The Middle East has become the largest Project Finance market in the world, according to HSBC. Of the global total of US$98.5 billion in project finance debt raised in the first half of 2006, US$33 billion, or one dollar in every three, was raised for Middle Eastern projects.
“The rapid rise in demand for project finance is symptomatic of the rapid growth in regional economies, the rising profile of the Middle East in the global investment community, and the recognition of international debt providers of the fundamental strengths of the region in terms of risk,” explained Darren Davis, HSBC’s Head of Project Finance for the Middle East and North Africa. “Expansion in infrastructure investment has been rapid with all sectors seeing growth, not only the traditional energy-based projects. In addition, both governments and regional corporates are increasingly turning to project finance as a means of financing their infrastructure needs in sectors such as transport and non-power utilities.”
Project Finance is a mechanism of raising finance to fund the development of major industrial and infrastructure assets. Project finance debt is provided by lenders on the basis that repayment of the debt will come from the cash flows generated by the asset being financed. The structure of project finance allows developers to leverage their investment returns without taking on significant long term risk.
The growth in the market has been driven by the needs of the rising population and the increased liquidity in the region as a result of the sustained strength in oil prices. Approximately US$7 billion was raised in project finance debt in 2001 compared to US$33 billion in the first half of 2006, “a figure which we expect to rise to at least US$45 billion by the end of this year,” says Davis.
With the world investment community increasingly seeing the Middle East as an attractive investment opportunity, international banks have substantially increased their presence in the region both on the ground and in terms of the amount of debt they are committing to regional borrowers.
But even with these new entrants, there could be a shortage of debt capital to support the level of funding required by the enormous projects planned for the region. The answer, believes HSBC, will come from the region accessing the international debt capital markets. “This is a trend that has already begun, and will accelerate,” says Davis. “This will mean that those institutions with the global distribution capabilities, as well as strong balance sheets, will be able to reap the rewards.”
HSBC, which has the largest project finance presence in the Middle East, remains the leader in advising regional governments and corporates on the raising of project finance debt. Some recent milestones transactions on which HSBC acted as advisor include:
• In Saudi Arabia, Al-Waha Petrochemical Company’s US$1 billion project which included the first fully stand-alone Islamic financing facility for a project.• The largest ever privately sponsored petrochemicals plant in the region – the US$2.5 billion Saudi Ethylene & Polyethylene Company’s project in Saudi Arabia• The Shoaiba Independent Water and Power Project in Saudi Arabia – the first privately developed water and power facility in Saudi Arabia.