As the Gulf states' populations demand better infrastructure, healthcare and education, the PPP model has attracted attention as a way to attract capital to sectors outside hydrocarbons, while also promoting better budgetary management and transparency in public finances. Most activity is centred on Abu Dhabi, which has successfully closed three deals and is now moving ahead with the next wave. State-owned Mubadala has provided most of the equity that the programme has attracted.

"PPPs are likely to increase in the region as governments try to stretch what they can do directly with their budgets, as well as bringing private sector skills into sectors such as healthcare and education," says Andrew Hodgman, partner at DLA Piper in Dubai. "For example, Saudi Arabia has been looking at increased private sector involvement in its economy, and has potential to be a big PPP market."

Elsewhere the development of PPP has proved to be more problematic. The military engineering college PPP in Oman was shelved in 2008 after four years of planning. And the $7 billion Saudi Landbridge rail PPP has been taken back into the public sector and will be financed on-balance sheet by the Saudi government.

"In the short term we are likely to see some projects moving forward through direct government funding, but as the lending climate improves we would expect to see PPP take off across the GCC region," adds DLA's Hodgman.

A further complication is the current state of long-term project lending. The sheer size of projects in the GCC region has necessitated multi-sourcing of financing in recent years, and regional banks came to play an important role, alongside the big global lenders like BNP Paribas, Calyon and Deutsche.

Though regional banks still highly rate Abu Dhabi and Mubadala risk, many have pulled back from long-term lending, which effectively rules them out of the PPP market. That will leave PPP syndicates typically made up of a couple of domestic banks plus a larger group of international lenders.

However, for 2010, the debt requirements of PPP in the GCC remain relatively modest, and market participants remain optimistic about the funding prospects for the next batch of deals.

"Abu Dhabi has been leading the way with PPPs in the GCC region, with two universities and a satellite deal already closed," comments William Breeze, a senior associate at Freshfields in Abu Dhabi. "We are now seeing PPPs moving forward in the healthcare sector, while the Mafraq-Ghweifat highway PPP is attracting a lot of interest and is likely to be the first of a number of road deals. We expect to see PPPs growing in importance across the GCC region, while further afield Egypt is leading the way," he says, referring to transactions under the Egyptian Education Initiative.

Mubadala makes a market

The leading sponsor in PPP activity thus far has been Mubadala Development Company, the strategic investment company at the centre of new infrastructure plans that its government hopes will transform the Abu Dhabi economy. Despite reporting heavy losses for its last financial year, because of write-downs on asset values, it says it remains committed to growth.

In December 2008 the Paris-Sorbonne University Abu Dhabi PPP project reached financial close. The project's sponsors are Mubadala and Abu Dhabi Educational Council (ADEC), and it was the first time that an Abu Dhabi-owned project company raised long-tenor debt against revenues from budget allocations. The $323 million debt package had a 20-year tenor. Mandated lead arrangers (MLAs) were First Gulf Bank, Bank of Tokyo Mitsubishi, BNP Paribas, Calyon, RBS and SMBC.

The deal was important for the development of PPP in the Emirates since it was the first time that lenders took performance risk on local contracting entities. The holder of the design and build contract for the campus was a joint venture of Al Habtoor Engineering Enterprises and Murray & Roberts Contractors. The non-academic facilities management contractor is John Buck International Properties. This is the Sorbonne University's' first campus outside of France.

Back in April 2007 Mubadala had signed a 28-year concession agreement on standard PFI/PPP terms to develop a new university campus at Al Ain City. This was done on a build-own-operate-transfer basis, and the first phase was completed in 2008, with all four phases due to be completed by the end of 2010. The $410 million debt package featured MLAs Barclays Capital, National Bank of Abu Dhabi, RBS and Societe Generale.

Mubadala's most complex deal involved the satellite Yahsat. The timing of the Yahsat financing was somewhat fortunate, since it was signed shortly before the collapse of Lehman Brothers triggered the worst phase of the financial crisis. Yahsat was signed in early September 2008 with a group of 14 banks taking an average of just under $100 million each, with the loan priced at 110bp over Libor, rising to 140bp. In today's market margins would likely be double or triple that level.

When it closed in March, Yahsat received commitments in excess of $1.6 billion, which was split into a 14-year $1.014 billion non recourse loan, $100 million of standby facilities, and a $80 million debt service reserve letter of credit. In the final allocation, fourteen banks participated. The lending group had a good geographical mix; Abu Dhabi Commercial Bank; BTMU; BayernLB; BNP Paribas; Calyon; EDC; First Gulf Bank; HSBC; ING; Mizuho; National Bank of Abu Dhabi; Natixis; Societe Generale; and Standard Chartered Bank.

"Skynet 5 in the UK was the pathfinder deal on satellite PPPs, but as well as providing military satellite capacity Yahsat is providing commercial communications services," says Freshfields' Breeze, which advised the lenders on the Yahsat financing.
Transport's turn to shine.

Some of the same banks are now looking forward to the next deals, and transportation capacity is likely to feature prominently. In February the Abu Dhabi Department of Transport pre-qualified five consortiums for the Mafraq-Ghweifat highway, which runs to the Saudi border.

The project is of strategic importance to Abu Dhabi since it will serve as a land link between the UAE and Saudi Arabia, as well as Qatar. The five pre-qualifiers were; ANITE (including Autostrade and Impregilo); Bouygues (also featuring China Habour Engineering); CCCC-MTD (China Communications Construction Company and MTD Capital of Malaysia); IRTIBAAT (including Macquarie Capital, Abu Dhabi Commercial Bank and Al Jaber Transport & General Contracting); and Mafraq Motorway Group (including Strabag). Also coming up is the Metro Light Rail Project, which is expected to generate substantial international interest.

Bankers are divided as to whether PPP travels badly outside the UAE, badly outside of Mubadala deals, or badly into the region's transportation infrastructure. Experience with the Saudi Landbridge railway, and the military engineering college in Oman, illustrate that some patience is going to be required on the part of financial advisers, law firms and sponsors. Serco and Bahwan Contracting were named as preferred bidder in 2004 for the $1.4 billion Joint Technical College for Oman's military, but early in 2008 the Omani government pulled the plug.

The Saudi Landbridge saga is a good illustration of the difficulty of doing major PPPs in the region. The Tarabot consortium, led by power and water developer Acwa, was named as preferred bidder on the $7 billion project in April 2008. The project involves the upgrade of existing rail line between Dammam and Riyadh, and the construction of a new 945km line from Riyadh all the way west to the port of Jeddah, mainly for freight.

The project was structured as a 50-year build-own-operate-transfer concession, owned 80% by the sponsors and 20% by the Kingdom of Saudi Arabia. Tarabot comprised seven Saudi partners and Australian rail group Asciano.

Financial advisers UBS and National Commercial Bank of Saudi Arabia were selected in December 2003, and the tender process began in 2005. Having been named preferred bidder in April 2008, the Tarabot consortium was expected to reach financial close within twelve months and start construction soon after, but got caught up in the global financial turbulence sparked by the Lehman collapse in September.

The tender was then re-opened, allowing Tarabot to join forces with second placed bidder Saudi Binladen Group, also bringing their financial adviser Deutsche Bank on board. But even with the increased strength of this merged grouping, many felt that the project would not proceed as a PPP. "The Saudi Landbridge PPP has been a long story without a happy ending," comments one observer. "To use a rail metaphor, the PPP deal has hit the buffers."

Some see the Landbridge problems simply as collateral damage from the global credit crunch, but others feel that there are still some philosophical objections within some quarters of the Saudi government to high-profile national projects being done via PPP.

Unlike smaller PPPs in Abu Dhabi, which could get done with a relatively small group of local and foreign banks, the Landbridge would have been difficult even at the best of times. One challenge for very large PPPs is the current lack of underwriting capacity, and the absence of regional banks to take tickets, leaving the international banks to form a club with one or two domestic banks.

Less liquid, less local

The financial crisis and economic downturn has hit the GCC hard, especially because of falling property values. In mid-August Moody's placed the ratings of several UAE banks on review for possible downgrade, citing the rising challenge facing the banking sector. On review are Mashreqbank and Dubai Islamic Bank, as well as Emirates NBD, a product of the merger between Emirates Bank International and National Bank of Dubai.

The overall weakness of regional banks is feeding through into their project finance/PPP lending activities, and a number of high-profile banks have basically stopped adding to their loan books for the rest of 2009. They could return in 2010, but there are doubts as to how fast regional bank liquidity will come back, especially since international term lending is likely to be slow to return.

Regional banks had access to plentiful international lenders in 2005 and 2006, but since mid-2007 those deals have dried up. This access to global liquidity helped regional banks build up their project finance lending activities, and regional names were increasingly to be seen on syndicates. For example, in the first half of 2007 Gulf International Bank participated in nine major project finance deals.

"There have been three-year term loans which needed refinancing this year, but we have not seen any deals, since borrowers know that the pricing would be extremely high," comments one arranger. "Regional banks are dependent upon deposits, and with that constraint it is hard to see how lending will come back," he adds. "It may take another eighteen months for regional lenders to get back into project lending."

"It is a very selective market, mainly government-related entities from Abu Dhabi and Qatar that have been doing both bond offerings and corporate loans," says another banker with a regional institution which has drastically scaled back its activities.
"We are generally only interested in short-term lending in the one- to three-year range, unless it is a very close client relationship – though we did roll over on Dolphin," he adds, referring to the ten-year Dolphin Energy refinancing loan which signed in late July. But Dolphin, which is 51% owned by Mubadala, is an exceptional deal, and many banks feel that they have to participate for the sake of long term banking relationships. The same cannot be said of lower profile PPP deals that may be looking for bank debt in 2010.