BENCHMARK TEAM / UAE Project financing will remain the single largest challenge for independent water and power project (IWPP) companies operating in the Gulf Cooperation Council countries even as several high profile utilities projects are being announced across the region to satisfy the increasing hunger for water and power. Even as utilities providers explore the most competitive options to secure funding for their projects, the role of private capital was still not completely understood or it is often viewed with scepticism, according to experts. "The GCC's utilities sector is trying to keep pace with the region's demand for power and water, but with the high number of projects being announced by governments in the region, private equity can help the developers to complete their projects on time and at less risk to governments," said Nick Carter , Director General, Regulation and Supervision Bureau, the independent regulatory body for the water, wastewater and electricity sectors of Abu Dhabi . In order to further underline faith in the region's project finance sector, he pointed to the Ruwais Power Company in the Western area of Abu Dhabi that raised more than $800 million for refinancing through the issuance of a bond in August this year. This was the largest offering in almost a decade, according to Carter, whose organisation was required to approve the re-financing, "This is an excellent example of confidence in a maturing sector for a long-term bond with an average life of 21 years, mainly from American investors," he said. Policy makers, top utility leaders, ministers and technology leaders discussed the issue at the 2nd Global IWPP Summit in Ras Al Khaimah , organised by Fleming Gulf recently. Debt and equity Most independent water and power project (IWPPs) fund their project costs through a combination of debt and equity. The debt is arranged on a nonrecourse project financing basis. The successful bidder is responsible for arranging the required financing and for negotiating financing agreements with the lenders. The debt to equity ratio used to be as high as 80:20 before the financial crisis of 2008 but recently has been closer to 75:25, in effect raising the cost of financing. The debt may be raised in international, regional, Islamic or local debt or capital markets. "The availability of project capital also depends on local market conditions and the specifics of the project," pointed out Daniel Zywietz, Managing Director, Ambata Capital Middle East and CEO of Enerwhere, a Dubai -based provider of solar off-grid and temporary power solutions that are structured as Independent Power Projects (IPPs). "Financing a government-backed IWPP in Oman or Saudi Arabia is relatively easy, as local banks in these countries have a lot of liquidity and investors trust their track record of successful IWPPs. Achieving the same in jurisdictions with a shorter track record, less stable government finances or without explicit government backing is much harder and more expensive, as investors and banks demand a higher risk premium," he said. Reliable source Speakers at the summit also opined that project bonds could become a reliable and cheaper source of funding for long term projects such as utilities and infrastructure projects. According to Zywietz, it nevertheless remains possible to finance such projects. "In times of single digit interest rates, many investors are actually look- ing for the higher yields that projects in less established markets can offer, and consequently we are seeing a lot of in- terest in our solar IPP structures in both the Middle East and Africa ," he said. Conservative estimates by regional utilities leaders show that approximately 80,000 MW of additional power capacity and 290 million gallons of water per day will be required by GCC countries by end-2015 based on an average of 7 per cent annual growth as the region struggles to meet the high demand caused by low tariffs, increasing population and investment in new investment projects. Ruurd Abma , Managing Director, Utico Middle East, said that as IWPPs rush to satisfy the growing demand for power and water in the region, they are always faced with the challenge of obtaining capital for new projects. "Much of the time is spent in finding the right financing partner and negotiating the appropriate contract and terms with the financiers. This delay can affect the start of the project and also the overall commissioning," he added. "While private equity can help, we are seeking terms that can also be beneficial to the IWPPs." Delivering the keynote address, Nick Carter , Director General of the Regulation and Supervision Bureau , suggested a 'workable model' which underlined the importance of reining in costs, especially during the establishment of new projects. Underlining the role for private equity in projects, he said, "With the high number of projects being announced by governments in the region, private equity can help the developers to complete their projects on time and at less risk to governments." Abdullah Al Hajri , Executive Vice President-Customer Services, Dubai Water And Electricity Authority , underlined the need for employing the most sophisticated technologies to serve customers better. Another important technology highlighted on the first day concerned increasing plant power out- put and reliability through enhanced (HEPA) filtration for gas turbine machinery. James Kenneth , Aftermarket Manager of AAF International , emphasized on the issue of gas turbine avail- ability and reliability improvements through cleaner air. The highlight of the opening day was a panel discussion on the opportunities that await private sector players in existing and upcoming government projects. With increased dependency on IWP and IPP, and government bodies now have the option of using public resources more effectively and focus on other important development priorities. The discussion was aimed at understanding the global requirements, opportunities and challenges and pro- vided a platform for developers and financiers to capitalize and build partner- ship models that are well understood and are of mutual interest. This year's summit also featured a host of important speakers, notably Dr. Fares M. Howari , Professor and Chair at Abu Dhabi University , who focused on how Carbon trading was an emerging new market in the GCC countries besides highlighting the huge potential for Gulf companies to reduce emissions and earn money from generated credits. Project bonds Rating agency Standard & Poor's said in a report titled "How Project Bonds Could Plug The Potential Gap In GCC Infrastructure Financing," that the cap- ital markets in GCC countries received a boost in August 2013 with the success- ful issuance of $825 million in project bonds by Ruwais Power Co. (Shuweihat 2) to help refinance a power and water plant in Abu Dhabi . "This ended a lull in project bond activity in the region since the RasGas and Dolphin transactions of 2007 and 2008, respectively. Although there have been large GCC project transactions such as Barzan (for the construction of a gas plant in Qatar ) and Yanbu (for a new oil refinery in Saudi Arabia) successfully executed between 2008 and 2013, these have been primarily bank-funded with an important contribution from local and regional banks," the report said. The Shuweihat 2 transaction shows that both bank loans and bonds can be used together in co-financed project transactions. Despite significant infrastructure needs in the region and relatively low yields over the past 5-10 years, the number of GCC project bond transactions remains low, mainly due to the abundant liquidity in the local bank market and strong relationship lending by commercial banks to petrochemicals- and energy-related projects with perceived strong creditworthiness. BB BOND MATTERS : DESPITE SIGNIFICANT INFRASTRUCTURE NEEDS AND LOW YIELDS, THE NUMBER OF GCC PROJECT BOND TRANSACTIONS REMAIN LOW DUE TO ABUNDANT LIQUIDITY $825m RUWAIS POWER COMPANY RAISED THROUGH BONDS TO HELP REFINANCE A POWER AND WATER PLANT IN ABU DHABI The GCC's utilities sector is trying to keep pace with the region's demand for power and water, but with the high number of projects being announced by governments in the region, private equity can help the developers to complete their projects on time and at less risk to governments
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