Interview: Mohammed Khalil Alsayed
How competitive is project financing in the kingdom, and what do you identify as the most significant challenges in securing financing?
MOHAMMED KHALIL AL SAYED: While Bahrain did not face liquidity challenges of the kind confronted by many Western markets, financiers are keen to ensure that the projects they finance show promise. The competitiveness of the project financing landscape largely depends on the nature of the project or asset being financed. In the case of, say, social and affordable housing, the underlying drivers are even more assured, simply because there is a pent-up demand and the government is ready to develop the sector through various models, including public-private partnership (PPP).
I am of the opinion that local and regional financiers should take a greater piece of the pie. One of the key elements project financiers will assess is the track record of the developer or project promoter. It is critical to understand that housing PPPs are new initiatives. Financiers seeking to dive into big-ticket projects should appreciate that approaches and delivery models take time to mature; they have not been tried and tested yet. With reasonable safeguards of security, their assessment of risk should also include whether the overall financing structure offers the possibility of reasonable return and limited exposure. The template used for private financing of public projects in developed markets may not be wholly appropriate due to significant differences in local conditions. The key challenge, however, is the return of business confidence and improved consumer sentiment, both of which should increase risk appetite. In sum, I think it is fair to state that in the short term, while project financing is not immune to the overall global economic climate, a pick-up in business and consumer confidence is not far off.
How are raw material prices and competition from elsewhere in the region affecting developers?
AL SAYED: In general, increases in input costs inevitably squeeze margins; however, the market has evolved with large-scale developments being announced less frequently than in the boom period – barring several exceptions. To confront the rising cost challenge, developers have used strategies such as price-hedging through term supply contracts and incorporating or acquiring stakes in companies in the supply chain. The strategy of acquiring stakes in building materials intermediaries brings in some of the high profits of that segment, which partially compensates for tight margins. Other developers have announced mergers to be more viable in a competitive environment, such as Aldar Properties and Sorouh Real Estate of Abu Dhabi.
What can be done to encourage private sector investment in residential developments aimed at the lower-income market segment?
AL SAYED: The government has clearly gone on an aggressive public spending programme that necessarily involves tendering projects to private contractors. Furthermore, the government regularly offers home-building contracts to the private sector to help clear the backlog needed to meet the demand in the lower-income bracket. The construction contracting route is a straightforward way to involve the private sector.
Other forms of involving the private sector in the residential, low-income bracket include the PPP structure and, more recently, the Turn Key Procurement Programme. The latter is a unique partnership between the public and private sectors that allows private firms with land holdings to pitch their proposals to the government, which will then guarantee the offtake of the units constructed. This is unlike previous PPPs where the government provides the land.
There are many advantages to the turnkey model of development. For instance, it allows the successful private sector bidder to liquidate land holdings, freeing some of its resources and channelling them to other productive avenues. On a macro level, such initiatives help generate employment opportunities and provide a fillip for increased business consumer confidence.
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