In early October, Faisal Najed, chairman of Emirates Sembcorp Water & Power, the joint venture behind the Fujairah 1 independent water and power plant in the UAE, said it was considering issuing a project bond in early 2016 to finance debt on the project.

Although the issue, which could raise up to $350m, is not especially large, it reveals a potentially rising appetite among Middle Eastern project sponsors for funding innovation at a time when some traditional commercial lenders are experiencing tighter liquidity.

Predictable revenues

Power projects present near-ideal conditions for capital market instruments such as bonds or sukuk (Islamic bonds), with steady and predictable revenues underwritten by lower purchase agreements that can stretch out beyond the tenor of the projects’ debt.

In 2013, an $825m project bond formed part of the refinancing of the Shuweihat S2 independent water and power project (IWPP) in Abu Dhabi, backed by Ruwais Power Company, and underlines strong investor appetite for the asset class.

The first such use of a debt capital market instrument in a Gulf independent power project (IPP), it is hoped to provide a benchmark for repeated use in other regional power projects, offering an alternative source of funding that would compensate for commercial lenders’ increased reticence.

If SembCorp goes ahead with the project bond, it will give a broad lift to energy sector financings in the Middle East and North Africa (Mena) region, with other potential refinancing issuers waiting in the wings, notably Abu Dhabi National Energy Company (Taqa), Dubai Electricity & Water Authority and Saudi Electricity Company (SEC). Their interest in alternative sources of finance will also be compelled by the limits on banks’ exposure to regional government-related entities.

On the supply side, private sector investors are also looking to the capital markets for more competitive forms of financing.

In May 2015, Oman Electricity Transmission Company, which operates the high-voltage transmission network in the sultanate, raised $1bn on the international debt markets through a corporate bond issuance, after US ratings agency Moody’s Investors Service gave it the first investment-grade international bond issuance for an Omani corporate entity.

That bond, with a tenor of 10 years, attracted a strong investor appetite, with orders exceeding $2.7bn. It is expected to invest RO540m on upgrading the national grid.

Bond slowdown

But, says one senior project finance lawyer who has advised on large-scale infrastructure financings in the Gulf, beyond Shuweihat 2 and the potential Fujairah project bond, project bonds are not seeing the predicted uptake in the utilities sector.

“The fact is that in the competition between banks and bonds, the pricing is level at the moment,” he says. “Also, since the withdrawal of quantitative easing, there’s been a general slowdown in bond activity globally. People like the idea, particularly with local bank liquidity drying up, but the conditions just haven’t been right.”

Corporate and infrastructure bond and sukuk issuances in the GCC fell 58 per cent year-on-year by the end of August 2015, according to US ratings agency Standard & Poor’s. This fall in issuance is linked to lower oil prices and slowing government spending.

Lower oil prices have reduced government deposits into the banking system, but that is not all that is affecting lenders’ willingness to commit to project financings in the power sector. Basel III liquidity requirements now force commercial banks to match their liabilities to their assets, which has made it tougher for banks to extend loans with long tenors.

IPP awards in 2015*
  Country Status Generation capacity (MW) Cost ($m)
Mohammed bin Rashid al-Maktoum solar park phase 2 UAE (Dubai) Under construction 200 327
Salalah IPP Oman Under construction 445 620
Rumailah IPP Iraq Seeking financing 3,000 2,500
Facility D IWPP Qatar Seeking financing 2,520 1,560
Ouarzazate Solar IPP: Noor 2/3 Morocco Under construction 350 2,263
Hassyan IPP UAE (Dubai) Seeking financing 1,200 1,800
2015 total*       9,070
*=On 21 October 2015; IPP=Independent power project; IWPP=Independent water and power project. Sources: MEED; MEED Projects

Under pressure

With banks’ appetite to take on project loan assets restricted, power project sponsors have been under pressure to find new mechanisms for financing crucially needed schemes. The advantage of power projects is that in the past they have proved fruitful in attracting innovative financing techniques.

“Power projects are quite interesting from a financing perspective, as you can have a number of different approaches,” says Giyas Gokkent, a senior UAE-based economist at the US-headquartered Institute of International Finance.

“If it’s a specific power project and the assets are backing the financing, they serve as a form of collateral and these are attractive features for lenders. You can do a number of different things in terms of utility projects, whereas it becomes more difficult when doing it for transport sector projects because you need time to operate and charge a certain fee.”

With power plants, notes Gokkent, because the buyer is the government, which in turn distributes the power, the investor is assured of a certain return.

IPPs by country, 2016 (forecast)
  $m
Kuwait 2,957
Saudi Arabia 1,500
Oman 2,600
Egypt 17,670
Morocco 1,800
Other 1,500
IPP=Independent power project. Sources: MEED; MEED Projects

ECA support

More export credit agency (ECA) support is likely to figure in regional power sector financings.

The Japan Bank for International Cooperation (Jbic) has supported Japanese firms bidding for IWPP contracts in the GCC, such as the $3bn Facility D in Qatar, in which South Korean ECAs are also prominent. That project was expected to reach financial close before the end of 2015.

In Egypt, ECAs are in strong demand. For example, guarantees provided by French credit issuance company Euler Hermes were an important factor in giving banks confidence to lend $3.7bn towards a $9bn gas and wind turbine order from Germany’s Siemens that will see it deliver up to 12 wind farms in the Gulf of Suez and West Nile.

This is the second part of an agreement signed in June that will yield installed capacity of 2GW.

Development banks such as the European Investment Bank, the European Bank for Reconstruction & Development, Germany’s KfW and the International Finance Corporation are all prominent in supporting energy projects in Mena countries.

Egypt challenge

With Egypt planning to invest about $70bn in its power sector, it will be at the epicentre of electricity financing in the region in the next few years.

But the country also faces a massive challenge in that it is struggling for hard currency. Foreign reserves fell to $16.4bn in October 2015. The government has not offered developers guarantees on currency for power sector developers.

As one Dubai-based economist says, “[Egypt] needs tourist dollars, but the security situation means that tourists haven’t returned, and that has affected Egypt’s ability to bring in hard currency.”

That increases Cairo’s reliance on ECA and development finance support in its power project financing. Fortunately, these institutions seem ready to step up to the plate.

In November, MEED reported that Egyptian Electricity Holding Company had signed a financing deal with Deutsche Bank, HSBC, and German development bank KfW on 22 November for a e4.1bn ($4.4bn) 15-year financing to cover 85 per cent of a e6bn contract to build three power plants in Egypt, with Germany’s Siemens, local Orascom Construction and El-Sewedy Electric.

The international banks agreed to finance the deal thanks to the support from Euler Hermes, whose guarantees would protect the banks from heightened currency risk.

New arrangements

Egypt, along with Saudi Arabia and the UAE, is also planning to add nuclear power to the energy mix. That will force new funding arrangements, as will the advent of large renewables projects. Morocco, the UAE and Saudi Arabia are all looking to solar and wind projects, sometimes in conjunction with conventionally fuelled power plants.

Egypt’s feed-in tariff programme is seen as providing huge opportunities for private investors

Government authorities are doing their bit to help. Egypt’s New & Renewable Energy Authority issued a revised power-purchase agreement to developers on the renewable energy feed-in tariff scheme in early November, with investors said to be confident the scheme will go ahead.

In Morocco, where the government has set a target of 42 per cent of power generation to come from renewable energy sources by 2020, the government has sought to create favourable conditions for financing projects in wind and solar.

The Morocco Solar Plan aims to contribute about 14 per cent of the energy mix in the country’s electricity supply by 2020, through construction of five solar complexes that will require an estimated $9bn of investment.

The authorities have pushed down costs, enabling the likes of Acwa Power to take just four months to reach financial close on the second and third phases of the Ouarzazate Project, confirming the $2bn of projects as a highly bankable development.

Long view

As Said Mouline, CEO of Aderee, the Moroccan Agency for the Development of Renewable Energy & Energy Efficiency, tells MEED, investors like the financial stability that comes from local support and a clear mid-to-long-term view.

“The long view is particularly important when it comes to financing renewables, as we are talking about projects that tend to have very long life cycles.”

Private equity investors are also eyeing renewable energy projects, despite the long tenors that have traditionally put off private equity investors from infrastructure projects. However, Egypt’s feed-in tariff programme is seen as providing huge opportunities for private investors.

Overall, the Mena region should see an increasingly diverse mix of financing models to suit the increasingly varied modes of energy.