The MED This Week newsletter provides expert analysis and informed insights upon the most significant developments within the MENA region, bringing together unique opinions on the topic and reliable foresight upon future scenarios. Today we turn the spotlight on investments in infrastructure, which are increasingly important to let Southern Mediterranean countries fully unlock their economic potential.
The pandemic and the war in Ukraine have been taking a heavy economic toll in the MENA region, also in terms of the decline in FDI flows. These events have had a serious impact upon the economy of countries that rely substantially on foreign capital: for instance, in Morocco the stock of Foreign Direct Investments equals 55% of GDP; in Tunisia, the ratio is 71% and in Bahrain it is even higher at 86%. However, these percentages seem not to be enough: these States – and particularly some of them such as Algeria, Morocco and Tunisia – will require more investments in infrastructure assets. The current gap in financing is quite broad, the World Bank has estimated that at least $100 billion USD annually over the next five years will be required to improve regional connectivity in transport and energy cross-border projects. Additional investment would also produce benefits for Europe, for example in the energy sector: the current crisis has enhanced the value of North African natural gas for European diversification efforts in the short term and might be a catalyst for a renewed Euro-Mediterranean relation. Moreover, the future potential of green hydrogen as a promising renewable source might enhance the role of some MENA countries as FDI recipients. Some countries within the region – and in particular Arab Gulf States – have already been investing considerably in clean energy. But foreign capital is also required to enhance wider energy security within the whole Mediterranean region. This is why the European Investment Bank, through the EU Global Gateway initiative, has targeted countries in the Mediterranean for the implementation of projects in green and sustainable infrastructure.
The Pressing Need for Regional Infrastructure Connectivity in the MENA Region
High-quality infrastructure is a crucial element for inclusive and sustainable growth. It can reduce logistics costs, facilitate trade, enhance export diversification, and boost competitiveness. Currently, infrastructure connectivity in the MENA region remains limited, but the future choices of MENA economies and their approaches to infrastructure provision stand to have a long-term impact on Euro-Mediterranean integration. According to the World Bank, investments of at least $100 billion per year over the next five to ten years will be needed to maintain existing infrastructure and build new ones. The largest financing gaps are found in the areas of cross-border infrastructure, road transport, and energy. MENA countries should therefore identify good practices and develop guidelines on infrastructure quality and interconnection prospects. A regional platform for cooperation and dialogue upon infrastructure connectivity investments could help foster trade and investment, and also ensure a coordinated transition to carbon neutrality across the Mediterranean. This platform should enable countries to work together to improve the regulatory and business environment needed to attract more private investment in infrastructure. A network of integrated logistics platforms in a cooperative framework for ports and special economic zones in the north or south of the Mediterranean can also stimulate synergies and ensure the development of infrastructure in these areas.
Rim Berahab, Senior Economist, Policy Center for the New South
More infrastructure is needed to build trust between the public and the business sector
Sustainable Investment is not possible without a strong and robust infrastructure system. This is of particular importance for Southern Mediterranean countries, whose integration in regional and global value chains can be greatly improved. For the private sector, political stability, institutional support, and the rule of law all affect how investors assess the commercial viability of a project. In addition, infrastructure investments involve complex legal and financial frameworks, however, many economies within the region lack the skills to plan, execute, maintain, and regulate infrastructure operations. Furthermore, promoting investment in infrastructure requires greater cooperation and trust between the private and public sectors. Governments and businesses must work together to attract investment in the facilities needed to develop communities and cities, as well as the people who build a sustainable, stable, and prosperous future for the region.
Jihen Boutiba, EBSOMED's Executive Director & BUSINESSMED's General Secretary
Improved energy integration as a pre-condition for a successful green transition
The Mediterranean energy system has historically been characterized by a low level of integration, with the exception of the fossil fuel trade flows linking Africa to Europe. The current energy crisis has enhanced the value of North African natural gas for European diversification efforts in the short term, and might be a catalyst for a renewed Euro-Mediterranean energy relation in the longer term. In the South Mediterranean, new investments put forward by European oil and gas companies in the upstream sector are expected to increase natural gas exports through the already available infrastructure, both pipeline and LNG. This intensified presence might go in parallel with additional investments in renewables as part of the oil majors decarbonisation efforts. Major European Mediterranean power utilities, with a global presence in renewables but historically absent within the region, also have a unique opportunity to participate in this transformation. The EU-Egypt Renewable Hydrogen Partnership, an innovative institutional cooperative framework, may serve as a model to unlock many of the barriers that have prevented a higher degree of Mediterranean engagement beyond extractivism. If successfully implemented, in the longer term, Mediterranean low-carbon energy flows are expected to reach a higher level of complexity, offering European neighbours appealing energy and climate interdependence patterns that prepare the region for a post-fossil fuels economic model.
Ignacio Urbasos Arbeloa, Energy Analyst, Real Instituto Elcano
The role of multilateral development banks in unlocking infrastructure investment to the region
The Southern Mediterranean region with its geographical proximity, industrial potential, young population and labour force, could certainly make itself an attractive destination for companies looking to re-shore production from East Asia back to Western Europe, and also carry out near-shoring investments within the Mediterranean basin. This will require not only improving and upgrading infrastructure endowment of the region, but also adapting its infrastructure networks and logistics to evolving global value chains dynamics. Investments of at least 7% of GDP are required over the next 5 to 10 years to maintain existing, and create new, infrastructure in the MENA region. Drawing from the experience of regional and multilateral investment facilities, such as Invest EU, a common fund shared by the willing development banks of European countries could be created to attract private flows, using blended finance instruments and boost quality infrastructure investments in North Africa. This fund must be functional to achieve the priorities endorsed by the European Union, in the areas of climate resilience and sustainable transition, infrastructure maintenance and renewal, energy security, digital development and social inclusion.
Raffaele Della Croce, Senior Economist, OCSE
European Union: targeting the MENA region as a priority to improve international connectivity
As a major financier of Mediterranean countries, and supporter of the EU’s Global Gateway, the EIB puts infrastructure and connectivity at the top of its agenda to promote green and sustainable growth. Acting as the EU climate bank, the EIB invests significantly in clean mobility, both within and outside the EU. In Egypt, the EIB backed the Cairo Metro Line, which aims to reduce travel times and traffic congestion for residents, and also cut CO2 emissions. Sustainable infrastructure also means renewable energy generation, green hydrogen, and energy efficiency. In Morocco, the Bank financed Fes University to construct state-of-the-art buildings equipped with solar panels. The EIB also supports solid waste treatment, pollution abatement, irrigation, and water facilities, like we are doing in Jordan, one of the World’s driest countries, with several projects. Finally, the EU Bank is among the largest investors in digital technologies, in telecommunications and other sectors, supporting innovative, fast-growing companies.
Jacopo Andrea Lambri, Head of Vice-President Office, European Investment Bank.