Financing Infrastructure Projects in the Middle East
Chinca Seminar in Beijing
March2011
Aras Berenjforoush
Agenda
1.Infrastructure Financing and Contractors
2.Infrastructure Financing and Private Investments
3.Recent Financing Trends
Part I –Infrastructure Financing and Contractors 1.Need to access the financial viability of the projects and
the project owner’s cash flow
2.Effective financing arrangement is critical to win EPC
Contracts
3.Need to be aware where to invest resources
1.Need to access the financial viability of the projects and
the project owner’s cash flow
?EPC Contractors are taking more risks at less margin ?Delay in payments (e.g., early 2009, construction companies in Dubai were owed up to US$100m by
Dubai clients, most of them government-related)
2.Effective financing arrangement is critical to win EPC
Contracts
?Rabigh IPP Project
–1300 MW power plant project in Saudi Arabia launched by the Saudi
Electricity Company (“SEC”) in 2007. RFP was sent out at the end of
March 2008. A joint venture between ACWA Power and KEPCO reached financial close by July 2009.
–EPC contract (worth US$1.739bn) was signed with the consortium of China Dongfang Electric Corporation Limited (DEC) and SEPCO III.
–Notable for a number of firsts: (i) the first infrastructure project to reach
financial close after the onset of financial crisis; (ii) the first IPP in the
Middle East to be financed without a government guarantee for offtake; (iii) the first IPP to utilize Chinese EPC Contractors.
–The total project value was around US$2.7bn, of which Bank of China
contributed some 10%.
2.Effective financing arrangement is critical to win EPC
Contracts (cont’)
?Salalah IWPP Project
–445 MW power plant and 15 MIGD desalinated water facility project in
Oman launched by Government of Oman. A joint venture between
Sembcorp Utilities and Oman Investment Corporation reached financial
close by 23 March 2010.
–The total project cost was US$1bn, around 75% of which is to be met with 17-year project loans, and the remainder through equity. Bank of China and China Development Bank each put up US$173m, which was backed by Sinosure(China Export & Credit Insurance Corporation).
3.Need to be aware of where to invest resources
?Contractors must be aware of governments’focus in infrastructure development
?Trends of private sector investments must also be taken into account
Part II -Infrastructure Financing and
Private Investments
1.What is infrastructure financing?
2.What are the sources of infrastructure financing ?
3.What are the characteristics of infrastructure finance?
4.What is the likely future infrastructure investment need in
the Middle East?
1.Infrastructure and Infrastructure Financing ?Infrastructure facilities provide the basic foundations for commerce and trade
?Infrastructure Sectors
a)Energy (gas and electricity generation and transmission)
b)Telecommunications (telephone, television, cable, internet, etc.)
c)Transport (urban transport, railways, waterways, ports, and airports)
d)Water & Sewerage (water treatment and distribution along with
sewage collection and treatment)
e)Public works (dams, canal, and drainage etc.)
?Investing in infrastructure is vital to economic growth (e.g., per capita economic growth in African countries could increase by 2.6% per year if their infrastructure level could match those of South Korea)
2. Sources of Infrastructure Financing
1)Public Source
?70-75% of the of total infrastructure financing in the Middle East continues to come from the public sector.
?Public sources include:
–Host government budgets (equity, loans)
–Public entities (e.g., Saudi Arabia’s Public Investment Fund and Industrial Development Fund)
–Sovereign wealth funds (Abu Dhabi Investment Authority (US$627bn);
Saudi Arabia’s SAMA Foreign Holdings (US$415bn); Kuwait Investment
Fund ($203bn); Libyan Investment Authority (US$70bn); Qatar Investment
Authority (US$23bn); Algerian Revenue Regulation Fund (US$55bn))?Criticized for:
–low quality services
–relatively high costs
2. Sources of Infrastructure Financing (cont’)
2)Private Sources:
?Commercial & Investment Banks (loans, underwriting, advisory)?Project bonds and private equity funds (funds)
?Infrastructure investment funds formed by investment banks, multilateral banks and insurance companies (e.g., US$2bn Abraaj Infrastructure Capital Fund) (loans, underwriting)
?Multilateral Institutions e.g., World Bank Group, Asian
Development Bank, Islamic Development Bank (loans, grants,
guarantees, political risk insurance, advisory)
?Export Credit Agencies (guarantees and insurance)
3.Characteristics of Infrastructure Finance
1)Longer Maturity: infrastructure finance tends to have maturities of 5 to 40
years
2)Require Larger Finance (e.g., a kilometre of road could cost as much as
US$1m, a 200km project would require US$200m finance)
3)Higher Risk: large amounts are typically invested for long periods of time.
The risks arise from a variety of factors including:
a)demand uncertainty
b)environmental surprises
c)technological obsolescence (e.g., telecom projects)
d)policy and political uncertainties –in the Middle East force majeure
risks are very real arising from unexpected events like wars, civil
upheavals and natural calamities
4.Future Infrastructure Investment Needs in the Middle
East
?The World Bank estimates that between US$75bn to US$100bn a year in infrastructure investments is needed in the Middle East and North Africa (MENA) to sustain the growth rate of the recent years
a)these projects need large bulky investment
b)serious under-investment in infrastructure until 2006
?Prioritized sectors years:
1)Power
2)Water
3)Ports
4)Real Estate
4.Future Infrastructure Investment Needs in the Middle
East (cont’)
1)Power Sector
?Nearly half the project finance arranged in 2009 was in the Power Sector
?An estimated 170,000MW (estimated total cost of nearly US$200bn) in new capacity is needed in the GCC in the next 10 years with
Saudi Arabia, Iraq, Egypt and Kuwait leading the way
?SEC predicts that peak demand for Saudi Arabia will rise from around 40,000MW in 2010 to 120,000MW by 2030, that means an investment of nearly US$150bn in the next 20 years
4.Future Infrastructure Investment Needs in the Middle
East (cont’)
2)Water Sector
?Of the 15 most water-poor countries in the world, 10 are in the Middle East
?Almost all of the clean water provided to consumers in the Middle East is desalinated seawater which is very expensive (e.g., UAE and Saudi Arabia spend US$3bn each annually on desalination of water)
?MENA is estimated to have US$20bn wastewater projects in the pipeline.
?Three upcoming IWPP projects in Dubai (Hassyan), Kuwait (Al-Zour) and Qatar (Facility D) combined are expected to produce 280 MGID
4.Future Infrastructure Investment Needs in the Middle
East (cont’)
3)Ports
?US$36bn worth of port projects currently planned or underway in MENA
?Current projects are in Saudi Arabia (Red Sea, US$454m), UAE (Sheikh Khalifa, US$381m), Jordan (Aqaba, US$350m), Bahrain (Salman, US$150m), Qatar (Doha, US$7bn) and Egypt (East Port Said, US$5.4m)
4.Future Infrastructure Investment Needs in the Middle
East (cont’)
4)Real Estate
?Real estate market has collapsed in Dubai and is in trouble in Abu Dhabi but in other Middle Eastern countries the market is still growing:
–Qatar is undertaking a number of massive real estate projects in preparation for the World Cup 2022
–Saudi Arabia has announced construction of 1.2 million new homes by 2015
–Libya’s plans to develop some 115,000 residential units by 2015
–Iraq announced that it needs US$100bn investment to build 1 million new homes to accommodate its growing demand, with Baghdad
earmarking US$1.5bn for residential projects in 2011 alone
Part III –Recent Financing Trends
1.Resilience of Project Finance
2.Revival of Project Bond Market
3.Increasing Role of Local Banks
4.Growth of Export Credit Agencies and Multilaterals
5.Increase Participation of Islamic Finance
GCC Project Finance
2007 to 2010 Total Yearly Deals Closed ?Year Quarter US$bn Total
Yearly
?20071st9209
2nd7440
3rd20750
4th1451351912?20081st4303
2nd14834
3rd9475
4th1173340345?20091st86
2nd5279
3rd12815
4th594924129?20101st0
2nd18295
3rd1500
4th N/A19795
GCC Project Finance 2007 to 2010
Yearly Deals Closed
10000
20000
30000
40000
50000
60000
2007200820092010
Year
$
b
n
1.Resilience of Project Finance
?Reasons for resilience of project finance market:
a)Demographic (e.g., 55% of the Saudi Arabian population of 28 million
is under the age of 24)
b)Regional banks
c)Abundance of natural resources
?Shorter tenures and development of “Mini-Perm”project finance ─ e.g., US$2.1bn Addur IWPP in Bahrain, raised US$1.3bn in debt with
a maturity of 8 years
?Delay in reaching financial close
─ e.g., US$12.8bn Jubail oil refinery in Saudi Arabia reached financial close nearly one year later
?Lowering of prices