You cannot afford to wait
Most Middle East countries have three things in common: a growing
population, the need to replace aging infrastructure in the power
sector and an increasing desire by governments to move closer to
balancing the budget. For these and other reason, opportunities for
private participation projects in the infrastructure sector are
increasing.
According to Capital DATA ProjectWare, there are 298 projects in the pipeline in the Middle East, excluding oil, gas and petrochemicals projects. Most projects are concentrated in the infrastructure, road and water sector. Most are concentrated in Israel and Saudi Arabia.
But there are reasons to believe that other countries such as Jordan or Iran might become increasingly interesting for project financiers.
Spurring on these changes is the World Bank. It has been pushing for the region's governments to increase the use of build-own-operate and build-operate-transfer projects, which have so far been used only for a handful of projects. The sectors most likely to be affected by this change in attitude are electricity generation, water production, wastewater treatment and transportation.
An emerging market
Jordan is one country which is luring in sponsors and investors. Reasons for the change in sentiment stem from political stability and support from the US, to the fact that the king and the government are committed to economic development. Says one source: ?It is one of the friendliest locations of the Middle East and it is a very benign environment. In addition, because of the pressures on the Jordanian budget, the government is looking at international markets in order to finance projects on an off-balance sheet basis.?
Privatization is high on the political agenda in Jordan. A UK-Jordanian consortium is developing Jordan's first independent power project. The $300 million concession is the country's largest privatization deal. The World Bank is involved in the financing with Fieldstone and Atlas Investment. Gibb is the technical partner and Arnold & Porter is the legal adviser.
The project involves developing a 300MW to 450MW power plant at Al-Samra, north of the industrial city of Zarqa. The project, now in tender, will be offered on a 25-year, build-own-operate basis and it is a key landmark deal in the International Monetary Fund-led privatization programme.
Among the bidders are: ABB Energy Ventures, National Power, Mitsubishi, Electricité de France, AES, Ansaldo Energia and Tractebel. The contract will be awarded nine months after the presentation, which was due in mid-June 1999. Commercial operations of the first unit are expected to begin by the end of 2002.
If the deal goes well, Jordan will attract further attention from power project developers, as electricity consumption in the country has increased an average of 8% since the 1990s. Forecasts indicate that there will be further growth as a consequence of the construction of fertilizer plants and of an increase in tourism.
Reforms in the power sector have also helped progress. These included the division of the Jordan National Electric Power Company (Nepco) into three separate subsidiaries. The company will operate in transmission, while generation and distribution will be privatized.
The government has also taken initial steps for the creation of an independent regulatory authority to control the tariffs for future deals between independent power producers and Nepco.
Another project being developed in Jordan is the Aqaba railway project, which involves the construction of a 22.5km rail link to the Eshidiya mines. HSBC is financial adviser and Opic will finance the project. A source defines this as a ?groundbreaking deal?. Foreign investors will be watching carefully to assess the potential for further investment opportunities in the country.
Beyond oil and gas
The water issue is crucial in the Middle East. Scarce water supplies carry many political implications. Israel and Jordan have recently had a dispute over water resources and the topic has been the subject of the peace treaty between the two countries. In the Middle East ? if one includes North Africa ? about 45 million people lack access to safe water and more than 80 million lack access to safe sanitation services. According to Jamal Saghir, sector manager at the World Bank's infrastructure division in Washington DC, water losses in Jordan, Lebanon, Yemen and West Bank/Gaza vary from between 50% and 55% of water provided to the systems. Only 20% of urban wastewater is treated compared to 60% to 70% in the US and Europe. ?We all need to increase our efforts to address these problems. And the private sector should play an important role,? says Saphir.
In Jordan, France's Suez Lyonnais des Eaux is involved in a project in a joint venture with a local partner to develop Greater Amman water and wastewater system. Another very large water project is in the pipeline in Kuwait, which will be developed on a build-own-operate basis.
But for many the Tawellah power and desalination project (see Project Finance, June 1999) is the landmark deal for the region. The deal, which signed earlier this year, has given a positive sign to the market that projects can be financed successfully in the Middle East.
Infrastructure needs
According to the World Bank's Saghir, the public sector in the Middle East has done a poor job of managing infrastructure. Only the countries of the Gulf Cooperation Council Countries and Israel provide infrastructure services comparable in quality and coverage to those countries with similar income levels.
According to his indication, the potential market for private participation in the region could be more than $45 billion to $60 billion over the 10 years, more than three times the amount provided by international financial institutions. In the water sector in particular, the number of water projects worldwide with private participation reaching financial close has increased tenfold between 1990 and 1997 compared to the previous decade.
Most countries in the region have launched privatization programmes. Egypt has recently accelerated its programme, while Jordan and Yemen have been slower. In the Gulf Cooperation Council countries, there has been considerable discussion and studies of privatization issues but very little action except in Kuwait and Oman. Saudi Arabia, though, is preparing comprehensive privatization and public-private participation programmes.
Developing telecoms
One of the most innovative projects being financed in the Middle East is the Thurayya Satellite Network project which involves the launch of a new satellite that will provide services for mobile users in the Middle East, north Africa, part of Europe and south Asia. In December 1998, the Thurayya Satellite Telecommunications Company mandated a consortium of four banks as lead arrangers for its $600 million financing facility: Abu Dhabi Islamic Bank, ANZ, SG and Union National Bank. The financing has a seven-year tenor and includes an Islamic tranche of $100 million, which is being managed by Abu Dhabi Islamic Bank.
As Project Finance goes to press, the consortium, whose mandate was based on an underwritten offer, is arranging the bank facility through local, regional and international syndication. Financing is expected to close shortly.
But there are also a number of smaller telecom projects in the pipeline in Jordan, Kuwait, Oman, Qatar and Iran. Another project is Tep8 in Saudi Arabia, a $5.5 million telephone expansion project, to be awarded to contractors this year.
The Saudi government has also recently corporatized ? through a $600 million loan for STC ? the telecom company. And a source anticipates that the government will list shares of the company on the stock exchange. According to the source, ?the establishment of STC has broken the deadlock for banks for financing projects of this kind in the Middle East.?
New power opportunities
Power remains among the most rapidly developing sectors. In Saudi Arabia, a key development has been the establishment of Saudi Electricity Company (SEC), initially owned 100% by the government. The company, under which other utilities such as Sceco will be rolled, will be involved in generation and build-operate-transfer projects. It is not clear, though, whether the company will also be involved in distribution and transmission.
The Gulf Development Council, for example, has set up a new body to oversee the linking of the national grids of the six member states. This is an important development for a project that had been in the pipeline for more than 10 years and had been on hold because of the reluctance of Gulf States to give power to a higher authority.
Once up and running, the project is likely to create opportunities for the construction of new power stations to cover the power shortage of Gulf Cooperation Council countries. In the future, there might also be more opportunities for merchant power plants.
The interconnection grid project is likely to be carried out in three phases. In the first $2.5 billion stage, the national grids of Bahrain, Kuwait, Qatar and Saudi Arabia will be linked. In a second phase, the national grids of Oman and the United Arab Emirates will be connected. In a third phase, the project will link the two countries with the rest of the Gulf.
The project will have an interesting impact on opportunities for the project finance market. Says Steve Wardlaw, senior solicitor at Arnheim, Tite & Lewis in London: ?There is already a huge demand for project finance transactions in this region and this project could suddenly create a far bigger market for project finance and independent power projects. And it will create far more flexibility as to where to build the power plants.?
?But a lot of issues remain unresolved,? admits Wardlaw. In the United Arab Emirates one of the problems is on a regulatory level, as each of the states has a different legislation in terms of privatization. Also, each state is at a different stage of deregulating of its electricity sector. While the United Arab Emirates have almost completely liberalized the electricity market, Saudi Arabia is still combining the four power companies into one.
The interconnector project is also likely to have an impact on projects in Iran. Says Wardlaw: ?Iran is crying out for infrastructure development and power. Clever project financiers should lobby to have the grid interconnected with Iran. This means that potentially you can start by building power plants on the Kuwait border. This is a market that will be developing in the future.?
Changes in the political picture in Iran since 1997, following the election of Mohammed Khatami, have eased relations between this country and the west ? including the US. As a result, opportunities are more positive. Over the past six months, the pace of change has accelerated considerably.
Several Western European countries have sent in official trade delegations, including Italy and the UK. And their respective export credit agencies reopened credit lines which have been closed for years. This will open up opportunities for all sectors of the economy, as the government has made it one of its priorities to reduce the country's economic dependency on oil. The policy has been established in the five-year plan that starts in April 2000.
According to a report prepared by UK law firm Ashurst Morris Crisp, while the country's infrastructure is in remarkably good shape ? considering the country's isolation in the past years ? a significant amount of investment will be needed in the power transmission sector, transport and telecoms. The government is also keen to promote investment in non-hydrocarbon natural resources and has recently enacted a new mining code.
But, as Steve Atkinson, director of project finance at ANZ in Bahrain points out: ?Iran is still going through a phase of acceptance by the international financial community.?
The list of projects in the pipeline in the Middle East is growing and includes private power generation in several countries of the Gulf Cooperation Council, privatization of telecom networks in Jordan, Saudi Arabia, Oman and the West Bank and Gaza, wastewater projects in Tunisia and water conveyor projects in Lebanon and Jordan. Saghir's report estimates the potential value of private infrastructure projects in the region ? including North Africa ? at $45 billion, 3% of global private infrastructure investments.
Projects such as Tawellah can provide a blueprint for other deals in the region. But, says Atkinson: ?There are structures and solutions that are already tested. The question is how quickly these countries will adapt existing models. But some time will be lost if they attempt to reinvent the wheel.?
According to Capital DATA ProjectWare, there are 298 projects in the pipeline in the Middle East, excluding oil, gas and petrochemicals projects. Most projects are concentrated in the infrastructure, road and water sector. Most are concentrated in Israel and Saudi Arabia.
But there are reasons to believe that other countries such as Jordan or Iran might become increasingly interesting for project financiers.
Spurring on these changes is the World Bank. It has been pushing for the region's governments to increase the use of build-own-operate and build-operate-transfer projects, which have so far been used only for a handful of projects. The sectors most likely to be affected by this change in attitude are electricity generation, water production, wastewater treatment and transportation.
An emerging market
Jordan is one country which is luring in sponsors and investors. Reasons for the change in sentiment stem from political stability and support from the US, to the fact that the king and the government are committed to economic development. Says one source: ?It is one of the friendliest locations of the Middle East and it is a very benign environment. In addition, because of the pressures on the Jordanian budget, the government is looking at international markets in order to finance projects on an off-balance sheet basis.?
Privatization is high on the political agenda in Jordan. A UK-Jordanian consortium is developing Jordan's first independent power project. The $300 million concession is the country's largest privatization deal. The World Bank is involved in the financing with Fieldstone and Atlas Investment. Gibb is the technical partner and Arnold & Porter is the legal adviser.
The project involves developing a 300MW to 450MW power plant at Al-Samra, north of the industrial city of Zarqa. The project, now in tender, will be offered on a 25-year, build-own-operate basis and it is a key landmark deal in the International Monetary Fund-led privatization programme.
Among the bidders are: ABB Energy Ventures, National Power, Mitsubishi, Electricité de France, AES, Ansaldo Energia and Tractebel. The contract will be awarded nine months after the presentation, which was due in mid-June 1999. Commercial operations of the first unit are expected to begin by the end of 2002.
If the deal goes well, Jordan will attract further attention from power project developers, as electricity consumption in the country has increased an average of 8% since the 1990s. Forecasts indicate that there will be further growth as a consequence of the construction of fertilizer plants and of an increase in tourism.
Reforms in the power sector have also helped progress. These included the division of the Jordan National Electric Power Company (Nepco) into three separate subsidiaries. The company will operate in transmission, while generation and distribution will be privatized.
The government has also taken initial steps for the creation of an independent regulatory authority to control the tariffs for future deals between independent power producers and Nepco.
Another project being developed in Jordan is the Aqaba railway project, which involves the construction of a 22.5km rail link to the Eshidiya mines. HSBC is financial adviser and Opic will finance the project. A source defines this as a ?groundbreaking deal?. Foreign investors will be watching carefully to assess the potential for further investment opportunities in the country.
Beyond oil and gas
The water issue is crucial in the Middle East. Scarce water supplies carry many political implications. Israel and Jordan have recently had a dispute over water resources and the topic has been the subject of the peace treaty between the two countries. In the Middle East ? if one includes North Africa ? about 45 million people lack access to safe water and more than 80 million lack access to safe sanitation services. According to Jamal Saghir, sector manager at the World Bank's infrastructure division in Washington DC, water losses in Jordan, Lebanon, Yemen and West Bank/Gaza vary from between 50% and 55% of water provided to the systems. Only 20% of urban wastewater is treated compared to 60% to 70% in the US and Europe. ?We all need to increase our efforts to address these problems. And the private sector should play an important role,? says Saphir.
In Jordan, France's Suez Lyonnais des Eaux is involved in a project in a joint venture with a local partner to develop Greater Amman water and wastewater system. Another very large water project is in the pipeline in Kuwait, which will be developed on a build-own-operate basis.
But for many the Tawellah power and desalination project (see Project Finance, June 1999) is the landmark deal for the region. The deal, which signed earlier this year, has given a positive sign to the market that projects can be financed successfully in the Middle East.
Infrastructure needs
According to the World Bank's Saghir, the public sector in the Middle East has done a poor job of managing infrastructure. Only the countries of the Gulf Cooperation Council Countries and Israel provide infrastructure services comparable in quality and coverage to those countries with similar income levels.
According to his indication, the potential market for private participation in the region could be more than $45 billion to $60 billion over the 10 years, more than three times the amount provided by international financial institutions. In the water sector in particular, the number of water projects worldwide with private participation reaching financial close has increased tenfold between 1990 and 1997 compared to the previous decade.
Most countries in the region have launched privatization programmes. Egypt has recently accelerated its programme, while Jordan and Yemen have been slower. In the Gulf Cooperation Council countries, there has been considerable discussion and studies of privatization issues but very little action except in Kuwait and Oman. Saudi Arabia, though, is preparing comprehensive privatization and public-private participation programmes.
Developing telecoms
One of the most innovative projects being financed in the Middle East is the Thurayya Satellite Network project which involves the launch of a new satellite that will provide services for mobile users in the Middle East, north Africa, part of Europe and south Asia. In December 1998, the Thurayya Satellite Telecommunications Company mandated a consortium of four banks as lead arrangers for its $600 million financing facility: Abu Dhabi Islamic Bank, ANZ, SG and Union National Bank. The financing has a seven-year tenor and includes an Islamic tranche of $100 million, which is being managed by Abu Dhabi Islamic Bank.
As Project Finance goes to press, the consortium, whose mandate was based on an underwritten offer, is arranging the bank facility through local, regional and international syndication. Financing is expected to close shortly.
But there are also a number of smaller telecom projects in the pipeline in Jordan, Kuwait, Oman, Qatar and Iran. Another project is Tep8 in Saudi Arabia, a $5.5 million telephone expansion project, to be awarded to contractors this year.
The Saudi government has also recently corporatized ? through a $600 million loan for STC ? the telecom company. And a source anticipates that the government will list shares of the company on the stock exchange. According to the source, ?the establishment of STC has broken the deadlock for banks for financing projects of this kind in the Middle East.?
New power opportunities
Power remains among the most rapidly developing sectors. In Saudi Arabia, a key development has been the establishment of Saudi Electricity Company (SEC), initially owned 100% by the government. The company, under which other utilities such as Sceco will be rolled, will be involved in generation and build-operate-transfer projects. It is not clear, though, whether the company will also be involved in distribution and transmission.
The Gulf Development Council, for example, has set up a new body to oversee the linking of the national grids of the six member states. This is an important development for a project that had been in the pipeline for more than 10 years and had been on hold because of the reluctance of Gulf States to give power to a higher authority.
Once up and running, the project is likely to create opportunities for the construction of new power stations to cover the power shortage of Gulf Cooperation Council countries. In the future, there might also be more opportunities for merchant power plants.
The interconnection grid project is likely to be carried out in three phases. In the first $2.5 billion stage, the national grids of Bahrain, Kuwait, Qatar and Saudi Arabia will be linked. In a second phase, the national grids of Oman and the United Arab Emirates will be connected. In a third phase, the project will link the two countries with the rest of the Gulf.
The project will have an interesting impact on opportunities for the project finance market. Says Steve Wardlaw, senior solicitor at Arnheim, Tite & Lewis in London: ?There is already a huge demand for project finance transactions in this region and this project could suddenly create a far bigger market for project finance and independent power projects. And it will create far more flexibility as to where to build the power plants.?
?But a lot of issues remain unresolved,? admits Wardlaw. In the United Arab Emirates one of the problems is on a regulatory level, as each of the states has a different legislation in terms of privatization. Also, each state is at a different stage of deregulating of its electricity sector. While the United Arab Emirates have almost completely liberalized the electricity market, Saudi Arabia is still combining the four power companies into one.
The interconnector project is also likely to have an impact on projects in Iran. Says Wardlaw: ?Iran is crying out for infrastructure development and power. Clever project financiers should lobby to have the grid interconnected with Iran. This means that potentially you can start by building power plants on the Kuwait border. This is a market that will be developing in the future.?
Changes in the political picture in Iran since 1997, following the election of Mohammed Khatami, have eased relations between this country and the west ? including the US. As a result, opportunities are more positive. Over the past six months, the pace of change has accelerated considerably.
Several Western European countries have sent in official trade delegations, including Italy and the UK. And their respective export credit agencies reopened credit lines which have been closed for years. This will open up opportunities for all sectors of the economy, as the government has made it one of its priorities to reduce the country's economic dependency on oil. The policy has been established in the five-year plan that starts in April 2000.
According to a report prepared by UK law firm Ashurst Morris Crisp, while the country's infrastructure is in remarkably good shape ? considering the country's isolation in the past years ? a significant amount of investment will be needed in the power transmission sector, transport and telecoms. The government is also keen to promote investment in non-hydrocarbon natural resources and has recently enacted a new mining code.
But, as Steve Atkinson, director of project finance at ANZ in Bahrain points out: ?Iran is still going through a phase of acceptance by the international financial community.?
The list of projects in the pipeline in the Middle East is growing and includes private power generation in several countries of the Gulf Cooperation Council, privatization of telecom networks in Jordan, Saudi Arabia, Oman and the West Bank and Gaza, wastewater projects in Tunisia and water conveyor projects in Lebanon and Jordan. Saghir's report estimates the potential value of private infrastructure projects in the region ? including North Africa ? at $45 billion, 3% of global private infrastructure investments.
Projects such as Tawellah can provide a blueprint for other deals in the region. But, says Atkinson: ?There are structures and solutions that are already tested. The question is how quickly these countries will adapt existing models. But some time will be lost if they attempt to reinvent the wheel.?
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