Governments of the MENA region have tightened their purse strings and are seeking outside investment. Howard Gooder looks at the opportunities available in public private partnerships
Project Finance and public private partnerships (PPPs) are flourishing throughout the Middle East and North Africa (MENA) region, from Morocco to Oman. Indeed, contrary to the many fears expressed following the Lehman collapse and during the first six months of 2009, the project finance market has not dried up.
This is just as well, since the region’s governments now have tighter budget constraints and an even greater need for PPP. However, the international financial crisis and the resultant credit crunch have influenced both the pace of development and the structure of acceptable financing solutions.
The first MENA project financing of 2009 did not close until the end of June, when GDF Suez and Gulf Investment Corperation signed the $1.6 billion financing of the Al Dur IWPP (Independent Water and Power Project) in Bahrain. This success, in which the Arab Bank group was a mandated lead arranger, set several trends that have been followed in subsequent projects. Al Dur is a water desalination and power-generation project being built under a 25-year build-own-operate (BOO) concession from the government of Bahrain. Most of the PPP projects in the MENA region have been, and continue to be, in the power-generation and desalination sector.
PPP infrastructure projects are long-term revenue-generating assets. To avoid having to charge excessive tariffs in their early years, these projects require finance that amortises over the long asset life. However, as the bank market now has reduced liquidity and is experiencing regulatory pressure to avoid long-term commitments without matched funding, the durations of PPP bank loans have been forced to shorten.
Al Dur finances a 25-year concession with a loan-duration of only eight years. This is known as a ‘hard mini-perm’ structure. Even with the introduction of a ‘cash sweep’ dedicating all available cash flow to debt service, there will be a need to refinance 80 per cent of the debt at loan maturity. A hard mini-perm was also used in Abu Dhabi’s $1.2 billion Zayed University financing, which closed in December 2009. This was ten-year debt, of which only 30-35 per cent will have been amortised by maturity, leaving the rest to be refinanced.
Some PPP structures use a ‘soft mini-perm’ variation, in which there may be a long-term legal debt maturity, but the loan terms or tariff structure strongly encourages early refinancing. Indeed, significantly higher debt margins have been yet another consequence of the financial crisis. Abu Dhabi’s Shuweihat 2 IWPP, which closed in October 2009, has a $2.2 billion, 22-year debt, but at post-crisis debt margins with a pre-crisis tariff. This encourages the owners, if they are to gain their target return-on-investment, to refinance when lower margins once more become available.
The terms of Oman’s 15-year, $650 million financing for the Salalah IWPP, which closed in December 2009, also encourage early refinancing. It is reported that, in return for absorbing some of the extra crisis-related financing costs into the tariff, the government will receive 80 per cent of any refinancing gain.
Export Credit Agencies (ECAs) are increasingly filling the gap in billion dollar projects at a time when the crisis has caused a number of international project finance banks to withdraw from the market and when local banks have difficulty funding in US dollars. Another feature of Al Dur was that a third of the financing involved ECAs from Korea (the engineering, procurement and construction contractor is Korean) and the US (it uses GE turbines), providing insurance for the banks’ risk and direct financing, respectively.
Saudi Arabia’s $1.9 billion, 20-year Rabigh IPP financing in July 2009 had 25 per cent of its debt benefiting from Korean ECA cover. Furthermore, almost two-thirds of Jordan’s second IPP financing, the $340 million, 18-year debt for Al Qatrana, which closed in November 2009, also involved the Korean ECA. These examples also illustrate the rise of competitive Far Eastern EPC contractors in the Middle East.
The financing gap is filled not only by ECAs. Half ($1.1 billion) of the Shuweihat 2 IWPP was funded by the Japanese government’s Overseas Investment Loans, once a Japanese company had joined the investing consortium. Local bank participation is also encouraged by increasing use of local currency finance.
Islamic finance has also come to be considered an obvious source of additional financing for PPPs in the MENA region. Al Dur had a $288 million Islamic financing tranche. Saudi banks provided a $1.45 billion Islamic tranche (75 per cent of the debt) for the Rabigh IPP. Al Qatrana sourced $75 million from the Islamic Development Bank and the Zayed University had a $70 million Islamic tranche.
Following these trends, we should see more sectors financing PPP projects this year. Abu Dhabi will close the region’s first motorway project under a 25-year government concession, and Bahrain will finalise its Muharraq, 27-year BOO sewage treatment concession. Egypt will finance the New Cairo wastewater concession, with desalination, toll road and hospital projects similar to the UK’s Private Finance Initiative programme in the pipeline. Jordan’s Aqaba Gateway concession represents the port sector, while new entrants taking the typical PPP first steps in the power sector may be Syria and Yemen.
Global Arab NetworkHoward Gooder, head of Project Finance, Europe Arab Bank plc (part of the Arab Bank group). This article is published in partnership with the Middle East Association,
and was published by News desk Media in the Middle East Business Focus 2010 on behalf of the Middle East Association