As government revenues in the GCC are squeezed by lower oil prices, public private partnerships (PPPs) are once again being considered as a way to finance important infrastructure projects.

The extent to which countries move towards project finance will depend on how stressed their finances are, as well as their preexisting frameworks and plans.

Oman has an oil breakeven price of $94 a barrel in 2015, according to the IMF. Last year, 84.3 per cent of its revenues came from oil and gas, according to its Central Bank. It has a strong pipeline of project finance deals and is using increasingly sophisticated lending structures.

Oman Rail’s interest in financing part of the national railway through PPP is part of this trend.

Oman considers PPP for rail network

Oman Rail is working with financial advisors and banks to study the possibility of developing sections of its 2,135km national rail project on a public private partnership (PPP) basis. Read More

There are major upcoming opportunities in Oman for lenders, across the downstream oil and power and water sectors.

“There are multiple large projects in Oman such as rail, Duqm, Liwa plastics and ongoing investment in power generation and transmission,” says Iain Morrison, Head of Commercial Banking at HSBC Bank Oman.

“One of the impacts of a reduced oil price has been an increase in bank financing at the corporate and project level, as well as an increase in more structured lending, which of course includes project financing.”

Many of these projects will be funded in US dollars due to the need to import equipment and the earnings from future exports.

The constraints on local banks for lending to one party and lending in dollars mean there are plenty of opportunities for international banks to take large portions of debt.

The budgetary pressure is also affecting how government entities and private companies approach borrowing in Oman.

“In the past we often saw less structured rolling-bridge style solutions,” says Morrison. “Now there is a move towards more structured longer tenor solutions, including project finance, syndicated loans and bond issuances. Increased structuring greatly facilitates the borrower’s ability to tap international lenders and investors.”

One example is the decision by the Oman Electricity Transmission Company (OETC) to raise $1bn on international debt markets through a corporate bond issuance in May 2015.

In Kuwait, recent moves to get its PPP pipeline moving have little to do with oil prices. The renewed activity there is related to the pace of reforms to legal frameworks and internal parliamentary politics.

Governments with more financial breathing room can take a more measured approach to structured finance.

Saudi Arabia, for example, is unlikely to be a hotspot for project finance or PPP in the near future.

GCC governments turn to debt

GCC governments are planning to revive or increase their sovereign bond issuance programmes as lower oil prices and high spending on infrastructure and social services lead to budget deficits.

Following three years, when $100-plus oil allowed healthy surpluses and expansionary spending, a return to debt markets signals a significant shift in Gulf fiscal policy. Local and international banks welcome the move, and have consistently shown a strong appetite for GCC sovereign debt. More frequent issuance will stimulate debt markets and establish a yield curve, clarifying pricing for lenders.Read More

Lending growth has also slowed from around 13 or 14 per cent in 2014 to single figures in 2015, according to Fitch’s figures, reflecting lower economic growth and less confidence.

This follows explosive growth in both lending and the project pipelines from 2012 to 2014 when oil prices were above $100 a barrel.

“What drives a lot of corporate growth is government-related lending,” says Redmond Ramsdale, director, financial institutions, at Fitch Ratings. “These projects could be airports, something around Mecca, or other strategic infrastructure.”

Saudi Arabia is expected to rationalise and postpone some of its $1.2trn project pipeline, cutting projects which are less of a priority. This means that financing opportunities will be scarcer.

“With slightly less liquidity, due to the lower oil prices, it could open up opportunities for banks, but the truth of the matter is, there are already many opportunities there,” says Ramsdale.

“There will be some new opportunities for banks, but not a significant number as we expect less project approval and possibly some delays in those started.”

Even in active sectors, financing deals may be limited. The Saudi Electricity Company’s capacity building programme has returned to a directly funded model for internal reasons, with the exception of the Waad al-Shamal Integrated Solar Combined Cycle (ISCC) power plant, which has Saudi Aramco’s involvement.

There may also be fewer petrochemicals joint ventures, as the private sector takes a more cautious approach. Large deals like the project financing for Saudi Aramco’s $8.1bn PetroRabigh project are unlikely to be repeated in the short term.

But despite political objections, once long-term oil price begins to seriously affect government finance, the motives to look at PPP again will grow.

“As the private sector matures, the PPP model will become more successful,” says Fahad al-Turki, chief economist and head of research at Riyadh’s Jadwa Investments. “This will be slow, based on previous experiences. But if oil prices don’t rise the trend will be faster, as this would create pressure.”

Selected upcoming PPP opportunities:
Project Value ($bn) Client Stage Country
National Railway 12-15 Oman Rail Main contract bids Oman
Duqm refinery 6 Oman Oil Company Prequalification for civil works Oman
Integrated Liwa Plastics 3 ORPC Main contract bids Oman
Al-Zour North 2 IWPP 2.7 KAPP Prequalification Kuwait
Sohar 3/Ibri IPPs 2.6 OPWP Evaluating main contract bids Oman
Umm al-Hayman WWTP 1.6 KAPP Prequalification Kuwait
Fadhili cogeneration IPP 1.5 SEC/Saudi Aramco Main contract bids Saudi Arabia
Taif International Airport 1 GACA Study Saudi Arabia
Source: MEED Projects