4 April 2012
The retreat of international commercial banks since 2008 has left a void at the heart of project finance in the Middle East. So how can regional governments afford to deliver the grand projects they have promised their people?
The retreat of international commercial banks in the wake of the 2008 financial crisis has left a void at the heart of project finance in the Gulf. Regional governments, stung into action by the Arab Spring, have unveiled a host of infrastructure spending programmes, but even the richest oil producers will have to seek financing from outside their own deep coffers. Where will the money come from?
"We're in interesting times, and there's a huge amount of infrastructure projects that need to be built," Aaron Bielenberg, Partner at US-based law firm Latham & Watkins tells AMEinfo.com. "We need the jobs in the region, and the sovereign budgets simply cannot handle that. There is fortunately a significant amount of liquidity in this market, but we need to redirect it for infrastructure. There is an opportunity for local and regional banks to step up and plug the gap, and there is also a great opportunity for the bond market."
Mena banks hold capital to plug financing gap
It is a task for which many analysts believe local banks are comfortably equipped. "Things slowed down after the collapse of Lehman Brothers, particularly for banks in the US and Europe," says Adil Marghub, Manager, Infrastructure Cluster, MENA, at the International Finance Corporation (IFC), a member of the World Bank Group which finances and provides advice for private sector ventures and projects in developing countries. "Banks in this region are better equipped to handle [project finance] as they have higher capital adequacy, and some have very low loan-to-deposit ratios."
Indeed, banks in Saudi Arabia and Egypt ended 2011 with loan-to-deposit ratios of around 80% and 50% respectively, compared with more than 110% in Europe. The total value of project finance deals completed globally in 2011 rose 13.2% from a year earlier, to $405bn, according to financial research firm Dealogic. And 2011 certainly proved to be a boom year for infrastructure in the Mena region, thanks in large part to Qatar's landmark Barzan Gas Project deal, which was closed last December and was the largest project financing deal completed globally in 2011.
The Barzan project, valued at $9.8bn, involves onshore and offshore gas processing facilities, which will produce 1.4bn cubic feet of sales gas per day when completed in 2015. The gas will be used to supply Qatar's growing domestic energy demand, and the deal represented a significant portion of the total value of energy sector projects sealed last year: power sector project finance grew 23% on 2010 to $89.4bn globally.
Nor is Barzan likely to be the last such scheme to tempt project finance players to Doha. According to data from MEED projects, a number of high-value projects are expected to be awarded in the next two years, including the Qatar integrated rail project, a light rail system in Doha that will interconnect with other rail projects, with an estimated contract value of over $20bn; a $6bn contract for the civil works for the metro system in Doha; $3.5bn for part of the Lusail development to the north of Doha; a $3bn expansion of the integrated water and power plant at Ras Lafan; and $3bn for phases three and four of the Musheireb project, a mixed-purpose development in the centre of Doha.
Islamic finance model provides alternative solution
Outside Qatar, Marghub at the IFC highlights the Desertec Industrial Initiative (DII) as worthy of close attention from a project finance perspective. A German-led, €400bn project to build a vast network of solar and windfarms across Mena to provide 15% of Europe's electricity supply by 2050, DII will begin building in Morocco with construction of the first phase of a 500MW solar farm scheduled to start this year.
The precise location of the €2bn plant is yet to be finalised, but it is expected to be built near the desert city of Ouarzazate, and like the Barzan project, it is also expected to attract a number of local and Islamic banks.
"Islamic finance is something that can be used very readily in these infrastructure projects," suggests Faris Mansour, Senior VP at Macquarie Capital. "The Ijara structure is very common, and it's an area in where we can expand the capital markets within this region."
Ijara is a lease contract where a lessor purchases an asset and rents it to the lessee for a specific period of time at an agreed rental. Ownership of the asset is not transferred, and so it is essentially of the same design as an instalment leasing agreement. It is already one of the most commonly used structures in project finance in the region, along with Islamic bonds, or sukuk: HSBC estimates sukuk issuance will amount to around $14bn in the Middle East in 2012.
"Long-term sukuk could be well suited for infrastructure financing, but you need regulation and you need transparency," cautions Marghub. "Malaysia is leading in terms of sukuk issuance, and that is mainly because of the standards that have been implemented. In this region, most sukuk are still coming from governments, but this will perhaps lay the foundations for more corporate issuances."
He uses the recent example of a sukuk programme by Abu Dhabi National Energy Company, known as TAQA, as evidence that well-rated borrowers with transparency are able to access such capital. Just last month, TAQA completed the sale of a $215m Islamic bond in Malaysia, as part of ongoing efforts by the state-run utilities company to diversify its funding sources. The sukuk was part of the firm's $1.1bn sukuk programme, which was established in October last year and came after Malaysia eased foreign ownership regulations and encouraged new Shariah-compliant products to attract investors. The Islamic bond was upsized from $160m to $215m on strong investor demand from Malaysian asset management companies and Islamic investors, TAQA said.
"We'll be hearing a lot about sukuks in this part of the world in 2012, as many of the large sukuks that were issued before the financial crisis are due to mature," Marghub adds. "This is a growing market and Islamic finance is well suited to this region, which has Islamic banks and Islamic borrowers. It's a question of ensuring there is regulation and there is transparency, to bring sukuk further into the infrastructure space."