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Bridging the funding gap

Export Credit Agencies (ECAs) are increasingly filling the funding void in billion dollar projects. This comes at a time when the crisis has caused a number of international project finance banks to withdraw from the market and when local banks are challenged to fund in US dollars. This is resulting in significant interest from the East (Singapore, Korea and China). Saudi Arabias US$1.9 billion, 20-year Rabigh Independent Power Project (IPP) financing in July 2009 had 25 per cent of its debt benefiting from Korean ECA cover. Furthermore, almost two thirds of Jordans second IPP financing, the US$340 million, 18-year debt for Al Qatrana which closed in November 2009, also involved the Korean ECA. These examples illustrate the rise of competitive Far Eastern EPC contractors in the Middle East, including the non-PPP award of the MENAs first nuclear power plant project to a Korean consortium, KEPCO. The financing gap is filled not only by ECAs. Half (US$1.1billion) of the Shuweihat 2 IWPP was funded by the Japanese governments Overseas Investment Loans, following the addition of a Japanese company to the investing consortium. Local bank participation is also encouraged by increasing the use of local currency finance into the deal. Islamic finance has also come to be considered an obvious source of additional financing for PPPs in the MENA region. A key distinction of Islamic law is that it prohibits the payment of interest on loans and deposits. Consequently, banks and other lenders have designed various products and investment vehicles in which Sharia compliant funders share in the reward and risk of the owner, effectively becoming equity partners rather than lenders.

How to ensure success

Following these trends, the region should see more projects funded through a PPP route. Abu Dhabi will look to secure the regions first motorway project, the Mafraq to Gweifat Highway which is the Department of Transports pathfinder project, and Bahrain will finalise the 27-year build-own-operate Muharraq sewage treatment concession. Egypt will finance the New Cairo waste water concession and has desalination, toll road and hospital projects, similar to the UKs Private Finance Initiative (PFI) programme, in the pipeline. Jordans Aqaba Gateway concession represents the port sector, while new entrants taking the typical PPP first steps in the power sector include Syria and Yemen.

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