Kuwait leads 2016 project finance pipeline

12 October 2015

Power schemes look set to tap the most project finance next year, but the $48bn-worth of project finance opportunities forecast is unlikely to fully materialise

MEED has identified $47.7bn-worth of project finance opportunities that are expected to progress towards financial close in 2016. The power and water sector is set to dominate, with $22bn of project finance potential, or 46 per cent of the total.

Given the current negative sentiment in the projects market, combined with difficulties securing funding, the full value is unlikely to be realised. While many of the projects seeking finance are expected to progress, MEED anticipates the final figure will be between half and two-thirds – $24bn-$32bn – reaching financial close in 2016. Many of the rest will be pushed back to 2017.

“I would expect project finance volumes to be slightly down [in 2016],” says a UAE-based project finance adviser. “It will be a combination of the usual liquidity constraints and the public sector being more careful on spending.”

Prize markets

Kuwait, Egypt and Oman have the most schemes seeking finance by value for 2016. Saudi Arabia traditionally dominates the project finance market, but the kingdom has no major deals on the horizon for 2016.

The broad consensus is that governments will maintain essential infrastructure spending to support wider economic growth and diversification, despite this massive deficit.

This is playing out differently across sectors, as the vast majority of power and water projects are moving ahead, while petrochemicals projects have seen billions of dollars-worth of cancellations.

GCC governments will be forced to deplete their financial assets by $242bn, according to National Bank of Abu Dhabi (NBAD). This is based on a scenario of spending as budgeted and average oil prices of $55 a barrel in 2015.

Outside of the GCC, the funding gap is even higher, and infrastructure investment in Egypt and Jordan will rely heavily on international financial support, especially from development banks.

Exploring options

To maintain this spending, governments are already accessing debt markets and drawing down on reserves. Project finance is the third option, and there is a renewed focus on the possibilities and challenges.

“In terms of activity and tenders, it is a lot more active this year and a lot more projects are coming up,” says Gurmeet Kaur, head of projects in the UAE at UK-based law firm Eversheds.

“Both Kuwait and Dubai have passed PPP [public-private partnership] laws, so we could see a lot more BOT [build, operate, transfer] and BOO [build, own, operate] projects being tendered, but it is hard to predict when they will reach financial close.”

Project spending in other sectors is dependent on the needs of various countries, with Oman and Qatar publicly committing to the transport sector, while Saudi Arabia is reviewing unnecessary spending. MEED reported in early October that Riyadh had ordered that no more major deals be awarded this year.

Kuwait PPP

Kuwait has moved fast on priority projects in 2015, and the success of the Kuwait Authority for Partnership Projects’ (KAPP’s) massive PPP programme will be a major factor for project finance in 2016.

MEED has included five KAPP projects in its 2016 estimates that have a combined project finance potential of $3.9bn, but these could be pushed back into 2017.  

Chief among the five schemes is the largest – the second phase of the Al-Zour North independent water and power project (IWPP) – with an estimated cost of $2.4bn. While it looks likely to move ahead next year, there were lengthy delays in tendering and securing finance for Al-Zour North phase 1, Kuwait’s first and only private finance project to reach financial close and begin construction.

The biggest deal in the country, however, is for Kuwait National Petroleum Company’s $12bn Clean Fuels Project. It is seeking $9.9bn from banks by early 2016, so any delay in securing finance would affect the total value dramatically.

High Kuwaiti banking sector liquidity and appetite bodes well for project finance in the country for 2016, however.

Egypt’s needs

Egypt’s demand for project finance could hit $17.7bn in 2016, but this will undoubtedly far outstrip supply. The country’s banking sector has limited capacity for long-term project finance, and international banks and investors are wary due to concerns over currency reserves, exchange rates and availability.

“The issue in Egypt is the lack of hard currency, and until this is solved, it is unclear how quickly projects can progress,” says Kaur.

“If there is a continued shortage of hard currency, depending on which currency developers are paid in, this may limit the number of projects that can be financed as there is a limit as to how much local banks can lend.”

The government has proposed solutions to the currency problem, but no concrete steps have been taken.

The elevated figure for 2016 is driven by several large projects in Egypt that will be competing for banking and public sector resources. Not all of these will be able to secure financing in 2016, so there will be a race to secure commitments from lenders.

Some project owners have been seeking funding for several years, and have renewed their efforts as part of Egypt’s multibillion dollar investment drive. These include state-owned Middle East Oil Refinery’s (Midor’s) $1.4bn expansion of its Alexandria refinery, and the local Orascom and Abu Dhabi-based International Petroleum Investment Corporation’s (Ipic’s) $3bn El-Harmarawein coal power plant. Both schemes have made progress so far in the second half of 2015.

“Project finance in Egypt may be up,” says the project finance adviser. “But it is starting from a very low base, which affects whether you see this as dramatic or not.” The project finance market in Egypt all but stopped during the political turmoil between 2011 and 2013.

Power focus

The focus will be on Egypt’s power sector, which is projected to need $9.9bn of financing, and where a high level of funding and support from development banks continues.

Aside from public and private conventional power schemes, Egypt’s New and Renewable Energy Agency (NREA) is tendering both BOT and feed-in tariff schemes. NREA hopes all the 20-50MW projects – up to 80 – in its 4,000MW feed-in tariff scheme will sign power purchase agreements (PPAs) by the end of 2016, despite delays in releasing revised documents.

On this basis, and with development bank support, MEED’s optimistic projections are based on half the renewables projects reaching financial close within this time frame, requiring well over $1bn of finance.

Oman pipeline

Oman has a smaller yet steadier project finance pipeline, worth $768m so far in 2015, not including the Liwa Plastics scheme.

Two independent power projects (IPPs), Ibri and Sohar, as well as two independent water projects (IWPs), Barka and Sohar, are likely to reach financial close in 2016 or early 2017, underpinning more than $2bn in definite project finance opportunities. The $6bn Duqm refinery is included on a more speculative basis.

Oman also intends to tap private finance for projects outside the utilities sector, starting with $80m in financing for Oman Tourism Development Company’s (Omran’s) Crowne Plaza hotel at the Oman Convention and Exhibition Centre.

However, the Omani banking sector will struggle to find the capacity to finance such a high volume of project finance deals, and will need international banks to come in on any major project.

Meanwhile, Saudi Arabia, Qatar, the UAE and Bahrain are set to disappoint in 2016, with just the Fadhili IPP, the Facility D IWPP, the Hassyan clean coal IPP and the extension to Aluminium Bahrain (Alba) on the horizon. However, the market could still see smaller deals outside the utilities sector reach financial close.

Deals to come

MEED’s project finance forecast suggests that completed deals in the Middle East and North Africa in 2015, which have reached $18.8bn so far, will show an increase on 2014 figures from UK-based Dealogic.

A projected $25.8bn in project finance deals by the end of 2015 would be a 9.8 per cent rise on the $23.5bn in 2014, but still well below the 2013 high of $39.9bn.

Surpassing the 2013 total depends heavily on individual large projects closing, most importantly the $3.6bn financing on Oman’s Liwa Plastics. While the project owner, Oman Oil Refineries and Petroleum Industries Company (Orpic) has publicly announced that it aims to reach a financial close this quarter, delays are possible.

Saudi Arabia has been the most active market in 2015, thanks to the PetroRabigh phase 2 financing, worth $5.2bn. Egypt also saw elevated levels of project finance, all in the power sector.

Of the project finance deals so far in 2015, 54.2 per cent, or $10.2bn, were for power and water projects, and this long-running trend looks set to continue into 2016.

However, Saudi Arabia may lose its pole position for project finance as its independent power and water programme loses momentum and no major downstream oil projects are expected to be ready to tap private finance before the end of 2016.

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