Bank debt should be supplemented by other sources of finance
- Oman needs to look beyond commercial banks for infrastructure financing
- Upcoming projects will drain liquidity at local banks
- Funding will be a challenge despite plans to develop projects using PPP model
Oman needs to look beyond local commercial banks to finance its ambitious infrastructure spending, according to panelists at MEEDs Oman Projects Forum on 26 October.
While liquidity in local banks is still adequate, financing megaprojects such as Liwa Plastics and major power plants would drain liquidity and leave other companies struggling to find finance.
It is vital for large scale projects to diversify the sources of financing and to tap various liquidity pools available within the financial markets says Amir Bourani, head of large corporates and public sector banking at HSBC Bank Oman. Strategic Projects have the potential of attracting multiple financing sources such as ECA [export credit agency] financing, Regional and International liquidity in both the Bank and Capital Markets. Attracting international liquidity has been done successfully on a number of occasions, such as in the power sector.
Oman is planning to introduce public private partnerships across a number of sectors, including health, transport and housing. But the financing will be a major challenge. The experts recommended bond issuance, both project bonds and by the client, ECA credit, international banks through project finance.
Debt capital markets are relatively untapped in Oman and could offer opportunities to create an alternative source of funding by reaching investors that are active regionally and globally, says Bourani. There might be price and tenor advantages, Corporates can consider establishing stand-alone formats or setting up a reoccurring programme to increase the ability to frequently tap into various pools of liquidity in the debt capital markets on a more timely and efficient manner. This leaves banking capacity for other financing needs, for example day-to-day working capital or medium term requirements.
The Omani government is aware of the issue, and is looking at financing both the sovereign debt and megaprojects internationally.
We are trying to convince the government not to crowd out the private sector on liquidity, says Ali Hamdan al-Raisi, vice-president of Omans Central Bank. They can draw on reserves, or finance abroad, by issue bonds or loans. I am not sure how many projects will go live, if the government will go ahead. Given the current deficit I am sure it will postpone some.
Bankability of projects in another concern. While Oman has had great success in independent power and water projects, it is yet to set a framework for other sectors.
Oman has been successful in the power and water sector, because of the risk allocation, says Hari Ram, senior manager in advisory for UK-based Deloitte. We know cashflows will come in as planned, there is a single buyer so you have limited market risk. But different models open questions, if demand risk is passed to the private sector.
The challenge will be transferring bankable models to larger projects with many more variables.