Three landmark project financings were put in place in 2004, as Saudi Arabia finally joined its Middle Eastern neighbours in the limited recourse project loan boom that has gripped the region since the second half of the 1990s. But as the project numbers begin to climb higher, financiers canvassed by The Banker predicted that the necessary entrance of international banking and insurance money will make for a more complex financing environment, with harder questions being asked about guarantees and other aspects of lending security.
The prizes for banks and sponsors could be huge. The hope is that the government’s previously intermittent signals that it desires private sector companies to develop, finance and build major infrastructure projects in sectors (including railways, mobile telephone networks and, of course, the power, oil and gas sectors) will begin to translate into large chunks of overseas financing.
The outlook is good, following another year of record oil revenues that has left the world’s largest oil exporter with flushed coffers and a balanced budget. Some SR75.5bn ($20bn) of this has been allocated for new development projects, while state oil and gas giant Saudi Aramco has planned a $19bn five-year expansion programme covering upstream oil and gas, power and refining projects.
‘Crunch time’
But despite the positive surface noise, the jury is out on how far the Saudi projects boom will go. A banker close to an ongoing power project argued that for big-ticket project finance “it is crunch time”. He says: “Without at least some international finance, the bigger projects that require more than $1bn-$2bn may not be do-able. There has traditionally been enough lending capacity for lots of Saudi petrochemicals deals over the years, as the Saudi banking market is very liquid. You can even finance a $2bn project domestically if the money is short term. But when the tenors lengthen out towards 20 years – which is often a prerequisite for large infrastructure financings – international creditors will probably be needed, whatever the margins on offer.” He concludes: “International creditors will take a more robust view of security rights as deals start to shape up, which may prove quite difficult for the Saudi authorities.”
One Bahrain-based banker stressed that although the Saudi government was in favour of expanding industries and infrastructure, “the various ministries can slow and water things down”. However, he enthused over the prospects of participating in Saudi project loans. “The margins may not be spectacular, but the economics are so advantageous in all the hydrocarbons and petrochemicals schemes. There is very little economic or market risk attached because the developers get the feedstock for next to nothing as it is government-owned. The infrastructure side is less lucrative for everybody, but at the end of the day you are still dealing with Saudi government risks.”
Islamic highlight
A solid start in widening the market was achieved in 2004. Perhaps the biggest headlines were triggered in September by the Islamic financing market’s largest-ever transaction, a project-related $2.35bn murabaha deal covering the lion’s share of a licence purchase and working capital for Ettihad Etisalat Company, which was awarded Saudi Arabia’s second GSM licence and the first 3G telecommunications licence. (A murabaha deal is an Islamic finance deal involving purchase of goods by the bank, which then sells them to the client at an agreed mark-up).
Arab, local and regional banks participated as lead arrangers in the structure, which was lead arranged by Samba Financial Group and National Commercial Bank (NCB). Advised by BNP Paribas – which is establishing its first office in Saudi Arabia in 2005 – the deal is intended only as a bridge facility designed as an entrée to a long-term non-recourse loan earmarked for 2006. Gulf International Bank (GIB) assumed an identical role for Saudi Electrical Company’s (SEC) 15-year, SR6bn corporate loan in mid-2004, which will be used for project finance purposes.
The longest project financing loan so far was tapped in March 2004 by the developers of Saudi Arabia’s first large-scale independent power project (IPP), Tihama Power Generation Company, a joint venture between International Power and Saudi Oger.
Landmark tenor
Tihama raised a $510m loan arranged over a landmark 17.5-year tenor by Arab National Bank, Banque Saudi Fransi and Saudi American Bank to finance the installation of some 1074 megawatts (MW) and 4.4 million lbs/hr of steam to serve four Saudi Aramco facilities.
The financing was underpinned by a so-called energy conversion agreement, whereby Aramco will supply the natural gas and water feedstock, and the developer will be paid a tariff – guaranteed by Aramco – for producing specified volumes of electricity and steam over a 20-year period.
The Tihama contractual structure was one result of the government’s strengthening of the electricity sector’s legal and regulatory framework for private investment, and was first seen on a smaller scale by bankers in July 2003, supporting a 15-year, $170m limited recourse financing for Saudi Arabia Petrochemical Company (Sadaf)’s captive 250MW co-generation power project in Jubail, developed by a CMS Energy-led consortium. Until the Sadaf scheme, the government had always provided traditional loan guarantees, particularly for the country’s numerous projects in the petrochemicals sector.
Widening horizons
According to a very senior Gulf-based banker, the Saudi government’s energy needs are now “at least 2400MW annually for the next 20 years – probably accompanied by 250 million gallons per day (g/d) of water – and each of these project chunks alone will cost $2bn-$2.5bn. You are looking at massive projects in which foreign investment and lending will be needed.”
The government itself has predicted that more than $90bn is required for power sector investment by 2023.
Heading the immediate queue is a 700MW and 176 million g/d oil-fired independent power and water project (IWPP) planned at Shouaiba, south of Jeddah, where the selected developer will build the estimated $1.5bn-$2bn facility and sell its entire capacity and output to the parastatal Water & Electricity Company (WEC), jointly owned by SEC and the Saline Water Conversion Corporation (SWCC).
Bids from three internationally led consortia are due, and “the level of debt financing could well top $1bn,” said a project source, emphasising that for financial capacity reasons, as opposed to political risk concerns, the potential sponsors are “looking at export credit agencies and other types of offshore debt”.
He told The Banker that in summer 2004, after considerable delays, the Ministry of Finance finally approved a guarantee for WEC’s payment performance, contained in a 20-year power and water purchase agreement (PWPA).
As other power and water projects across the Middle East have shown, guarantee facilities hold the key to any IWPP programme – and at least four schemes should be implemented in Saudi Arabia over the next six years.
Questions of guarantees may have delayed the Gulf’s largest grassroots IWPP – the privately owned Power & Water Utilities Company for Jubail & Yanbu (Marafiq)’s 2400MW and 300,000 cubic metres/day complex, whose PWPA signing was originally expected in the first quarter of 2005 – but where bids are already delayed until the end of April. Financial advisor Citigroup was unavailable for comment.
Other sectors likely to require financing include steel, cement and transport. However, the biggest investments still seem destined for petrochemicals. Even though the dominant Saudi Basic Industries Corporation (Sabic) is cutting back its project agenda, it is still planning a $3.5bn greenfield petrocracker. An even bigger project expected to go forward is the $4bn-$4.5bn Rabigh refinery and petrochemical company.
