Is the Doha banking sector prepared to fund the country’s major projects?
In tandem with the Qatar Vision 2030 and the fixed deadline of the 2022 World Cup, Qatar’s infrastructure agenda has assumed a proportion that lends itself to few global comparisons. In progress are public works authority Ashghal’s multiple projects, rail and metro construction and the airport completion and ports expansion plans, to name a few. These will require massive investment, and while the government will fund a sizeable part, both local and international banks are looking with increasing optimism at project finance. But how significant will this business be? Can the risks and the long-gestation periods associated with this sector justify the banks’ exposure?
Infrastructure financing models vary across the world. In mature economies of the West, past governments supported the infrastructure and project finance markets with cash and/or guarantees. However, this is no longer sustainable due to significant deficits and sovereign debt levels in developed countries, and has led to public-private partnerships (PPPs) increasing in countries such as the United Kingdom (UK), Canada and Australia.
Emerging economies that require large infrastructure spending can consider PPPs, provided the government partners can show private investors both stability and a professional transactional capacity.
Qatar has tried such PPP models in its power generation sector (Ras Laffan A, B, C IWPP and Mesaieed IPP) and with public works authority Ashghal and Qatar Foundation projects. The Ministry of Business and Trade has also set up a PPP Directorate to develop the business case and policy framework for PPP in Qatar.
Globally, however, PPP has exhibited weaknesses relating to both cost and time overruns. Anthony Holmes, director at the Institute for Infrastructure Studies in the UK tells The Edge that PPPs might not be the best model for Qatar, though Doha can certainly learn from global examples.
“Even PPP projects get delayed and get delivered at substantial cost overrun,” explains Holmes, “and the complex infrastructure projects on a global basis like airports, ports or railways are often delivered at 100 percent above the cost estimated when the projects were conceived. Legal systems and structures cannot avoid that”.
Given the scope of infrastructure projects in Qatar and the overall regulatory climate, local bankers attest to a heightened appetite for project finance.
“PPP,” Holmes adds, “may be a reality in Qatar in the second stage of the projects wherein we may see that the government may feel the need to hand over the operating management of some of the projects to international companies.
Qatar, Holmes also points out, does not need the PPP option to fund its infrastructure programme since it has enough monetary reserves of its own. “If at all, it wants to distribute more of the infrastructure activity into the economy, he says, “then it could think about coordinating the purchase of some key raw materials for construction like cement, rather than allow separate projects to do their own purchasing on a piecemeal basis. Qatar has a particular problem in that it pays more for its cost of project than anywhere else in the region, which may be avoidable if there is central control over the purchase of key raw materials.”
Qatar’s infrastructure projects span multiple areas. There are Ashghal projects such as roads, drainage, sewerage and buildings valued at QAR100 billion to be delivered within the next five to seven years. In addition, regional business resource MEED estimates put the complex Qatar Rail Development Programme (comprising the Doha Metro, passenger rail, freight rail and light rail) at a combined investment figure of USD35 billion (QAR127.4 billion, over the next 10 years). There also is the New Doha International Airport with its remaining project opportunities and future expansion plans for USD12.5 billion (QAR45.5 billion) and the port expansion plans at Qatar’s three main ports – Ras Laffan City, Mesaieed City and the New Port Project.
In June 2013, Qatar Central Bank issued a circular that reduced bank limits on equity and debt investments from 30 percent to 25 percent of capital reserves. This move is thought to be driven by a desire to free up funding for the upcoming infrastructure projects in the country by ensuring banks have enough cash to fund the growing government debt market.
Infrastructure financing realities
Given the scope of infrastructure projects in Qatar and the overall regulatory climate, local bankers attest to a heightened appetite for project finance, a cycle they say has returned with renewed optimism after the Lehman Brothers collapse in 2008.
At the recent Qatar Banking Summit, organised by MEED, Yusuf Saeed, acting assistant general manager, global structured finance, group corporate and institution banking at Qatar National Bank, pegged the total infrastructure spend between 2013 and 2018 at USD205 billion (QAR746.2 billion). “With general global economic recovery, the banks’ appetite for this product has gone up,” he said at a talk at the conference. “In Qatar, banks like ours are experiencing a new-found attraction, which is not a result of any dictate from the government.”
Also speaking at the event, Bhupendra Jain head of corporate banking at International Bank of Qatar (IBQ) added that of the total spend, it is expected that infrastructure finance demand will be more than USD100 billion (QAR364 billion).
Saeed categorised infrastructure projects in Qatar into two categories: oil and gas projects (such as the Barzan Gas project which sought a loan of USD4.7 billion, (QAR17.1 billion) and which saw global and international banks participate, with a substantial funding component), as well as water and power projects, which will host increasing participation of Islamic banks in coming years. “Projects of this scale have the capacity to bring in a new investor class, the Islamic banks, who will participate in the funding of infrastructure projects by issuing bonds,” Saeed added. The other category of projects, according to Saeed, features integrated infrastructure such as the Qatar Rai Development Programme, which will largely fall under sovereign funding and sukuks.
“The metro alone,” added IBQ’s Jain, “is going to be about USD35 billion (QAR127.4 billion) and the ports at USD7 billion to 8 billion (QAR25.5 billion to QAR29.12 billion). Then there are roads, electricity and water, sewage, Aviation City, the stadiums for the 2022 World Cup plus hotels, new shopping malls, Lusail City, etcetera. The funding requirements for these projects will be a percentage of these numbers and is a complex algorithm.”
Opportunity and risk
A prevailing sentiment among bankers who spoke to The Edge is that the main opportunities around the infrastructure spends Qatar will see in the coming years will be more related to the contracting companies that are building the projects and their financing requirements than direct funding.
“There is a large funding requirement as part of most projects, and there are also material working capital requirements for many of the contractors,” Jody Sanderson, managing director and head of global banking, HSBC tells The Edge, However the amount would be well below the size of the projects planned”.
Moreover, with the size of the projects and the longer timeframe of the delivery schedules, banks need to build in a thorough risk-management audit before committing to any business. Financing structures in many cases will be built according to individual project feasibility, implementation plan and economics and complete due diligence will be conducted by financiers including cost analysis and risk assessment. The structures, according to some bankers, will address the profitability of the banks while not inconveniencing the contractors in any way.
“Banks will be able to offer hedging solutions to enable project owners to manage potential currency or interest rate risks,” Mohamed A Abdulkhalek, al khaliji bank’s group chief business officer says, “while also ensuring that the project model is based on economic realities. These are likely to have conservative assumptions that indicate a considerable profit margin for the contractor and in the meantime achieve debt service.”
Learning from past mistakes will also be a factor when it comes to designing financing structures, and it will be a joint effort between the banking community and the contractors. Bankers will need to give considerable thought to the potential inflationary effects, given the reality that projects are to commence in a relatively short time period which might lead to bottlenecks, higher project costs and inflation that were seen around the 2006 Asian games.
Sanderson of HSBC points to the safeguards that the contracting companies should adopt. “The better-run contracting companies will be factoring in these risks when taking on jobs,” he says, adding, “however it’s something that cannot be fully mitigated and there is the potential for some material challenges in this regard.”
The pricing strategy of banks will play a crucial role in determining how much of the infrastructure business they can obtain. This in effect, will be a factor of their ability to evaluate the project risks, and bear in mind that there is a factor of dynamism involved in such contracts. Sunit Bhardwaj, country head Qatar of First Gulf Bank agrees that the correct pricing is what will get banks the business, but understanding the risks will determine the pricing strategy.
Contractors present at the MEED Banking Summit shared their perspective on the risks of financing multiple projects at similar delivery schedules. Both Mark Rudman, Qatar director of UK construction major Faithful+Gould and Rupert Booth, associate director of Atkins Qatar, said that companies that are planning projects such as Ashghal or Qatar Rail are prioritising these to ward off massive burden on the supply chain, both in terms of labour supply and resources, which could lead to cost escalation.
With the average size of the expected projects to be massive, disbursements will also be of a matching size. QNB’s Saeed said as the state-owned bank, QNB is in a position to write large cheques, they would rather invite syndications to facilitate sustained business of foreign banks in the country.
But though facilitating international banks is one aspect, a greater reality is also that these banks will want to be involved in the large-scale projects. IBQ’s Jain was of the opinion that foreign banks will make an increasing attempt to take part, largely based on the perception of the Qatar story.
A sentiment among bankers is that the main opportunities around infrastructure spend in Qatar will be related to contracting.
Given the size and complexity of planned expenditures, Qatar would need banks to form consortiums and combine deals to accommodate the financing requirements. Except for QNB, no single bank has the financial depth to individually fund any project. This, in a way, will be good for smaller banks, which can hope to contribute to the growth of Qatar. al khaliji’s Abdulkhalek agrees, “Consortiums will reduce competition among local banks and enable the establishment of product risk management process.”
Of course, the eventual size of the infrastructure business that any bank will be able to fund, will also to some extent depend on the existing banking relationships that the contractors of these projects have. “Quite often the simplest solution is bank financing through a bilateral loan or syndication with a core group of relationship banks, which is the most common funding tool used in Qatar,” says HSBC’s Sanderson.
Bankers widely agree that with the project pipeline as it is – and the banks’ willingness to partake in this business segment – what is now needed is a logistical fine-tuning. This will ensure that deadlines do not clash and costs do not escalate, which will unleash an inflationary spiral. Ultimately this will call for exacting coordination between the government to manage the total process, the banking community and the contractors executing the projects.