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Private Equity and Strategy Consulting in the MENA Region “Promising investment sectors in the MENA region”

The Middle East and North Africa (MENA) region encompasses a diverse array of countries and economic activities, offering numerous opportunities for private equity investments. However, due to the global economic downturn that impacted the region in 2009 along with the Arab Spring that broke out in 2011, the overall performance of the MENA region and its investing scope were adversely impacted. The ongoing civil war in Syria that also affects Jordan and Lebanon, the insurgencies in Libya and Yemen and the overall spread of the terrorist group ISIS have participated in decreasing foreign direct investments over the last few years. Furthermore Egypt and Tunisia are still undergoing a fragile transition while Morocco and Jordan's liberalization reforms have yet to be fully implemented. In this context of general instability, investors are being extremely cautious and are now focused on markets where economic growth is driven by solid fundamentals and sectors that are resistant to the fluctuations in the global economic cycle. Investors are shifting towards defensive and less speculative sectors that offer turnaround and even high growth potential. The following report will investigate four of these sectors including healthcare, education, infrastructure and renewable energy. In order for the MENA countries to become predominant leaders in the future, they need to invest in a solid healthcare system and infrastructure to ensure the needs of their growing population. However, the MENA region spends only about 4.0% of its GDP on healthcare, compared to 14.3% by the Americas and 9.3% in Europe. Furthermore, the government allocation on healthcare of the MENA countries is only 8%, which is subsequently lower than developed countries like the US (20%), Germany (19%) or Japan (18%). In addition, the population of this region is growing and aging, which in turn means more business opportunities for healthcare providers, as elderly population spend more on medical care. This population also presents growing lifestyle-related diseases including diabetes, hypertension, cancer and heart ailments. Clearly, the lack of healthcare infrastructure along with the rising demand for health care needs of a population with a high purchasing power (especially in the GCC), reveals there is enough room for improvements that private equity firms can provide. From basic health care infrastructure to medical technology instruments for procedures or diagnostics, there is a huge untapped investment potential in the healthcare sector. A recent study conducted by Al Masah Capital estimates the healthcare market to be worth $61 billion in 2020, more than double the size in 2011. In addition to developing a strong healthcare system, the MENA governments need to heavily invest in the education of their workforce to meet the challenges of their economic growth. Indeed, a lack of workers whose skills match the needs of the labor market would leave MENA countries vulnerable and unable to thrive in the long term. Furthermore, as any emerging region, with economic development, the MENA countries have experienced an increase in the number of people who can afford higher education. This increasing demand for high-quality education, the growing population (in particular, expatriates whose purchasing power are high) and the need to educate the workforce are all growth drivers of the recession proof education sector. According to Alpen Capital, the UAE’s population is expected to reach 9.9 million by 2016, with expatriate penetration exceeding an astounding 88%. Furthermore, the private education sector represents a more attractive investment in the MENA region as compared to other emerging countries such as India or China. Indeed, although India’s population is approximately 140 times larger than the UAE’s population, the value of the private education market in the UAE ($1.9B) is five times as large as India’s market ($0.4B). Higher education offers substantial opportunity for elearning investments, to enhance traditional learning techniques or even replace entire programs, twoyear college degrees could be well replaced by online material only. Last but certainly not least, there is

also a large investment potential in vocational and technical education to tackle the lack of skills of the current MENA workforce. Furthermore, the development of infrastructure for water supply, transportation, energy and telecom is vital for the MENA countries to support the needs of its growing population for higher standards of living as well as to facilitate commerce and trade. Currently, the quality and quantity of MENA infrastructure services lag behind that of other regions, and it is estimated that the region will need $100 billion per year over the next 20 years to meet the region’s infrastructure needs. But despite the general willingness to upgrade their infrastructure framework, MENA countries face severe budget and fiscal constraints, this means there is a financing gap of approximately $30–40 billion a year. To tackle their needs for infrastructure and reduce the burden of such development on their budget, governments in the MENA have started to mobilize additional private investment and expertise in infrastructure through PrivatePublic Partnerships (PPPs). According to private sector experts, the growth focus will be on basic infrastructure (utilities and transport) as well as social infrastructure. Although, the private sector will have a key role to play in providing financing and efficiencies, thereby contributing to the region’s economic recovery, PPPs need strong political commitment and a more flexible regulatory framework. Finally, despite the overall instability spurred by the Arab Spring, the energy intensive nature of the MENA region’s extraction industries, the growing petro-chemicals industry as well as rising living standards are lifting the demand for energy. Moreover, as mentioned earlier, the MENA population is growing at a rate of around 2% per year which in turn will further the demand for energy. It is estimated that the region’s energy demand is expected to continue to rise above the world average, by around 3% per year from 2010 to 2030, and electricity demand is forecasted to rise by 6% per year over the same period. Although, MENA countries allocate generous subsidies (especially GCC) for the development of power-generating capacity, the region struggles to match its needs in energy, in turn, this shortage will undermine their economic growth. The OECD report on Renewable Energies in the Middle East and North Africa estimates that 21.7 million people still lack access to electricity across the MENA region, that Yemen and Iraq have the lowest electrification rates of 39.6% and 86% respectively while Morocco and Syria (apart form Iraq) have the largest populations without access to electricity (a total of 2.5 million). To strengthen the reliability and sustainability of the energy supply, the MENA region are leveraging on their unique geographical position and its high potential for the development of renewable energies for power generation. The region has one of the highest potentials for solar energy while the Atlantic and Red Sea coasts and some parts of the Sahara Desert also have potential for large-scale wind farms. Furthermore, during a forum held by the International Renewable Energy Agency and the Ministry of Foreign Affairs of the United Arab Emirates in 2013, it was reported that MENA renewable energy capacity was set to grow 60-fold by 2030. Moreover, the chair of the Renewable Energy Policy Network for the 21st Century, Arthouros Zervos, stated in The MENA Renewable Status Report that in the last two years, renewable energy has transformed from a niche interest to a regional phenomenon reaching almost $3 billion investment in 2012 alone, an increase of almost 40% over 2011. Clearly, the development of renewable energy in the MENA region represents a huge untapped market for private investors, and yet, similarly as the infrastructure market, its development will require greater flexibility from governments. All in all, despite the multifaceted tensions triggered by the global economic downturn in 2008 and the Arab Spring in 2011, the MENA still offers attractive opportunities in the healthcare, education, infrastructure and renewable energy sectors. Not only these sectors are resilient to fluctuations in the global economic cycle, but also they are vital for the MENA region to support its economic growth. However, investments in utilities and transportation infrastructures, in a solid and attractive healthcare system and in the education of a growing workforce are somewhat being undermined by budget constraints and an unwelcoming regulatory framework for foreign investors. Clearly, private equity investors appear to be the logical solution to bridge the gap between the MENA needs and its public means to efficiently grow into a global leader, and yet, this development is subject to the MENA governments' ability to ease their policies on private investors. PPPs in the infrastructure sector are one good existent solution to the latter issue and such initiative is now paving the way for a promised boom in private equity in the MENA.

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