Welcome to the Project Finance International (PFI) Gulf Power roundtable, held in the Dubai Capital Club in November as part of the Thomson Reuters quarterly Gulf capital markets roundtables series. As some project finance markets start to stutter, hit by the new age of government spending austerity, the power markets in the Middle East are moving in the opposite direction - towards renewed vigour.
As Ravi Suri from Standard Chartered pointed out at the beginning of the roundtable, it can be expected that the project finance market will be required to stump up between US$15bn to US$20bn of finance next year - and that figure does not include any nuclear or renewable energy projects.
A range of business issues therefore face this market, but the issues are mainly positive ones, in the sense the market is clearly on the rise. While some projects continue to take longer to progress than had been initially expected, that is hardly new in the project finance world. The pipeline is strong; the method of procuring the projects is tried and tested.
There are concerns about the availability of project finance bank debt, but round the table it was largely felt, for next year at least, that there would be few problems. Into the medium term, however, there will be constraints. Harold Fairfull of Consilium pointed out that export credit agencies (ECAs), which have played such an important role in the Gulf project finance market post credit crunch, will not be around forever. The general consensus around the table was the number of top tier and second tier project finance banks has fallen off, so commercial bank debt liquidity will remain an issue. And indeed the projects now being put into the market by procurers are slightly smaller than during the previous 2006/7 boom due to the smaller credit market.
The prospect of project bonds looms. Using the debt capital markets has often been talked about for power projects in the Gulf but never tried. A momentum is now building, however, for at least some schemes to be refinanced via bonds.
Contractors, linked to their ECAs, have been bringing liquidity to the market. The Koreans are currently top of the pile with the Japanese companies suffering from a high yen. The role of the Chinese was discussed at length. Chinese contractors are starting to play an important role in the region, but for high spec items such as gas turbines, market acceptance will take time. Charlie Seymour from ADWEA said Abu Dhabi, for its part, wanted the world’s best technology, while acknowledging more joint venturing with the Chinese would become a feature. Chinese finance will come too.
The IPP/IWPP procurement model, based on long term off-take contracts, was felt to have served the market well. A more flexible merchant style market would be difficult to construct but the model could see some tweaks, particularly in terms of the underwriting of finance.