ON the tombstones of big-ticket project financings in the Arab world, Arab Petroleum Investments Corporationa (Apicorp) is a name that appears with increasing frequency. Apicorp, which is owned by 10 Arab states, is one of the few institutions from the region with the expertise and reputation to play in the big league of project finance alongside banks from the West and Japan.

Apicorp has been in many of the mega-financings that are drawing the attention of the world's banks to the Gulf - the $1,200 million package for the Equate Petrochemical Company in Kuwait, the $1,350 million loan financing for the Ras Laffan gas project in Qatar and the big petrochemicals deals in Saudi Arabia. Though not as ubiquitous as the other Arab player in project finance, Gulf International Bank (GIB), Apicorp is earning a reputation as a useful partner for foreign banks. 'The perception is generally fairly favourable,' says one Western project financier. 'They're one of only two banks with international stature [the other being GIB]. One thing that distinguishes them is that they have a lot of technical and engineering expertise, which is quite unusual.'

Boom baby

A child of the oil boom, Apicorp was set up in 1975 by 10 Arab oil states - Algeria, Bahrain, Egypt, Iraq, Kuwait, Libya, Qatar, Saudi Arabia, Syria and the UAE. No one government has a controlling interest, though the three richest Gulf Arab states - Saudi Arabia, Kuwait and the UAE - own 51 per cent of the company between them. An investment bank in all but name, Apicorp's equity has nearly doubled in two decades from $340 million to $600 million. It is still a small institution, however, employing 135 people.

Its balance sheet is also conservatively structured: roughly half of its $1,354 million in assets at the end of last year was in the form of marketable securities, interbank placements or cash. Apicorp earned a respectable 3.32 per cent return on assets last year, though it is very highly capitalised and produced a modest 7.5 per cent return on equity.

Chief executive Nureddin Farrag says that Apicorp does benefit from being owned by the governments that sponsor the projects it finances. 'It helps, not in securing deals as such, but in placing us in a good position with the groups doing the deals. We can claim that we have the confidence of our governments so we have a better basis for assessing the risks, both economic and political.'

Based in Saudi Arabia, Apicorp enjoys 'very close cooperation' with other regional banks like GIB, The Arab Investment Company and Arab Banking Corporation. All four are controlled by Arab governments and share a common aim: to raise capital at home and abroad for investment in the Arab economies. Western bankers who have worked with Apicorp say that the company runs itself as a private-sector bank. There may be political pressures from time to time to back particular schemes, but Apicorp can resist by pointing out that it is too small to underwrite deals on its own if foreign banks cannot be convinced that a project is viable.

Project finance margins in the Gulf have tightened markedly as foreign banks pile into the market in search of higher yields than they can get in their home markets. Apicorp's response is to try to win more fee-earning mandates to supplement its lending income. Like most Arab banks, its liabilities are mostly short-term bank deposits. This is why Apicorp has just taken out a $225 million, five-year syndicated loan. 'Up to now we have been relying on deposits from banks to supplement our equity,' says Farrag. 'We thought it was time, with Apicorp reaching the age of reason, to introduce an element of stability into the structure of our finances.' Farrag says that over time he wants to increase the ratio of medium-term to short- term liabilities to 1:1 or 2:1, which could involve issuing bonds as well as going back to the syndicated loan market.

In addition to arranging and underwriting loans, Apicorp invests on its own account in Arab industrial projects and provides financing for oil- related trade between the Arab countries and the rest of the world, with commitments averaging $111 million last year. Its $140 million equity portfolio includes petrochemicals projects in Saudi Arabia, a mining company in Jordan, an oil storage and shipping firm in Tunisia and a handful of upstream oil firms. Media reports say Apicorp intends to take an equity stake in a new private-sector venture which will produce gasoline additives in the Saudi industrial city of Yanbu.

As a general rule, Apicorp will not invest more than 10 per cent of its own capital in such projects. Most of its investments are for less than $30 million. The Saudi chemical projects are exceptions: for example, Apicorp owns $66 million worth of shares in Ibn Rushd, a company which makes industrial fibres. Farrag says that Apicorp likes to have a seat on the board of the companies it invests in, but does not get involved in day-to-day operations.

The return on Apicorp's direct equity portfolio has not been impressive, earning only $5 million last year. Farrag concedes that the record has been patchy. 'We are satisfied with the successful investments. The major ones were mostly in grassroots projects. A number of these took place five or six years ago and it takes about six years to see a substantial flow of income. Some are coming up to scratch pretty fast.' One which is not is the Arab Company for Detergent Chemicals (Aradet), a factory in Iraq which was bombed during the 1991 Gulf War. The plant is working again, but is unlikely to pay dividends to its shareholders for some time.

The future

Until recently project finance was the preserve of banks, but projects are now starting to raise money from the bond markets as well. Apicorp may create its own capital markets operation over the next five to 10 years, Farrag says, as the Arab world's financial markets grow and become more sophisticated.

'The beginnings are here. Privatisation in a number of Arab countries is allowing a nucleus of national investment and merchant banking capabilities to emerge and to service, in cooperation with their more experienced international partners, the local needs for equity and bond underwriting and placement,' says Farrag.

In time, Apicorp may open its arms to private shareholders, though the government shareholders will probably stay in control of the company. '[Privatisation] was even envisaged at the time of setting up Apicorp, and the statutes explicitly provide for it,' the chief executive says, explaining that each shareholder government is allowed to sell up to 49 per cent of its holding to private investors from its own country.

'The timing is left to each government to decide. Given the present inclination towards privatisation, this should not be far away.'