Infrastructure: Question mark over who pays for projects

A swift glance across the low-rise landscape of Riyadh reveals what project finance bankers across the region like to see: cranes.

And what is on display is not the rusting equipment that has laid dormant in some other Gulf cities, but the hustle and bustle of active construction sites.

As the Saudi Arabian government continues with one of the largest fiscal stimulus plans in the world, building infrastructure for its swelling population remains at the heart of the country's domestic policy.

But with international banks taking a step back from long-maturity project finance, curiosity is mounting as to how these plans will be funded here and elsewhere in the Gulf.

"There ought to be more concern over some of the big projects - there's still a belief that the larger borrowers, such as Qatar Petroleum, Aramco and Sabic will always get their projects done. But they'll have to push even harder now," says Jonathan Robinson, head of regional project finance at HSBC.

With more than $500bn in foreign reserves, the Saudi Arabian government is well placed to finance its petrochemical and infrastructure projects but prudent cash management points to a need to diversify sources. Funding projects looks to be reliant on combinations of government financing, local banks and Islamic bond issuance.

A recent deal closed by National Industrialisation (Tasnee) and Sahara Petrochemical to fund three new factories is an example of how finance is being raised. The companies agreed a 16-year syndicated loan of SR5.09bn ($1.4bn) with nine local lenders. They will then raise more funds by issuing an Islamic bond to investors, so diversifying the sources of funding.

Though local lenders, flush with local currency liquidity, are helping to fill some of the vacuum left by international banks, they are not able to meet all the financing needs of the kingdom's development projects, bankers say.

Local banks tend to rely on short-term funding themselves, so are not well positioned to lend over decade-long periods. They are also restricted by single obligor limits that ringfence the maximum amount that can be lent to one company or institution.

In order to fund such projects in dollars, local lenders may have to raise funds in the debt markets. Banque Saudi Fransi sold its first dollar-based Islamic bond this month, attracting orders of more than four times what was required.

With these challenges, government funds such as the Public Pensions Agency, the Public Investment Fund and the General Organisation for Social Insurance, or Gosi, can step in to support certain deals that will help to create jobs and boost the economy.

"A lot of the big financing will be done by the pension funds," says Paul Gamble, chief economist at Jadwa Investment in Riyadh. "They have their money. They don't need to go out and borrow. Most government projects can fall back on to those if they want to."

Saudi International Petrochemical, known as Sipchem, announced this month that one of its units had signed a SR164.8m loan with the Saudi Industrial Development Fund to finance building a plant.

The scale of building in Saudi Arabia is hinted at by the data for cement sales in the kingdom, which rose 16 per cent in the first four months of this year, compared with the first four months of 2011.

However, this pace is not being mirrored across the region as a whole.

"Generally, we see that there are a number of major infrastructure projects in the GCC [Gulf Co-operation Council] but activity still remains low compared to two or three years ago," says Paul Mansouri, a lawyer at Norton Rose in Abu Dhabi.

Although progress is slow, bankers say project finance opportunities are cropping up again in Abu Dhabi, Kuwait and Doha. The union rail project and a liquefied natural gas terminal in the United Arab Emirates are also luring project financiers.

Qatar's future World Cup development plans are also expected to create some excitement in the project finance arena, once they begin in earnest.

Regardless of the country, international lenders will be hoping for one thing if they are going to lend large sums, and that is government guarantees.

"They [Saudi Arabia] are firing on all cylinders right now," says HSBC's Mr Robinson. "Saudi Arabia has the largest deliverable capital plan in the Gulf. Anyone can plan projects but not everyone can deliver."

© The Financial Times Limited 2012. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation