PF to focus on fewer deals
The project finance market in the Middle East is now likely to slow a little in terms of deal flow. New sectors are emerging, however, to replace those that have slowed and dollar volumes are likely to hold up. By Rod Morrison.
The latest list of prospective deals in the Middle East, produced by Project Finance International, shows the number of projects falling – from a height of 57 this time last year to 34 this year. This is due to two factors – one good and one not so good. The good point is that quite a few projects in last year's list were taken out because they have reached financial close. The not so good point is that other projects have been taken out because they are too marginal to be considered real prospects – given higher construction costs and the credit crunch.
Despite the near halving in project numbers, however, the actual dollar size of each project has gone up, with US$140bn of schemes still on the table compared with US$167bn last year. This increase in size per project is partly due to the continued rise in EPC costs, but in addition it is due to a real increase in the size of projects. Take, for example, the monster US$22bn Dow/Aramco scheme and add in Aramco's two other smaller refinery and petrochemical joint venture projects with ConocoPhillips and Total.The latter two will cost at least US$12bn each.
The mainstay of the Middle East projects market is now the power sector Ghandour whether independent power projects (IPPs) or independent water and power projects (IWPPs). There are nine IPP/IWPP deals in the prospects lists totalling US$23bn. There is a fair chance that all or nearly all the schemes will be financed. Indeed before the unprecedented events in the capital markets following the fall of Lehman Brothers, all would have reached financial close.
Since those events, debt capital has now become constrained and the world waits to see how long the fall-out will last. The first test in the loan syndication market will be the Shuweihat 2 IWPP financing for Suez and ADWEA in Abu Dhabi, which will require US$2.6bn. Three banks are leading the deal – but many more will be needed. Suez's Ad Dur in Bahrain will follow and then there are a range of schemes needing finance that are in the bid phase.
The infrastructure market is growing in importance, with 12 schemes on the list totalling US$31bn. Using private finance for infrastructure schemes is now taking off as a concept in the region. This is partly driven by sheer need. Economic development has been racing ahead of basic infrastructure development.
But in addition, it is a sign that local governments are keen to explore the long-term nature of concession deals. A private approach to infrastructure development means that the infrastructure assets procured are operated and maintained on a long-term basis. Before, contractors were able to build and walk away, leading to some unsatisfactory results.
The largest sector by dollar size remains petrochemicals. But the US$49bn number is made up of just four deals – a long-standing project in Qatar with the South Koreans and the three Aramco refinery/petrochemical joint venture deals. Aramco is pushing ahead with its schemes and it will be interesting to see how far they get in 2009. Export credit agencies – plus the local PIF and SIDF, Islamic sources, the IPO market and commercial banks – will all be needed. Whether all these sources will be enough is open to question. But it will be an exciting challenge.
The Aramco schemes aside, however, it is likely that the petrochemical sector will see a slowdown from now on. EPC prices are the main cause. The doubling, and more, in construction costs has been punishing for the sector. This will now be probably combined with a slowdown in product demand. The global economic slowdown will leading to a fall in product prices. The latter point is open to question but the sector has had a good run.
There has been a significant project build-out boom in the past few years. The same factors could be true for industrials projects as well, such as aluminium smelters, which could be in for a slowdown. However, it should not be forgotten that the Middle East retains its core strength in the petrochemical and industrial project sectors - low energy costs. These low costs will ensure Middle East schemes are cheap producers, whatever the economic environment.
Saudi Arabia is now the main market for Middle East projects. It has 12 projects in the prospects list amounting to US$90bn – well over half the US$140bn total. And it has large projects in all sector categories. The UAE, mainly Abu Dhabi, come in second with US$32bn split among 11 schemes.
HSBC remains the leading financial adviser in the region in terms of the number of mandates retained, with BNP Paribas second followed by Calyon, Royal Bank of Scotland, SG and Citigroup. RBS won two trophy mandates this year – the Dolphin refinancing and the monster Dow/Aramco project.
It will be interesting to see how the advisory markets adapt to the new capital markets. One feeling is that banks with balance sheets will get the mandates going forward. But on the other hand, the growing infrastructure sector could provide an opening for boutique advisers such as the UK accountancy firms.
Deal volumes thus far this year have held up, with a decent set of first-half results. More than US$15bn of project finance was raised in the first half of 2008. Activity dropped a little compared with the same period of 2007, to US$15,485.2m from US$15,840m. The result was not bad in the current credit-crunched environment, although the global project finance market did rise by 18% in the same period. In the first half 2006, the figure was US$25.7bn.
In 2008, Saudi Arabia and the petrochemical sector led the way, with power taking a back seat, in the first half. However, this should change in the second half, with a few mega independent water and power projects (IWPPs) set to reach financial close. The big Saudi petchem deals in the first half were Saudi Kayan and the Ma'aden/Sabic fertiliser scheme. The long-running Yemen LNGscheme finally made it into the league tables, pushing Yemen up to a presumably short-lived second place.
BNP Paribas topped the initial mandated lead arranger (MLA) list with a range of deals across the region and across sectors. Once again, despite the issues with the dollar peg, local banks accounted for the usual one-third of the total raised of US$5.3bn. However, there was a slight shift in emphasis, with Saudi banks such as Al Rajhi and Samba playing important roles. Arab Bank and GIB did not figure strongly in this year's first half.
Prospective project financings by sector
Sector Number US$bn
Petrochemicals 4 48.6
Infrastructure 12 30.9
Power 9 23.2
Industrial 4 18.6
Oil & Gas 5 18.0
Total 34 139.3
Current advisory mandates
Bank Number US$bn
HSBC 8 27.9
BNP Paribas 4 10.5
Calyon 3 13.4
Royal Bank of Scotland 2 25.0
SG 2 4.6
Citigroup 2 15.0
Credit Suisse 1 7.0
Standard Chartered 1 7.0
Riyad 1 7.0
National Commercial Bank 1 6.5
UBS 1 6.5
Ernst & Young 1 2.65
Macquarie 1 1.25
Bank Muscat 1 1.0
Project Financing Solutions 1 1.0
Taylor de Jongh 1 0.5
Prospective project financings
Project Country Cost (US$) Sector Description
Galsi Algeria 1bn Gas A pipeline project that would bring 10bcm into Italy from Algeria. Sonatrach will hold 36% and 12 European companies – including Eni, Edison and Wintershall – will hold the rest. A financial adviser is being selected.
Dubal Algeria 5bn Industrials Dubal and Mubadala have signed an MoU with Sonatrach to build a new 700,000 tpa aluminium smelter and a 2,000MW power plant.
Ad Dur Bahrain 3bn IWPP The Suez and GIC team has won the 1,234MW and 48m gallons a day scheme. Calyon, Mashreqbank and Standard Chartered are the lead banks on the deal. BNP Paribas is advising the government.
Muharraq Bahrain 120m Infrastructure The first scheme in the plan to privatise sewerage services in the Kingdom. Expressions of interest have been submitted and a shortlist of bidders is due soon. The sewerage plant will total 90,000m3 and be expanded to 160,000m3. HSBC, Fichtner and Norton Rose are advising the government.
Mostorod Egypt 2bn Oil Citadel is planning a new refinery next to an existing EGPC facility 10km north of Cairo. Morgan Stanley and SG are advising on the scheme, which will have a 65/35 debt/equity split. Bank of Tokyo Mitsubishi, Calyon, HSBC and SMBC have been appointed as pathfinder banks. GS and Mitsui have been appointed on the US$1.9bn EPC contract, so Kexim will play an important role in the financing. The European Investment Bank (EIB) could be involved too.
PPP programme Egypt 500m Infrastructure The Public-Private Partnership (PPP) Central Unit of the Ministry of Finance has launched the tender for two university hospitals with 430 beds and a blood bank in Alexandria. The Ministry of Health and Population (MoHP) has its own PFI schemes – the 400-bed Al Abassia chest hospital and the 230-bed Boulak general hospital – which will go out to tender in December and will be followed by three more in 2009. All the schemes will be modelled on the UK private finance initiative (PFI) and will have 20-year concessions. A range of PPP schemes are now emerging from the PPP unit. The first is the schools project. The Arab Contractors team that now includes Babcock & Brown, Abu Dhabi Investment Company and Samcrete is favourite. The PPP Central Unit says the overall value of its PPP schemes is US$15.3bn. Social infrastructure will make up US$6.12bn, with US$5bn to be spent on education, US$230m on educational medical facilities and US$800m on general medical facilities. Utilities will make up US$2.2bn, which will be spent on six waste-water treatment plants. The transport sector will account for US$7bn.
ADC Jordan 500m Infrastructure Expressions of interest are being invited for the new Aqaba Development Corporation port being procured under a 30-year concession. Bearing Point is the lead adviser, Taylor de Jongh the financial adviser and IB Law the legal adviser. Other consultants involved are Royal Haskoning and AECOM.
Al Qatrana Jordan 500m IPP The Kepco/Xenel team has won the reversed second IPP in the country. South Korea's Lotte Engineering & Construction will be the EPC contractor. BNP Paribas is the financial adviser. The financing will be backed by Kexim and the World Bank
Batinah Oman 1bn IWPP Bank Muscat and Project Financing Solutions (PFS) are the advisers on the 700MW and 34m gallons a day scheme. Berwin Leighton Paisner has been appointed legal adviser on the scheme and Electrowatt the technical adviser. Oman Power & Water Procurement Company is the client.
Salalah Oman 500m IWPP SembCorp and an International Power led team are bidding for the 400MW and 15m gallons a day IWPP, with SembCorp rumoured as the front bidder. The SembCorp bid is backed by a Chinese contractor, Shandong Electric Power Construction Company, the first time the Chinese have bid for EPC work for a Gulf IWPP. Doosan is working on the desalination element of the SembCorp bid. Standard Chartered is the bank on the deal. International Power/Mubadala/National Trading is the other main bidder. Seven banks are backing the IP team – Arab Bank, WestLB, Mizuho, KfW, Natixis, National Bank of Oman and DZ Bank. This team is still bidding hard as well. BNP Paribas is advising the government.
Shadeed Iron & Steel Oman 1bn Industrial Banks have put in some preliminary offers for the US$760m financing for Shadeed Iron & Steel, the 1.5m tpa steel billets plant being built at Sohar by the Al Gaith Holdings-owned company. The loan will take out a bilateral facility provided by National Bank of Abu Dhabi (NBAD) to fund construction. NBAD is now the financial adviser on the deal. The plant is under construction.
QHIIC Qatar 2.6bn Petrochems Honam Petrochemical of South Korea and Qatar Petroleum have signed an agreement to build a propylene/polypropylene and styrene/polystyrene plant under the name Qatar Holding Intermediate Industries Company. SG is advising.
Chalco Saudi Arabia 4.5bn Industrial HSBC has been appointed adviser to Aluminum Corporation of China (Chalco) on its US$4.5bn smelter scheme in the new Jazan Economic City. Chalco will hold 40% of the scheme with MMC of Malaysia having 40% and Saudi Binladen the other 20%. MMC recently announced that detailed studies on the 1m tpa scheme, plus 900MW power plant, will start this quarter and complete in the first half of next year.
GACA Saudi Arabia 1bn Infrastructure The IFC has been appointed to advise the General Authority of Civil Aviation (GACA) on the development of three airports – King Abdulaziz International Airport in Jeddah, King Khaled International Airport in Riyad and King Fahad International Airport in Damman.
Jazan Saudi Arabia 10bn Oil The scheme was offered to the private sector to build a new 250,000–400,000 barrels a day refinery. Bids are due back by March 9 2009. Eight local teams and 43 international teams have been invited to bid. The winning bidder will be include local and international companies. Aramco will supply the crude.
Jubail Saudi Arabia 12bn Petrochems An Aramco refinery and petrochemical scheme following the Rabigh model. Total has been selected as the IOC partner. JBIC, Kexim, KEIC and Sace are looking at the scheme. Calyon/Saudi Fransi is advising.
Ma’aden Saudi Arabia 7bn Industrial Saudi Arabian Mining Company is planning a 620,000tpa aluminium smelter and associated 1,860MW power plant project at Az Zabirah. The plant feedstock will come from a bauxite mine development in the centre of the country funded as part of the project cost. The project will utilise a PIF-funded US$2bn freight rail link. Alcan has signed an MoU to join the project company. Standard Chartered and Riyad are advising. The project will follow on from Ma’aden’s fertiliser scheme financed this year.
Marafiq Saudi Arabia 5bn IWPP The second Marafiq IWPP, this time to be located at Yanbu. Five teams led by Acwapower/Kepco, International Power, Marubeni, Suez and Tenaga are looking at the scheme, which is another heavy fuel oil-fired project. The scheme is not intended to have a full Ministry of Finance guarantee and instead project revenues will go to Marafiq subsidiary Newco and on to the project company. The bid deadline is December 15. HSBC is advising.
NWC Saudi Arabia 2bn Infrastructure National Water Company has been established to run PPPs in the water and sewerage sector across 17 cities and directorates by the Ministry of Water & Electricity. The first concession schemes are likely to be in Riyad followed by Jeddah. HSBC is advising NWC.
Ras Tanura Saudi Arabia 22bn Petrochemicals Dow and Aramco have signed an MoU on the mega scheme. Royal Bank of Scotland has been appointed financial adviser.
Raz al Zour Saudi Arabia 5bn IWPP The third WEC IWPP scheme. It will have a capacity of 850MW to 1,100MW and 220m gallons a day.
Malakoff/Sumitomo/Aljomaih Automotive has been made preferred bidder, subject to various conditions, on the US$4bn-plus Raz Al Zour IWPP in Saudi Arabia. The Malakoff team is backed by a bank group made up of Bank of Tokyo Mitsubishi, Citi, Mizuho, SMBC and Royal Bank of Scotland, with a large JBIC direct loan included in the package. Acwapower/Kepco is the reserve bidder. It is backed by Bayerische Landesbank, GIB, Samba, Woori Bank, China Exim and Kexim. HSBC is advising WEC.
SEC Saudi Arabia 3bn IWPP SEC is proposing three IPPs at Rabigh, Al-Qurayyah and Riyad totalling 5,200MW. The bid deadline for the first scheme at Rabigh has been put back to November 1. The project will be another heavy fuel oil-fired scheme, like Ras al Zour. It will not carry a government guarantee. Instead, it will be backed by the AA– sovereign-linked rating of SEC, which is the offtaker of the power. Under the contract, SEC will need to remain a government-owned company. The winning developer will hold 80% of the project company, with SEC holding the rest. Potential bidders include Acwapower/Kepco, International Power/Saudi Oger/Mubadala/GIC, US investor Khanjee Group, Malakoff/Xenel/Sojitz/Kansai Electric and Marubeni/UIDC (a joint venture of Arabian Bemco, Dabbagh and GE), Suez, Taqa and Tenaga. Citigroup is advising SEC.
SRO Saudi Arabia 6.5bn Infrastructure Saudi Rail Organisation (SRO) is offering its land bridge east-west freight and passenger scheme to the private sector. The Tarabot consortium has been named first preferred bidder,r with the Binladen team kept in reserve as second bidder. Tarabot bid for a subsidy of SR6,347m (US$1,688m). The Acwapower/Samsung/Pacific National team is backed by financial adviser BNP Paribas, Calyon, RBS, Arab Bank, Mashreqbank, Samba and Saudi Fransi, and Al Rajhi Saudi Binladen bid SR6,660m (US$1,771m). The scheme will have a 50-year concession and will carry both passengers and freight. National Commercial Bank and UBS are advising SRO.
Yanbu Saudi Arabia 12bn Petrochems Aramco refinery and petrochemical scheme following the Rabigh model. ConocoPhillips has been selected as the IOC partner. JBIC, Kexim, KEIC and US Exim are looking at the scheme. Citigroup is advising.
ADAC UAE 7bn Infrastructure Abu Dhabi is planning a major expansion of its airport to handle Etihad Airways' 50 A380 fleet of new jumbos. Credit Suisse is advising Abu Dhabi Airport Company (ADAC) on selecting a partner and on finance. AdP, Hochtief and TAV are bidding to become a strategic partner on the scheme. The project is actually split in two. Government-owned company Scadia will build the associated infrastructure at the airport and fund these works from public money. ADAC is responsible for putting together the other half of the scheme, the new terminal and associated works.
ADPC UAE 8bn Infrastructure Abu Dhabi Ports Company is planning a new port and industrial development. The port, which will cost US$2.5bn, will be in the Khalifa Port & Industrial Zone. HSBC is advising.
Dolphin UAE 3bn Gas The bridge loans on the completed project need to be refinanced. RBS is advising. The sponsors are Occidental, Mubadala and Total.
Emirates Steel UAE 1.1bn Industrial Government-owned GHC is building the plant and has raised an 18-month US$700m bridge loan that came in at 65bp this summer. The project company is owned by government-owned General Holding Corporation, which guaranteed the loan, so the deal is effectively Abu Dhabi state risk. The deal refinanced a previous bridge. The seven banks are ABC, adviser HSBC, National Bank of Abu Dhabi, agent Natixis, Mizuho, UniCredit and Union National Bank. The company is now seeking a financial adviser for a long-term financing.
Fujairah refinery UAE 2bn Oil Occidental and IPIC are studying a 500,000 barrels a day refinery as part of a joint venture agreement to study possible downstream and upstream projects.
Nakheel UAE 1.25bn Infrastructure Nakheel has taken over the procurement of its infrastructure from government-owned Palm Water and its successor Palm Utilities due to slow project progress. It had shortlisted developers for its US$250m 100,000m3reverse osmosis (RO) desalination plant and its US$1bn sewage treatment plant (STP) and taken bids on a concession basis. But then Nakheel has agreed a joint venture approach with Macquarie for the schemes. Nakheel will hold a majority stake in the concession companies and Macquarie will hold a significant minority stake. The bidders for the RO scheme are Aqualine/United Utilities, Acciona/Al Rajhi/Instrata and Metito/BerlinWasser. The bidders for the STP are YTL Wessex Water/Al Jomaih, MMC/ADIC and Metito/BerlinWasser. The RO is still believed to be a concession scheme but the STP scheme is now being bid on a design build and operate basis with a parent guarantees requested on the 30-year construction and O&M contract.
New Paris Sorbonne UAE 370m Infrastructure Mubadala is in the syndication market with its second university PFI-style scheme. Unlike the first, Al Ain, the deal will carry more project finance risks during construction and operations. The EPC contractor is Al Habtoor Leighton and Murray & Roberts. Calyon is advising.
Mafraq-Ghweihar UAE 2.65bn Infrastructure The first privately financed road to come from Adu Dhabi Department of Transport (ADDOT). Expressions of interest are due back from local and international firms by October 10. Ernst & Young and Allen & Overy are advising. The scheme to the Saudi border totals 327km and the upgrade is being procured on an availability basis, although the second scheme to Dubai could be a real toll scheme.
Shuweihat S2 UAE 2.6bn IWPP The scheme will total 1,600MW and 100m gallons a day. The US$2.6bn deal will be a test of the current syndication market but it has strong back-up in the shape of sponsor Suez and utility ADWEA. The deal will include a US$2.2bn senior loan and a US$400m equity bridge loan (EBL). Bayerische Landesbank, Calyon and Natixis are the lead banks. HSBC is advising ADWEA
Shuweihat S3 UAE 2.6bn IWPP The next ADWEA IWPP. It will be the same size as S2.
Zayed UAE 1bn Infrastructure This will be Mubadala's third university PFI scheme. Calyon is advising.