Nigel Blackaby – Associate Editor
When the power and water engineering community met in Bahrain earlier this year at POWER-GEN Middle East there was every reason to expect a somewhat depressed mood, given the way in which the economic downturn had put the brakes on the region’s spectacular economic expansion. The fact that most attendees did not seem at all gloomy at business prospects tells us as much about the special position of the utility industry and its long-term perspective as it does the unique needs of the Gulf region.
Despite the doubling of oil prices in the last four months, a recent report from Moody’s describes the current conditions for the region as the worst crisis since the oil price crash of 1998/99 and suggests that GCC corporates are expected to scale back their investment programmes as a result of the global slump as well as becoming more risk averse. The trend has generally shifted towards project prioritization and away from ambitious expansion. The report contrasts recent circumstances with those of the last crisis, saying that the ample sovereign wealth funds of the GCC countries invested abroad will serve as a buffer to the loss of oil revenue but also means a greater exposure to global economic conditions. Moody’s did however note that the overall slowdown could actually benefit public infrastructure spending, as governments step up investments in roads, power, water and district cooling plants.
But despite the optimism there is little doubt that many of the fundamentals for infrastructure project development in the region have changed. In many cases these changes have meant it has been harder to proceed with large projects due to the dearth of project financing. It seems though, that in the case of well-conceived projects, this problem has been more one of delay than cancellation. In recent weeks a refinancing of the Dolphin Energy project has been accomplished and Bahrain’s $2.1bn Addur IWPP financing is expected to close soon. Market sources also indicate that the financing for the $3.3bn Shuweihat 2 IWPP will close by mid-July. These deals have taken longer than expected to be put together, and the fact that they are being completed in the current marketplace says much about the sound basis on which they are based, i.e. a real demand for power and water.
It may be too soon to assume that these developments mark a return to the market of traditional project financing. Indeed some see the current crisis as part of a longer term decline in the availability of project finance. The tight conditions have seen export credit agencies such as the Japan Bank for International Co-operation (JBIC) lending support to projects where Japanese technology is being employed. The rising margins on project finance has attracted the interest of several large Saudi Arabian banks, which have expressed interest in putting some of their vast reserves to work in regional projects for the first time. This new source of liquidity is being welcomed by project sponsors who have seen their traditional finance sources drying up since the beginning of the credit crisis last year.
But the arrival of these new players is not solving everyone’s financing problem by any means. Large projects are being reassessed and in some cases scaled back, cancelled or deferred. Saudi Arabia’s Ras al-Zour power and water project, which was to have been an IWPP managed by the Water & Electricity Company, had its private participation cancelled by the government in April. It will now be tendered on an Engineering, Procurement and Construction (EPC) basis by the state-owned Saline Water Conversion Company (SWCC). Even then, it is possible that it will be tendered in separate units rather than one single package. The switch will give contractors the comfort of guaranteed payment by the Ministry of Finance.
The move is seen as a significant setback to Saudi Arabia’s privatization plans for its water and power sectors and the trend appears to be continuing with the reported decision in mid-June by the Power & Water Utility Company for Jubail & Yanbu (Marafiq) to abandon its plan to develop its Yanbu power and water plant as a private project and instead, proceed on an EPC basis. SWCC had announced plans to tender the Yanbu 3 project by the end of the year but the lack of available long-term project finance is likely to have prompted this policy reversal.
We will have to see what type of infrastructure project finance market will emerge once the current economic cycle has passed. It is most likely to be a market with more government involvement and a greater emphasis on public-private partnership. The credit crunch may be the catalyst for a rebalancing of risk among parties involved in major infrastructure projects, not just in the Middle East, but all around the world.