Financiers eye Saudi PPP opportunities

16 February 2017

Pipeline of deals for 2018 looks promising after a period of low deal flow in the kingdom

Saudi Arabia had a disappointing year for project finance in 2016, with just one new deal reaching financial close: a $720m loan for King Abdullah Port in Jeddah from Arab National Bank and Sabb.

Three refinancings brought the yearly total to $4.3bn, significantly down on 2015, when the total value of project finance in the kingdom reached $10.9bn.

The volume of project finance in 2017 is unlikely to recover, despite one project already reaching financial close in January. France’s Engie, the developer for the $1.2bn Fadhili independent power project (IPP) concluded a $950m project finance deal with the local National Commercial Bank and Islamic Development Bank, Japan’s Sumitomo Mitsui Banking Corporation and Mitsubishi UFJ Financial Group, Germany’s KfW and Korean export credit institutions.

The number and size of deals in the coming 12 months will be far below the high volumes seen in Saudi Arabia in 2013 and 2014, which included deals such as the $20bn Sadara Chemicals Company and the $5bn Maaden Waad al-Shamal Phosphates Company financings. There are not thought to be any major petrochemicals projects in the finance pipeline, reducing the opportunities for megadeals that attract tens of international lenders.

Despite the lack of deals to syndicate, financiers will not be idle in 2017.

“By the end of 2017, the market will look very different from the end of 2016,” says Leroy Levy, partner at the US’ King & Spalding. “Everything stopped in 2016, but the wheel is beginning to turn again. Not a lot of Vision 2030 PPP deals will close this year, but the first quarter of 2018 could see a lot of activity.”

Wave of PPPs

Transaction advisers and lawyers are already starting to work on a number of public-private partnerships (PPPs) and independent (water and) power projects (I(W)PPs). The National Transformation Programme (NTP), revealed in June 2016, envisages a much larger role for private investment in infrastructure and social infrastructure.

Utility companies such as Saudi Electricity Company (SEC) and Saline Water Conversion Company (SWCC) have returned to a private procurement model after several years’ hiatus. In addition, a number of other public sector clients now have to self-fund any major capital expenditure.

Despite having little track record in the kingdom, these government bodies are looking to PPP for any suitable project, promising a wealth of project finance opportunities.

“We are poised for a boom,” says a Riyadh-based banker. “How much happens this year depends on how quickly frameworks are established, pilot projects are agreed upon and tendered.”

Power, water, wastewater, airports and education projects are making good progress, while health, housing, metro and road projects appear to have stalled.

Selected project finance transactions   
ProjectOwnerStageSizeAdvisers
Fadhili independent power project (IPP)Saudi Aramco/SECFinancial close achieved in January1,507MW, 1477 t/h steam, 769 t/h waterShearman & Sterling (lenders), White & Case (Aramco)
Al-Jouf and Al-Rafha photovoltaic (PV) solar projectsSECDeveloper bidding100MWHSBC, DLA Piper, DNV
PP15 IPPSECPrequalification5,400MWHSBC, DLA Piper, Fichtner
Rabigh 3 independent water project (IWP)SWCCAppointing advisors600,000 cm/dTBA
Khafji solar IWPWECUnder construction,  switching to IWP60,000 cm/d + 20MWSynergy, Clifford Chance, Fichtner
Shuaibah IWP expansionWECStudyTBASynergy, Clifford Chance, Fichtner
Jubail independent water and power project (IWPP)SWCCAppointing advisers1.5 million cm/d + 3,000MWTBA
Jeddah airport 2 sewage treatment plant (STP)NWCStudy500,000 cm/dTBA
Taif STPNWCStudy270,000 cm/dTBA
Schools PPPTatweer Building CompanyStudy300 schoolsHSBC, King & Spalding
Taif airport PPP and three regional airportsGacaTender on hold5 million passengers a year (Taif)Gulf International Bank, Clifford Chance, Hillbrook Partners
t/h=Tonnes an hour; cm/d=Cubic metres a day; TBA=To be announced. Source: MEED

The current timescales suggest the first of the new projects in the pipeline could be tendered in mid-2017, and be arranging finance in the first half of 2018.

Power and water

The PP15 IPP will be the largest privately financed conventional power project in the region, with a capacity of 5,400MW. Prequalification has begun, and with SEC’s experience in procuring IPPs, the project should progress rapidly.

The same can be said for SWCC’s and National Water Company’s (NWC) desalination and wastewater projects, which include the Rabigh IWP, with a desalination capacity of 600,000 cubic metres a day (cm/d), and the Jeddah airport 2 sewage treatment plant, with a capacity of 500,000 cm/d. There is now a strong pipeline in the power and water sectors, which is likely to attract the greater capacity of international lenders.

“There is an incentive to include US dollar financing as the margins are more attractive; the Libor [London interbank offered rate] is low and the Sibor [Saudi interbank offered rate] is higher at the moment, and some of the project costs are likely to be in dollars,” says the banker. “Given the quantity of finance needed to implement these plans, developers need to tap all sources of finance.”

These base interest rates will affect developers’ cost of finance.

Saudi Arabia’s high credit rating may have, however, been undermined by a large backlog in payments to contractors by public sector clients.

“International banks have a lot of appetite, but it depends on how smart the Saudi government is at structuring deals,” says Levy. “If they are structured properly with credit support when needed and strong regulatory regimes, banks would forget the payment delays of 2015 and 2016.”

The utilities sector, which has plenty of precedent, is likely to dominate the next round of project finance deals in the kingdom. Moving away from utilities into transport and social infrastructure, PPP becomes more complex and challenging.

Outside utilities

The General Authority for Civil Aviation has already run into issues around traffic risk and guarantees with the tender of the new Taif International airport as a PPP. It went back to the drawing board in 2016 with a new set of advisors led by the Manama-based Gulf International Bank.

The advisory work also covers three regional airports, which may be less attractive to investors due to lower passenger numbers. Taif International airport is now expected to be retendered in 2017, with a capacity of 5 million passengers a year. If the tender attracts more interest, the resulting project finance deal would close in 2018 at the earliest.

Meanwhile, Tatweer Building Company, attached to the Education Ministry, is preparing what is set to be Saudi Arabia’s first social infrastructure PPP. It has appointed King & Spalding and the UK’s HSBC to advise on the development of 300 schools.

Deals like this, including hospitals and waste collection, are too small to attract international lenders, but will prove challenging to clients and local banks unused to structuring PPPs.

“There is going to be a learning curve as local banks have never done PPPs outside aviation,” says Levy. “When they are partnering with international banks it will be less of an issue, but if it’s a smaller deal with just Saudi banks we’ll have to see how they evaluate and mitigate risk.”

This has the potential to cause some delays, while government bodies are under pressure to deliver infrastructure.

Both local and international banks will place importance on the offtaker.

“One of the challenges on bankability is the counterparty to the concession,” says the Riyadh-based banker. “If banks can’t get comfortable with the counterparty they might require some government support, for example, with a ministry or authority that doesn’t have a track record in PPP like SEC does.”

Banks are likely to seek government guarantees on payments, while Riyadh will want the projects to remain off the balance sheet, so some compromise will be needed.

With a potentially huge pipeline forming, lenders will spend 2017 studying the deals and deciding which are well-structured and worth supporting in this untested market.

If the NTP progresses to schedule, 2018 should be the year the Saudi project finance market returns.

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