With major road, power station and petrochemicals projects expected to reach financial close in 2010, governments are turning to new financing strategies to fund infrastructure projects
Abu Dhabi’s Department for Transport is currently sifting through three bids for the 25-year concession to design, build, finance and operate a 327-kilometre-long highway between Mafraq and Ghuweifat. Assisted by its financial adviser, the UK’s Ernst & Young, the department is seeking the best team to deliver the region’s first road public-private partnership (PPP), thought to be worth about $2.7bn.
“Abu Dhabi is buying a service. It is able to specify services that are required for the long term, including routine maintenance and the renewal of the highway,” says Abraham Akkawi, Ernst & Young’s head of infrastructure and PPP advisory services. “The government wants certainty from this contract – certainty of price, certainty of schedule and certainty of service.”
Three major independent power plant financings are due to close in the Gulf in 2010, two in Oman and one in Abu Dhabi
This type of project also provides certainty that the road reverts back to the government in good condition in 25 years’ time. As with any public-private contract, payments to the consortium operating it depend on its meeting -performance and service criteria.
The Department for Transport is taking a 51 per cent equity stake in the project.
“The government is using the financing of IWPPs [independent water and power plants] as a model,” says Akkawi. “Any company operating in Abu Dhabi has by law to have 51 per cent local ownership. So the 51 per cent equity stake is there to enable international companies to come on board.”
In time, Akkawi says, the government will reduce its equity stake as local lenders and investors become more comfortable with the structure. “Once we have two or three projects under our belt, local funds and investors will have a better understanding of how things are going and there will be more interest,” he says.
Abu Dhabihas already completed three education PPP projects, including the $1bn Sheikh Zayed University, using the same financing model and there are more to come.
“There will be three or four further projects to be announced to the market later this year that will use this kind of Abu Dhabi government cashflow support,” says a senior banker from an international bank.
“Over the past couple of years [the state-owned development company] Mubadala has taken a large equity stake in Abu Dhabi projects but Mubadala’s purpose is not to retain these assets. It is more like a promoter. Later on it will use some of the funds that are in place to bring in other partners, which are looking for stable returns in the long term.”
It is exactly these kinds of features banks are looking for. Lenders want stable returns on tangible assets from strong clients, so independent power plants (IPPs) and PPPs will not struggle to raise cash.
“PPPs and IPPs have been quite resilient and the appetite for them from banks is quite strong, because it is an asset that is well identified,” says the senior banker. “The track record of Abu Dhabi, Oman, Saudi Arabia and Qatar is impeccable. There is not a single IPP [scheme] in default, there is not a single IPP that is exposed to major delay, unlike certain other projects.”
This is good news for the three major IPPs seeking to close in 2010. Oman is tendering two 650MW projects – Sohar II and Barka III – and Abu Dhabi is looking to finance the -Shuweihat III power plant. The Barka III IPP joins two existing IWPPs situated 30km from the Seeb reservoir in Muscat. Feedstock will be provided from the existing 24-inch-diameter gas pipeline that serves the Barka II IWPP. The Sohar III plant will join Sohar I at Sohar Industrial Port, 240km west of Muscat.
The projects’ client, Oman Power & Water Procurement Company (OPWP), is evaluating seven bids for the schemes it opened on 27 January. Originally, it had planned to appoint a preferred bidder by 20 January, but the projects are running slightly behind schedule. OPWP has anticipated that timescales might slip and has identified a -window of 12 months for operation to begin – from May 2012 to April 2013.
“The track record of Abu Dhabi, Oman, Saudi Arabia and Qatar is impeccable. There is not a single scheme in default”
Senior international banker
Even Dubai, with its relative inexperience of building IPPs and recent credit woes, should not struggle to get its independent power project financed, says the senior banker. Dubai launched its first IWPP in late December 2009.
Christophe Mariot, regional head of structured finance at French bank BNP Paribas, agrees projects such as Barka III and Sohar II will be attractive to lenders. “Banks are looking for well-identified, ring-fenced assets,” he says.
Other infrastructure schemes are borrowing features typical of IPP projects to make their schemes more attractive.
“What we are seeing more and more is the importance of linking time and cost,” says Simon Light, regional head of client services at international built assets consultant EC Harris. “We are seeing that there is money in the -system and there are developments and projects, which will be attractive to funders, but prior to investment being given, proper due -diligence is done.”
Mariot agrees that due diligence and planning are critical for securing finance.
“You may hear people complain that there is no liquidity [in the marketplace], but it is untrue. In 2009, $20bn was raised and the most successful were the people who had prepared [their financing] many months ahead.”
He points to schemes such as Abu Dhabi’s Shuweihat 2, the Dolphin project and the $11bn financing of Qatar Gas Transport Company’s fleet as examples of the most successful projects and says projects that struggle to raise investment should study their structure.
“Many projects don’t have the right sponsor or the right technology or they leave the banks with the market risk. If you leave the banks with, say, a number of hospital beds or solar panels still to be sold, you are exposing the banks to too much of the market.”
During the real estate boom project developers were prepared to borrow money at high interest rates, with some going as high as 500 basis points above the London inter-bank offered rate, but Mariot argues that, although this tactic may secure some investment, it is the wrong approach.
“The banks prefer the projects that are well structured. They will go to PPPs, universities and power projects. This is where the competition for project finance will be.”
Although Abu Dhabi is the only state to have so far used PPPs, Ernst & Young’s Akkawi says other countries are making their own plans for such schemes, albeit with differing formats. “In Qatar and Bahrain they have started to look at this from a planning perspective,” he says.
Apart from the deferment of capital expenditure by the state, another advantage of PPP is that it allows countries with no prior experience of certain types of infrastructure project to get them into operation quickly.
“When you look at new types of assets, which the Gulf has not had before, such as rail, metro, there is no legacy of operators,” says Akkawi. “To achieve this would normally take years, but we want to do it now. We might have to pay a little bit more, but PPP brings the expertise in on day one.”
Liquidity issues caused by the global financial crisis may have affected the lending power of some major banks but the infrastructure needs of Gulf states have not gone away. -Provided sponsors are well organised and properly explore their schemes, banks are likely to keep lending.
“Over the next two years there will be $20bn to $40bn of projects seeking finance,” says Mariot. “Do we have the liquidity to build -hospitals, financial districts, and universities? Probably.”
Nevertheless there will be competition for funding from some developers, particularly in the real estate sector, who will seek to refinance projects in 2010, having used short-term loans to fund capital work in the early stages.
“This may be an important factor we have not full taken into account. How many -refinancings are there in the market? This could have an impact on liquidity.”
But bankers say capital markets could offer some alternative finance, because government bonds have been oversubscribed. “If you look at the $27bn oversubscription for the state of Qatar’s sovereign bond in November 2009, this shows there is still money available on the capital markets,” says Mariot.
When it comes to infrastructure finance, the message from lenders is loud and clear. Well structured projects, with long-term planning and strong sponsors, will be able to keep -borrowing. To their credit, Gulf clients and developers appear to be listening and are adapting their strategies accordingly, launching PPPs and turning to long-term borrowing against fixed assets.
In the long term, it may mean some clients may pay more for their projects because of the cost of borrowing money for the project, but getting roads, railways and power stations built sooner rather than later has its own economic benefits.
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