Project Finance new_7dec10 21/05/2010 10:57 Page 71
“All of the Gulf countries have been in privileged positions over the last 18 months in that they have basically been able to keep on spending” Eckart Woertz
it is a myth that they have stepped out of project finance altogether. In fact, the rollercoaster Middle East project finance market could be about to enter a new phase of growth. Since 1995, project finance deals around the world have been completed to the tune of more than US$1.5 trillion, but global activity dropped by 40 percent over the last 18 months as the funding costs of banks increased, making long-term finance scarce and expensive. Even so, the Middle East still represents a big market for project finance deals. “In 2009, regional project finance activity was probably 50 percent of what it was in 2008 – but you have to bear in mind that it was coming down from an incredible peak,” explains Jonathan Robinson, Head of Middle East Project Finance at HSBC. “Globally the project finance market had a quarter of a trillion dollars of project finance activity in 2008. So even with the drop-off in activity you’re still talking about a very big business, and the Middle East still occupies a very important role in the global project finance market. It’s just changed. It’s changed because the economics have changed. It’s changed because the number of international banks who are still in this business has decreased, and those who are left are lending less money than they used to or are being more selective. And it’s changed because the regional banks are to all intents now primarily focused on local currency funding, their US dollar capacity is very limited, and the secondary market has all but dried up.” After closing GCC deals worth no more than US$20 billion in 2009, project financiers are predicting the value of completed transactions in the region could rise by up to 50 percent this year and to $40 billion in 2011. While this would still be less than in 2007 – when the Middle East was the world’s biggest project finance market – the oil price rebound over the last 12 months has restored confidence among project sponsors and delivered fresh urgency to the GCC infrastructure programme. “All of the Gulf countries have been in privileged positions over the last 18 months in that they have basically been able to keep on spending during the recession,” says Woertz. “They had savings that they could mobilise for counter-cyclical fiscal stimulus, so with the exception of Dubai, everybody has been able to keep projects going.”
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Such government intervention has proved reassuring, and led to a number of high-profile deals. Last June, Bahrain’s US$2.1 billion Addur power and water project closed its financing, while July saw one of the year’s largest deals – the US$4.1 billion Dolphin Energy financing. The equity markets are improving, too. Earlier this year, the Carlyle Group – the US buy-out behemoth that launched a US$500m regional fund in 2007 – acquired a 30 percent stake in General Lighting Company in Saudi Arabia, its first stake in a Gulf company after two investments in Turkey. And local houses also plan to start investing again, with Saudi Arabia’s Amwal AlKhaleej closing in on four potential investments in Egypt and Saudi Arabia.
Big projects, bigger challenges Driving this growing appetite for project finance is the power and water sector, with a number of big deals currently in the pipeline. Despite tightening credit conditions, five groups have bid for Saudi Electricity Company’s 2000MW PP11 independent power project, even though the tenors of the supporting finance were 20-22 years long. To help make the deal more attractive, SEC offered to take a 50 percent equity stake in the project, its second IPP; the first, for a power station in Rabigh, was closed last July with SEC taking a 20 percent stake. Indeed, the GCC project pipeline suggests there will be at least two big independent power and water projects (IWPPs) every year for the indefinite future; next up are four more power IPPs – required to help meet SEC’s power capacity needs to 2019 – at a rate of one every 18 months to 2016. But while this presents a huge opportunity for suppliers of equipment and services, it’s going to present a considerable challenge to the Gulf project finance industry because of the fact that so many other major schemes will be seeking long-term finance deals over the next decade. It raises a key point regarding the project finance market: that it has become, even more so than it was in the past, a matter of survival of the fittest in which only the most attractive projects – those with the best risk-versus-returns ratios – will be able to attract funding. “We’ve been following the market closely, and the international banks are being very choosey,” says Abraham Akkawi, Head of Ernst & Young’s Infrastructure and PPP Advisory Practice in the Middle East. “They want good pro-
Disposal of facility
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