The UK’s Standard Chartered bank had a busy 2013 participating in several major project finance transactions in the Middle East and North Africa (Mena) region.

It was the second-most active bank, in terms of project finance lending, according to UK financial services firm Dealogic. The bank was involved in 13 deals, lending approximately $1.3bn.

“2013 was a record year for project finance deals in Africa and the Middle East,” Ravi Suri, regional head of corporate finance for the Middle East and North Africa at Standard Chartered, tells MEED.

The high-profile deals the bank helped arrange or participated in last year include the $1.43bn Al-Zour North independent water and power project in Kuwait and the $1.6bn Rabigh 2 project in Saudi Arabia, which was Saudi Electricity Company’s fourth independent power project.

Increased pricing

Also in the kingdom, the lender was involved in the $10.5bn main project financing tranche for the Sadara Chemicals project, the largest project financing in 2013. 

Looking ahead to the next 12 months, Suri anticipates the regional market will be typified by a steady stream of smaller deals.

“My sense is that 2014 may see some deal reduction,” he says. “You are likely to see smaller deal sizes in 2014, vis-a-vis a number of very large transactions in the Middle East in 2013 and increased pricing due to the impact of Basel III.”

The Basel III regulations require banks to put more capital aside for financing long-term project finance transactions, which means it will cost more for them to lend. These costs will either have to be borne by the banks or passed on to the customers in the form of increased pricing.

Such regulations could reduce the number of project finance deals lenders want to participate in. 

“Basel III regulations have worked against project finance, making it more expensive for some banks to lend. I see this trend increasing into 2014 and beyond,” Suri says.

The Saudi market, usually the powerhouse of the regional project finance market, will see a decline in the number and size of deals reaching financial close this year. However, Suri adds that there will be some interesting opportunities in other GCC countries.

“The pipeline of project finance deals in Saudi Arabia might be slower, but we will see increased activity in Kuwait, Oman and the UAE. There will also be opportunities in new markets such as Morocco and Iraq,” he says.

“There will be opportunities in desalination, power and solar. Not all of them will be mega-projects, but they will also add to the overall volume. I would say 2014 will be a tougher year than 2013.”

Suri says “there is adequate liquidity for project finance in the region for well-structured deals” over the short term.

There is a strong domestic banking sector in the region and some of the international banks that left the market during the financial crisis are starting to return.

“Export credit agencies continue to be a key pool of liquidity,” he adds. “There are new pools of liquidity coming up supporting project finance. [Some] liquidity is from Islamic finance, while the project bond market is also growing.”

Technological risk

In fact, Suri sees another issue being potentially as important, if not more so than the availability of liquidity. He says rapid advancements in technology are presenting project financiers with new risks that traditional financing models were not designed to mitigate.

Basel III regulations have worked against project finance, making it more expensive for some banks to lend

Ravi Suri, Standard Chartered

“The next 10 years will be completely different from the previous 10 years in the project finance market,” he says. “The reason for this is the huge technological changes predicted in the coming years, with advances such as shale gas, third-generation biofuels and 3D printing. We need to be alert to these new developments and how to mitigate the risks.”

Suri says that by the time a project reaches financial close, new technology may have been developed, resulting in the cost of production suddenly falling.

This means, for example, the costs and expected revenues from a solar power plant could suddenly alter, which could affect how a project finance deal is structured. Suri says banks must address these challenges.

“We need to remodel our thinking and our risk tools. We need to look at insurance. They are the best people who can arbitrage risk and return,” he says. “The whole world is changing. Project finance was never designed to mitigate technology risk; it was designed to mitigate country risk and construction risk. Project finance has worked well for the past 30 years but in the next 10 years we will need to focus on ways of mitigating these new risks.”