How GCC should develop infrastructure bond market for project finance?

Qatar, GCC should develop infrastructure bond market for project finance, says Doha Bank CEO. For banks to have a framework to address project-and contract-financing challenges, there is a need for the development of GCC Bond Market to bring more investors as an additional source of project financing, Doha Bank CEO Dr Seetharaman has said.  Speaking at MEED’s Qatar Project conference yesterday at the St Regis Hotel here, Seetharaman said GCC (Gulf Co-operation Council) infrastructure bonds should be issued with sovereign guarantee to stimulate project financing.  “We also need to bring long-term investors such as pension funds and insurance and mutual funds into the GCC project market.

Dr. R. Seetharaman, CEO of DOHA BANK Group
Dr. R. Seetharaman, CEO of DOHA BANK Group

 

Project entities can issue bonds during the construction phase, and banks refinance the bonds upon projects getting operational. On the whole, Qatar and GCC should develop infrastructure bond market for project finance,” he explained in the presentation “Financing Qatar’s Project Market in Uncertain Times.” Seetharaman also highlighted on key challenges faced in projects-and contract-financing in the GCC.
He said: “The release of payments to contractors beyond the agreed time even against consultant certified invoices. This in turn affects payment to subcontractors and impacts project profitability. Reluctance to assign proceeds or give irrevocable assignment letters to financing banks; absent this, banks have no certainty on project cash receipts to appropriate for settlements.”
Seetharaman said there may be instances where main contractors have called on performance and advance payment guarantee even where projects have been substantially completed. “Banks are partners in the projects. In certain instances, they are the last to know of any concerns and disputes among the owner and contractor,” he said.  Despite having an assignment of proceeds, payments are sometimes made directly to subcontractors, without the bank’s previous knowledge and approval, according to Seetharaman.  “The above challenges have resulted in various disputes such as variation orders, extensions/variations of time, changes in design, resulting in cost escalation, time variation, bills partially certified, bills certified and not paid and late collection of payments.
“Disputes tend to have an adverse effect on project efficiency and timeliness of project completion, with no forum to settle differences which tend to eventually build up to detrimental issues,” Seetharaman stressed.
On Qatar’s banking sector, Seetharaman said: “Qatar banking balance sheet growth was more than 10% YTD in December 2015 and loan growth was more than 15% YTD. In 2015, the contracting sector growth was more than 23% YTD. The concerns on the economy include slowdown in growth, tightening of liquidity, surge in borrowing cost, and uncertainty over the determination of cash flows throughout the project cycle.”