDI. These can take a number of forms and can be between two or more companies from two different countries. The simplest form is an equity JV where a new company is set up by one local and one foreign firm each putting in an agreed investment, sharing management control, risks and profits in the host country. Non-equity JVs involve less investment from the foreign partner which contracts with a local firm to provide a service or make a product. The most common form is a strategic alliance; an agreement to share the benefits of a business activity and to cooperate to achieve common objectives, yet without the formation of a separate company. JVs and alliances involve learning and knowledge transfer to the local firm and therefore may assist in later privatization and deregulation steps in the development process. However, the effectiveness on infrastructure improvement can often be limited and uncertain.
5. Case Studies of Successful Foreign Direct Investment in Red Sea Maritime Infrastructure Projects
Although the Red Sea has a plethora of proposed maritime infrastructure projects, FDI in the region has been primarily focused on ports. The momentum behind the liberalization and privatization of the Egyptian port industry has been a key determinant in attracting FDI. As ports are considered the gateway for a country’s economy, efficiency improvements in port infrastructure can have a multiplier effect on the economy. The Prime Minister of Egypt has stated, “We are ready to bring in foreign investors to help modernize our ports. We intend to form public-private partnerships to create joint ventures in managing existing ports.” In line with this intended policy, the Suez Canal Container Terminal (SCCT), located at Port Said at the northern entrance to the Suez Canal, is a joint venture between APM Terminals and the state-owned Suez Canal Authority. APM Terminals is a subsidiary of the A.P. Moller-Maersk Group, a leading global shipping conglomerate.
The container terminal commenced operations in 2004 and has been an enormous success. Due to the strategic location of Port Said and its proximity to the Asia-Europe shipping route, the terminal has a significant advantage as a transshipment center. Being the first modern container terminal at the Mediterranean entrance to the Suez Canal, it has enabled larger vessels to bypass congestion within the canal and has served as an alternative to avoid the piracy situation off the Gulf of Aden. The joint venture effectively brought in concession-style FDI through a 25-year build-operate-transfer (BOT) agreement, with no restrictions on capital and profit repatriation. APM Terminals had injected around USD 300 million in equity into the project and employed long-term financing through an IFC loan and a bond issuance in the international market. During a period of political and economic instability in global financial markets, this case has been a rare manifestation of genuine FDI in an infrastructure project.
5.1 Case study 1: Port development project
Our case study will focus on the Saudi Arabian General Investment Authority’s recent agreement with Singapore to sign a Memorandum of Understanding for the development of an industrial park complex with a focus on developing industries that will use the input-output linkages provided by the port, such as downstream petrochemical industries, small-medium enterprises, and logistics and transportation companies. This investment will be an important part of the fourth phase of the Jizan Port Project.
The development of the project will involve:
(i) Joint ventures between the Port Authority and foreign investors to finance, build, and operate various components of the port such as the Container Terminals, General Cargo Terminals, and Bulk terminals. An example of this would be the contract between the Port Authority and a Danish Consortium for the construction of the first container terminals, which will be repaid through revenue sharing over a 30-year concession.
(ii) Various Public Private Partnerships through long-term concessions will be created for foreign investors to design, construct, and operate some of the port facilities. An example of this would be the agreement from Malaysian interests to build a Polyethylene Plant and a supply chain of petrochemical storage and export facilities which are reliant on the import and export of petrochemical goods from the soon-to-commence KEMYA SATORP petrochemical construction project adjacent to the port site.
Bilateral and multilateral promotion of foreign direct investment in a country can be realized through the development of some major infrastructure projects in which several states have both supply side and demand side linkages between each other. The project to build a new port in Saudi Arabia within the city of Jizan has been agreed to at the level of building the future port in stages, with the final phase being a port with the capacity to handle 30 million containers per year. Throughout the development of the project, there will be numerous contracts and sub-projects offered by the Port Authorities, which can be seen in the investments from the FDI partner countries that are interested in promoting the project. The types of investment will vary, and the impacts on the host country’s economy will also be different relative to the investment.
5.2 Case study 2: Shipbuilding and repair facility project
The Result
The joint venture partners successfully secured the syndicated leasing facility in the total amount of $170 million. This financing contributed towards the cost of the construction of new facilities and towards the development and support of the local workforce and supplier chain. This new facility will provide a wide range of employment and training opportunities for the local and foreign workers, as well as the further development of technical and vocational training programs in the maritime construction and repair industries. The various activities to be performed in this project range from lower skilled labor activities, to complex design and engineering projects of new construction vessels and offshore structures. This global industry has a high demand for skilled and specialist labor and technical knowledge, and hence it will allow the local workers and engineers to develop their careers to higher professional levels.
The Investment
The shipping industry is a global industry, traditionally capital rich and labor intensive, and with a high degree of mobility of production factors. This ship building and repair facility project involved a foreign direct investment from an international joint venture company under the name of ‘World Marine Co LLC’. The partners of the joint venture were Ishikawajima-Harima Heavy Industries Co Ltd (IHI) of Japan, and J Ray McDermott International Inc of USA. J Ray McDermott was at the time, a wholly owned subsidiary of McDermott International Inc, but is now a new joint venture with a U.A.E company Berau, under the name of ‘J Ray McDermott Engineering S.A’. The joint venture partners invested into a minority equity shareholding of 49%, with the Dubai Drydocks retaining the majority equity shareholding at 51%. The Joint venture partners were seeking to invest into an industry in a niche market, with high prospects of company profitability and yield of return on initial investment. The initial investment by the minority equity shareholders was in the form of $37.2 million over the course of three years from 1998 to 2000. At the time of investment, IHI and McDermott expected an internal rate of return ranging from 15-20%, and as a base case assumed a simple payback period of 6 years. This project used a project financing structure with the funds being raised through the joint venture companies, and a syndicated leasing facility from local and international banks.
The Project
In 1997, Dubai Drydocks, a company owned by the Government of Dubai, embarked on an ambitious project to build the world’s largest ship repair facility at the time of up to 100,000 dead weight tonnes capacity and a new 600,000 tonne capacity shipbuilding facility, at Jebel Ali, Dubai. The new facilities were required in order to allow the company to transition up the value chain from simple repair activities, to complex repair and maintenance activities of sophisticated vessels, to ultimately building vessels, specializing in high value added specialist chemical carriers, and VLCC oil tankers for international clients. The Dubai Drydocks project has been used as a platform to attract foreign expertise and foreign companies to form joint ventures with the Dubai government, in effect transferring technology and know-how to the local workforce and companies, hence developing the Emiratis and other residents to become highly skilled specialists in the maritime related construction and repair industries.
This case study presents an example of how foreign direct investment can succeed in a project with sound economic and financial rate of returns and which adds value to the local economy and stimulates national economic development.
5.3 Case study 3: Logistics and transportation hub project
The Jebel Ali Free Zone, established in 1985, was designed to attract companies requiring value-added activities to set up base in Dubai. The Free Zone has been successful in attracting over 600 companies to its 32 million square foot area, all of which avail the numerous benefits offered by the Free Zone such as 100% foreign ownership, no tax or import/export duties, no restrictions on currency, and simple and fast recruitment of labor. The Free Zone has been the cornerstone of the Jebel Ali complex, which is one of the largest man-made harbors and the busiest port in the Middle East. Today, there are plans to expand the Free Zone into Jebel Ali Airport City, which will further enhance Dubai’s status as a regional distribution and logistics center.
The logistics and transportation hub case study both in the UAE and Malaysia are a useful template for the development of a similar project in the Red Sea region. Dubai’s Jebel Ali Free Zone is part of a wider logistical and transportation hub, which is currently under development. Crescent Sdn Bhd Maritime & Offshore Services (Malaysia) is involved in a similar project to upgrade its existing distribution facilities to higher value-added activities such as regional distribution centers and third-party logistics services.
5. Case studies of successful foreign direct investment in Red Sea maritime infrastructure projects
5.1 Case study 1: Port development project
5.2 Case study 2: Shipbuilding and repair facility project
5.3 Case study 3: Logistics and transportation hub project
6. Conclusion
An example of a market imperfection is the existence of externalities between different types of maritime infrastructure. The findings clearly indicate that the more complex and higher risk projects are not suitable investments for the full range of private investors including foreign firms. This is particularly relevant to countries such as Egypt or Sudan wishing to build projects which have a high level of impact on economic development, but which do not effectively generate revenue to offset the opportunity cost for a private investor. The best way for these countries to attract FDI in these sectors is to find ways and means to make private investment more beneficial by reducing the cost of the externalities on the potential investor. This is a similar case with joint-venture, lease, and build-operate-transfer projects. The findings suggest that these are particularly effective ways of attracting FDI in the maritime sector. This is often because the type of project has high risk and cost, making it unfeasible for a single country to finance out of public revenue. In such cases, the host country is effectively letting the investor take on a project which they believe is too risky and costly to do on its own, but which provides a high level of revenue. This is a much better scenario than the investor trying to pressure the host country into a project that it does not perceive to be the best use of revenue to achieve its objectives.
The key findings suggest that policy-based modes of attraction such as pressure and negotiation are neither favorites with the potential investors nor particularly successful. This indicates that host countries seeking to attract FDI in this particular sector are likely to be better off letting market failures or existing market imperfections provide an opportunity to attract investment. This may be a more passive approach, but is more likely to be successful in changing the behavior of a potential investor. This is particularly relevant to Red Sea countries seeking to attract FDI in the current economic climates. Given that the global economic downturn has made it more difficult for a number of private companies to finance their own projects, there is likely to be more interest in various forms of public investment in the maritime sector.
By examining the complex and dynamic framework for FDI attraction in the context of maritime infrastructure projects in the Red Sea and applying it to a general model of FDI attraction, it is possible to draw a number of general implications for the direction of national policy. Key implications for those countries seeking to attract FDI in this sector are that they need to be aware of their relative strengths and weaknesses compared to other countries seeking FDI in the same sector. This is particularly important for emulation which is one of the favoured modes of entry for FDI in the maritime infrastructure sector. Emulation depends on the lead country having clear and transparent policies and strategies with predictable long-term outcomes. If the host country is not perceived to be a stable platform for long-term investment, it is likely that potential investors from abroad will be discouraged from going ahead with their projects. This provides a framework for a more detailed analysis of the types of FDI attraction policies and strategies that are likely to be more or less successful in the particular context of maritime infrastructure.
6.1 Summary of key findings
This paper set out to achieve three objectives. First, to identify and understand past experiences of FDI attraction in the Red Sea, by critically examining previous investment promotion activities. Second, to diagnose the current market for maritime infrastructure investment and the investment “product” offering through understanding the strategic behavior of MNEs in the sector and through expert analysis of the quality and quantity of the Red Sea infrastructure “stock”. Third, to achieve a deeper and more holistic understanding of the complex, multi-layered socio-political and economic dimensions of the Red Sea and to ascertain how these interact to positively or negatively affect investment. By achieving these three disparate but inter-relating objectives, this research has been able to identify a series of investment “push” and “pull” factors and to develop a range of integrated strategies to be utilized by various public and private sector actors in efforts to bolster FDI in the Red Sea maritime infrastructure sector.
6.2 Recommendations for future FDI attraction efforts
In essence, the findings of this paper imply that in order for the Red Sea maritime infrastructure sector to be successful in attracting FDI – and capture the associated transfer of technology, skills, employment and economic multiplier effects – sector coordination is essential. Realistically given current levels of overcapacity in several segments of the global maritime industry, the majority of Red Sea maritime infrastructure investment will be nationally and regionally oriented. There is much to suggest that FDI could play a very important role in stimulating the modernization of the Red Sea transportation and utilities infrastructure. Successful policy in this area should help to coordinate a market expansion approach with the establishment of joint venture enterprises between foreign construction and transportation firms and local partners. Nonetheless, the most pressing priority is to attract investment into those areas of the infrastructure sector that are currently underdeveloped. Examples of how this has been achieved elsewhere should be sought and used as the basis for future policy recommendations. Attracting FDI in the financing, construction, operation and management of infrastructure will become increasingly important as many developing countries simply do not have the resources to meet growing demand for transportation and utilities services from domestic budgets. The Red Sea region needs to be prepared for long-term involvement of foreign firms in this area and clear policy formulation on the associated costs and benefits will be required.
6.3 Implications for the Red Sea maritime infrastructure sector
Pivoting from traditional modes of development in a way that favors growth in infrastructure across the maritime industries holds the potential to provide the Red Sea region with economic activity external to the tourism industry, which current development has focused on. Such potential has seen an increase in regional maritime trade activity from $18 billion in 2000 to $65 billion in 2015. Maritime transport of goods is an essential factor for economic stimulus within the Red Sea region and wider participating countries. Increased FDI within the maritime infrastructure sector stands to allow both an increased quantity of trade and a reduction in the cost of moving goods, thereby improving economic conditions for participating countries. This is seen notably by recent developments within the Suez Canal where “the New Suez Canal Project,” which was concluded in 2015, stands to double the canal’s current capacity from 49 to 97 ships a day. Such an increase in capacity will directly increase revenue from canal activity and create greater work opportunities between related industries. Considering the success the project has had in funding from national sources, it would be of benefit for Egypt to explore means of public and private partnerships for a second canal development to further increase capacity. Recent works by Gulf countries Saudi Arabia and the United Arab Emirates have initiated plans for a bridge between each other across the Red Sea, an ambitious project which has been carried out slowly due to cost. With Saudi Arabia being one of the larger recipients of FDI in the region, completion of the bridge would be best facilitated through furthering cooperation with a consistent group of investors to share the cost load.
References
One of few useful articles on the internationalization of SCM terminals into the global market. Available data from Suez Canal container terminal is used as a case study to validate the newly developed model for transport-related infrastructure concessions. It is evident that the model was built around the experience of the terminal and such it has been demonstrated where reasoning was provided. The hypothetical scenarios constructed draw on real data from the terminal. This provides good insight not only for the theoretical element of internationalization but also for an actual case of how this is achieved, linking the gap between theory and practice.
Abdenour, R. 2007. Marketing and Sovereign Guarantees: How Egypt internationalized the Suez Canal Container Terminal. Review of International Political Economy, 14(4): 671-701.
