The inclusion of the last two words signals a sea change in the global project finance market, and it is a shift that will come to have an impact on the markets of the Middle East and North Africa.

The ball started rolling on 4 June, when 10 international banks signed up to a voluntary set of guidelines - the Equator Principles - for the management of environmental and social issues relating to the financing of development projects. Since then the list of signatories has grown to 19, and there are a host of other banks considering joining. Although no Middle East financial institutions have yet committed themselves, Equator has already had an impact on the region and this is likely to grow.

First, the early signatories include a number of the key international houses active in regional markets. As the table on page 42 shows, seven of the 19 subscribers feature in MEED's most recent league table of international lead arrangers on GCC project finance deals. They accounted for 44 per cent - or more than $2,300 million worth - of the underwriting in that category in 2002.

'The list of international banks active in the Gulf that have signed up to Equator will, by definition, have an impact on regional deals,' says one of the signatories. 'Environmental questions are going to be forced much higher up the agenda on regional projects. Certain issues will require much more detailed study and some project sponsors might have to rethink their strategies.'

The Equator Principles are based on the guidelines laid down by the International Finance Corporation (IFC), a subsidiary of the World Bank (see box). The terms are neither legally binding, nor are they particularly detailed, and there is plenty of room for subjectivity. The last point is likely to be hotly debated, as several other Equator signatories remain interested in the Baku-Ceyhan pipeline financing.

To date, the room for manoeuvre has not been tested on any Middle East deals. 'The only recent deal that caused some anxiety was the QVC [Qatar Vinyl Company] refinancing,' says an international banker active in the region. 'When the deal went out to bid, QVC was in breach of Qatari environmental codes with its effluent discharge. But it is worth noting that they had made a full and frank disclosure and that they also showed what their plan was to remedy the situation. However, the credit committees at some of the banks signed up to Equator did ask difficult questions.'

Given the rapid development of regional industry and infrastructure - and the enthusiasm with which cutting-edge technology is deployed - the likelihood is that few greenfield initiatives will cause insurmountable problems. 'With exceptions such as the power complex in Dubai bumping into residential areas, there are few constraints with locations for projects and generally domestic environmental standards are fairly high,' says another signatory to Equator. 'However, there are some black spots. Mining projects might run into problems, as could brownfield project sponsors and lenders in Iran, where there has been a more selective approach to environmental issues. And. project lenders could have a nightmare on brownfield projects in Iraq.'

New pressures

However, there may be pressure to change the way in which projects are put together. 'Environmental impact studies will move from being occasional to being de rigueur,' says the banker. 'Credit committees are going to demand that everyone's back is covered. There will be more hoops to jump through and they will be getting narrower. Due diligence will take longer and this will slow everything down. Sponsors are going to have to get used to this pretty quickly or they might find they get their market timing horribly wrong.'

Although these considerations will continue to preoccupy international bankers, their counterparts in the Middle East are likely to have an easier ride. None of them has yet signed up to Equator - although one regular project lender is understood to be considering it seriously - and few are likely to. 'The issue for the international banks is shareholder pressure and the exposure they have to environmental pressure groups which can be very serious,' says a senior regional project financier. 'There are no such problems in the Gulf, not least because most of the project banks have regional governments among their shareholders. It is hard to imagine many regional banks signing up to Equator and passing on domestic projects. They would, in effect, be condemning their own governments - and in many cases, their own shareholders - by doing so.'

However, shifts in market timing strategies could mean that Equator still has an impact on regional banks. There is a possibility that a growing number of medium-sized deals will be deliberately aimed at the regional banking community alone, in an attempt to accelerate the process of financing by bypassing the more rigorous criteria demanded by Equator signatories. But on the whole, the Middle East financial community has given the new initiative its cautious approval.

'We welcome Equator, even if we don't sign up to it,' says another regional banker. 'Morally and ethically it is important that the concept of best practice is established and that it is injected into the region. Bankers don't often get praised for trying to do the right thing - and there is no shortage of cynics who regard Equator as an elaborate fig leaf - but if it brings better standards to the region, it can only be seen as good.'

Tom Everett-Heath