Funding the future—project finance in the Middle East

Project finance activity is on the rise in the Middle East say Peter Avery, and Benjamin Goss, partner and senior associate at Clifford Chance LLP. They predict that sharia-compliant project financing structures will continue to feature heavily in the market.

Is 2014 shaping up to be a good year for project finance?

With improved sentiment and additional bank liquidity following the completion of major regional restructurings, we have seen a cautious increase in the level of project finance activity across the Middle East during 2014 and expect that activity to continue. There is still a huge requirement for infrastructure (including power, water and sewerage treatment) across the region. Export credit agencies continue to feature in many of the significant project finance transactions, along with European, Asian and regional banks. There remains an expectation of significant future activity in the renewables sector, particularly the solar market, and this has raised the profile of renewable energy as an alternative energy source in the Middle East. Demand for sharia-compliant project financing structures in the Middle East remains strong, particularly in Saudi Arabia.

Are you seeing any trends emerging in project finance this year?

Sustainable and diversified energy sources have become a key theme across the Middle East. Jordan, Saudi Arabia, and the United Arab Emirates (UAE) are three jurisdictions in the Middle East that are focusing on renewable energy as an integral component in their future energy mix. Saudi Arabia announced an ambitious renewable energy target of 54 gigawatts by 2032, with solar energy expected to constitute approximately 75% of that target. Jordan and the UAE have also been active in the solar space, with the Dubai Electricity and Water Authority (DEWA) currently tendering the 100 megawatt Mohammed Bin Rashid Al Maktoum solar photovoltaic power project expected to be operational in 2017. Dubai's sustainable and diversified energy strategy also extends to clean coal, with the DEWA seeking to procure the Hassyan project that will use clean coal as feedstock for electricity generation.

What are the main challenges for project sponsors and/or lenders?

Credit analysis, due diligence, structuring, and negotiation are some of the key challenges facing project finance sponsors and lenders investing in the Middle East where bespoke financing plans are required to accommodate multi-source financing arrangements.

Government support has typically been an important feature of projects in the Middle East. This can be provided in a number of ways, including through direct support (such as government guarantees to support offtake arrangements) or through the advance of 'soft financing' by specialised government agencies such as the Saudi Arabian Industrial Development Fund. Combined with conventional and sharia-compliant financing from international and regional commercial lenders, financing and cover arrangements from international export credit agencies, and equity financing from project sponsors, multi-source project financing continues to be a complex undertaking. Differing objectives, reporting requirements and capital allocation restraints that arise in multi-source project financing can lead to concerns about the administration of the financing in the ordinary course and in the context of restructuring.

Are there any jurisdictions which are particularly active?

Qatar is undertaking a significant programme of infrastructure upgrade and expansion in preparation for the FIFA World Cup. This which includes new investment to improve existing capacity, such as the Facility D independent water and power project, a 2000 megawatt power plant and 144 million gallons per day desalination plant.

In Kuwait, the Az-Zour North Independent Water Power project was the first project successfully procured under the Kuwait BOT law. It is hoped that this significant milestone opens up the projects pipeline in Kuwait.

Sponsors and debt and equity investors in the Middle East are increasingly looking at opportunities in Africa, including South Africa, Mozambique, and Tanzania, in recognition of the huge demand from a rapidly growing population and middle class.

What does the second half of 2014 have in store for project finance?

Multi-source financing arrangements are expected to continue for projects executed in the Middle East, as is the demand for the involvement of strong sponsor(s) and government(s).

We anticipate that if not in the second half of 2014, then in the near future, there will be more focus on project bonds as a feature of the project funding plan, which should allow greater liquidity to return to the market to further boost the projects activity.

In terms of sectors and countries, we expect there will be continued demand in the water, wastewater, conventional power and mining sectors, and continued growth in renewable energy. Sharia-compliant project financing structures will continue to feature heavily, particularly in Saudi Arabia. We also expect that the pipeline of work in Kuwait, Oman and Qatar will focus attention on those countries.

Interviewed by Anne Bruce.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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