According to Dr. R Seetharaman, CEO of Doha Bank Group, prior to financial crisis Government Infrastructure Projects were primarily financed through syndication loans by Foreign Banks at very competitive prices. During boom times, project financing deals worth over $30bn were signed in 2007 in GCC Post 2008 crisis, the availability of project finance dried up and cost of debt too went up. In August 2007 a tranchesize of $2.3bn in Qatalum Project was financed at L+40 bps before crisis post crisis Riyadh Power Project was financed at L+250 bps going upto 350 bps over the loan life. Post crisis multi-Currency Loans came in vogue to permit local banks lending in local currencies. Post financial crisis, most MNC banks have withdrawn from project financing space due to USD liquidity constraints back home and capital shoring up needs. The void in GCC project financing space was filled up to some extent by regional banks, Export credit agencies (ECAs) and Bonds markets."
Post financial crisis, most MNC banks have withdrawn from project financing space due to USD liquidity constraints back home and capital shoring up needs
Highlighting major project financing deals in GCC, in recent years Dr R Seetharaman says that "JBIC Bank provided about $17bn of financing in 2011 for projects in the Middle East, including $697m for Marubeni Corp's $1.6bn power-plant project in Oman and a $1.5bn power project in the UAE. Of the $7.2bn in debt raised for Qatar's Barzan natural-gas project in December 2011, $2.55bn was provided by export credit agencies. Japan gave $1.2bn, Korea lent $1bn and Italy provided $355m. Foreign Banks are unlikely to be prepared to provide the required long term project finance on account of need for Basel III capital preservation and ongoing Euro crisis. Local Banks have limited capacity to provide long term financing. A hybrid structure could be developed – where syndicate of banks can provide the initial project financing underwriting the construction risks and upon operation of projects, refinancing could take place through Bond Issues. Alternatively, project entities can issue bonds (with sovereign guarantee) during the construction phase, and banks refinance the bonds upon projects getting operational."
GCC infrastructure bonds targeting project segment may be an attractive option to investors looking for yield because the projects are typically backed by more financially sound and highly rated governments
Regarding the role of bond market for project financing, "Bonds targeting project finance can be attractive way to target developing economies as such bonds are long dated and investors searching for enhanced returns in the current low yield environment. GCC infrastructure bonds targeting project segment may be an attractive option to investors looking for yield because the projects are typically backed by more financially sound and highly rated governments and have stable, visible contractual cash flows. GCC Institutions have encouraged indirect participation of Asian economies through bond issues. Pre 08-09 period, Asian economies participation was 5-10 percent in a debt issue. Now they are generally around 15-20 percent. GCC institutions such as Abu Dhabi National Energy Co and Bahrain-based Gulf Investment Corp have tapped funding from Malaysian ringett market. NBAD and ADCB have tapped ringgit sukuk market in 2010," says Seetharaman.
Governments can also establish infrastructure funds in collaboration with the private sector
Highlighting the role of asset management for project financing, Dr R Seetharaman says that "Asset managers are often the primary gateway for foreign institutional investors seeking to make foreign direct investments in a country. Asian investors, especially from China, are keen to consider investment propositions from the region. Governments can also establish infrastructure funds in collaboration with the private sector. Asset managers can target the large and rapidly growing middle class population of China and India."
In his concluding remarks, "Infrastructure boom in GCC will encourage active participation from developing markets," says Dr R Seetharaman.