Sunday, 23 September 2018

Green shoots for PPP model

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The concession-based model for infrastructure has had little traction in the Gulf region – aside from the power sector. But this is slowly changing, with a handful of deals in the market. So the question is now: How big could this market become? By Rod Morrison.

An important sign that the private finance initiative/public-private partnership procurement model had gained acceptance among the Gulf states was the launching of the Mafraq-Ghweihat design build finance and operate (DBFO) road deal this summer. The 25-year concession deal will cost US$2.65bn in capex and covers the existing 327km road from Abu Dhabi to the Saudi border. The project will be a traditional PFI/PPP-style scheme, with payments to the concessionaire based on making the road available and safe. The current road needs upgrading, and improving a bad road safety record along the road is a priority.

In the past, of course, Abu Dhabi would have comfortably funded this type of scheme from the state coffers. But with road maintenance an important part of the concession, US$250m every 12 months and US$22m annually on routine maintenance, the government clearly wants an asset that will be built to last. Notwithstanding the fact that the annual concession payments reach US$216m in year four of the concession and peak at US$378m in year 25, the procuring authority, the Abu Dhabi Department of Transport (ADDOT), calculates that the DBFO scheme will save the government US$550m compared with a traditional procurement route.

ADDOT had been warming the road concessionaire market up for the deal before the request for prequalification (RFQ) document went out in July. It had already roadshowed the scheme across Europe. International bidders contacted include Autostrade, Bilfinger Berger, Brisa, Bouygues, Cintra, Cofiroute, Egis, Hochtief, Mota-Engil, OHL Concessions and Strabag. Responses to the RFQ are due by October 10. Under the current timetable, the request for proposals (RFP) will go out on November 9, with full bids due by March 25.

Ernst & Young has recently been appointed as the financial and process adviser on the scheme. Allen & Overy has been appointed the legal adviser. It is possible that a specialist banking adviser will be appointed to access debt availability in these credit-crunched times. The deal will be a mix of local and international expertise - both in the contracting and financing senses. The government sees the project helping local firms build up their PPP expertise.

Since the RFQ went out, it has been decided to bring quasi-government funds into the equity on the deal by allocating them a 51% stake in the project company. This obviously creates some questions over control, although the precedent is already there in Abu Dhabi, albeit in a different sector – power.

Government-owned power utility ADWEA initially holds 60% of the independent water and power project (IWPP) concession deals and then hands then on to the government linked energy investor – Taqa. The independent power companies in the concession have never worried about this requirement but roads obviously have different risk profiles. ADDOT said the 51% stake would either be taken up by Abu Dhabi Investment Council (ADIC) and its Abu Dhabi Investment Company, which has an infrastructure fund joint venture with UBS, or Mubadala.

ADDOT sees the project as a first, not a one-off. Its second scheme is a link to Dubai. Given the traffic levels to Dubai, this scheme could be offered on a real toll basis. To take both schemes forward ADDOT has established its own small PPP unit headed by John Lee. He is recruiting other road industry experts to his team.

Abu Dhabi has always been a project finance-friendly environment, unlike its neighbour Dubai, so it is no surprise that the government is turning to PPPs on its transport deals. Indeed, Mubadala, just rated AA by Standard & Poor's, has adopted the role of project promoter for a range of government-linked, project-financed energy and infrastructure schemes, both at home and overseas, and has this year hired a number of ex-project finance bankers. The company has already established a track record in PPPs.

Mubadala's first deal was the US$410m Al Ain university scheme, signed last summer. The scheme had more than the usual contractual supports on the 25-year concession, with a construction guarantee and direct government payments during the operating period. Hence, the debt financing – from Barclays Capital, National Bank of Abu Dhabi, Royal Bank of Scotland and SG – was priced at just 20bp to 25bp.

That was obviously low, even before the crunch, but by way of comparison, Mubadala raised a three-year US$2bn corporate loan at 17.5bp with 21 banks at the same time. During the operations phase the margin is higher at 50bp–60bp. The concession runs for 28 years and the loan for 20 to 22 years. Front-end fees are about 50bp. Equity on the deal is between 15% and 20%. Saudi Oger is the contractor of the facility and Bovis Lend Lease is the project manager. Serco has a 49% stake in the facilities management (FM).

As with the ADDOT road deal, Al Ain will be the first in a series of university PPP schemes that Mubadala will undertake. The next, New Paris Sorbonne, has just been launched to the bank market. Some aspects of the scheme are the same as Al Ain, such as the 28-year concession period. But crucially, the scheme will have a more standard PFI contractual feel, with no construction guarantees and no other explicit supports. As a result, the debt tenor is likely to be shorter than 22 years, particularly given the new credit environment. Calyon is advising.

The scheme is for new campus accommodation at the university. Al Habtoor Leighton and Murray & Roberts have signed a US$324m construction contract for the scheme. The Sorbonne scheme will be quickly followed into the debt markets by the bigger US$1bn Zayed scheme. It will have the same development team and contractual framework as Sorbonne. And there is a further scheme, a joint venture with New York University.

Mubadala has just financed a quasi-PPP scheme – the Yahsat satellite project. The template for this deal was the £963m EADS-led Skynet 5 PFI deal for the UK Ministry of Defence signed in 2003. On Yahsat, Mubadala will keep 100% of the equity. Project company Al Yah Satellite Communications Company has selected EADS Astrium, Thales and Alenia Space to build the group's satellite scheme.

Yahsat will operate a hybrid communications system with both government and commercial users. It is believed that 60% of the capacity will be used for government military use. There will be one satellite in orbit and one spare, costing US$1.4bn. BNP Paribas, one of the three lead banks on Skynet, advised on the scheme.

The Yahsat loan is split into a US$1.01bn senior tranche, a US$100m standby facility and a US$80m debt service letter of credit. Insurance covers the build-out phase, as on all satellite financings, and then there is an availability payment structure. The bank terms came out similar to Skynet. The tenor is 14 years and the margin is 110bp, stepping up to 140bp. The banks are Abu Dhabi Commercial Bank, Bank of Tokyo-Mitsubishi, BNP Paribas, Calyon, EDC, First Gulf, HSBC, ING, Mizuho, NBAD, Natixis, SG and Standard Chartered.

Another big potential PPP in Abu Dhabi is the US$7bn airport expansion scheme. Once again, control over the project will remain in local hands but outside experts and companies are being brought into the project process. The expansion will be split between two government companies. Scadia will be responsible for the basic infrastructure and will pay for this itself. Abu Dhabi Airport Company (ADAC) will be responsible for the operational elements, which will cost about US$3.5bn. ADAC's part of the scheme will be financed by government grants and private finance.

Three developers are competing to be the terminal operator – AdP, Hochtief and TAV. The new terminal will be developed by Abu Dhabi institutions, which will own 70%–80% of the project company's equity, and the selected private operator. The terminal scheme will be funded by a mix of airport revenues, government grants and availability payments. This mix will be partly decided by the final bids from the operators. Credit Suisse is advising ADAC on the competition and on the debt finance that will be raised once an operator is selected.

Waste water deals are an important part of the PPP sector across the Gulf – even though they do cross over the with power sector, particularly on the monster power and desalination deals. However, the waste water deals are usually procured on a stand-alone basis.

In Abu Dhabi, ADWEA has just signed its first sewage treatment plant concession through wholly owned subsidiary Abu Dhabi Sewerage Services Company (ADSSC). As with the ADWEA power deals, the utility will take 60% of the project company equity. The winning sponsor group, which bid for the deal in April 2007, is made up of Biwater, Kharafi and Al Qudra. It bid Dh1.5233m3 for the 25-year scheme.

The scheme, although in the infrastructure arena, was transacted in a similar way to ADWEA's IWPP deals. The scheme is made up of two plants – the 380,000m3/d Al Wathba plant and the 80,000m3/d Al Saad plant. Abu Dhabi Commercial Bank provided all the debt – a US$329m term loan with a short tail and a US$79m equity bridge loan. Pricing on the loan is said to be on April 2007 terms. Macquarie advised the sponsors and BNP Paribas advised the government.

Keeping both the margins and the EPC prices the same from April 2007 would have been a challenge. ADSSC is now looking at a second 380,000m3/d scheme at the same site. Veolia, which bid Dh1.6195m3 last April, is said to have offered the same price as the Biwater team during a state visit to France by the Emir last year, although its partner Besix is still working out whether it can match the price.

In Bahrain, a healthy range of bidders have expressed interest in the Muharraq sewerage treatment plant (STP) scheme, the first part of a plan to privatise the sewerage services in the Kingdom. A shortlist will now be drawn up and the request for proposals (RFP) is expected to be sent out this month. Included within this document will be details of the contractual supports within the deal, including government guarantees. The initial scope of the scheme is 90,000m3 at a cost of around US$120m but this will increase to 160,000m3.

The scheme is being undertaken by the Ministry of Finance, the Ministry of Works, and the Economic Development Board. HSBC, Fichtner and Norton Rose are advising the government on the STP scheme and the wider plans for introducing private capital into the sector. The plan involves advising on Muharraq, a new sewerage network at Nabi Saleh and privatisation work across the Kingdom. HSBC bid US$2.25m for the advisory mandate.

In Saudi Arabia, HSBC is again involved on the advisory side of the ambitious National Water Company (NWC) programme, with Clifford Chance and Fitchner. NWC is part of the Ministry of Water & Electricity (MoWE) and is headed by former deputy water minister Loay Al-Mussallam.

Two projects for Riyad will come out first to tender – followed by Jeddah, then Damman and Mecca/Medina and the 13 other directorates around the country. The programme will involved operating contracts for many concessions and new investment projects in Riyad and Jeddah. NWC signed a six-year operating deal with Veolia for the Riyad schemes recently and is now moving on to the new capex schemes.

The requests for proposals (RFP) on the two Riyad waste water schemes are due shortly, perhaps by year-end. NWC will take a 40% stake in each project. The schemes will total around US$1bn. The first and bigger scheme will involve buying the existing Manfouha plant and building new capacity at Al-Hayer, and the second project will involve buying existing plant at Al-Kharj and adding new capacity.

The deals were due out last year but have been delayed and are still awaiting a royal decree. One issue is believed to be the gap between the price paid for water services in the Kingdom by customers and the real cost of the services. However, MoWE will be the procurer of the plants so the deals will have the support of the Ministry of Finance. Whether this support is formalised in formal guarantees is still unclear. The government is trying to move away from formal guarantees on its concession projects but the global financial climate could stymie this move.

Private developers in the Gulf are seeking PPP solutions to their infrastructure needs. HSBC been selected by Emaar, the Economic City to advise on the provision of infrastructure and utility services for the new King Abdullah Economic City (KAEC). The bank advised on the IPO of the project last year. The infrastructure bill will be well into the billions, with power and utilities required. The concession route could be used with the project company as the credit.

In Dubai, Macquarie is now advising and investing with property developer Nakheel on its infrastructure concession projects. Nakheel took over the procurement of its infrastructure from government owned Palm Water and its successor Palm Utilities due to slow project progress. It then shortlisted developers for its US$250m 100,000m3 reverse osmosis (RO) desalination plant and its US$1bn STP plant, and has taken bids on a concession basis.

But then Macquarie proposed a new model under which Nakheel will hold a majority stake in the concession companies and Macquarie will hold a significant minority stake. On the RO plant, the winning bidders will hold a smaller minority stake, 10%–20%. But on the STP plant, the bidders have now been asked to provide EPC and 30-year operating bids, backed by parent guarantees, with no role in the concession.

The STP bids were due in September but have been put back a couple of weeks. The STP bidders are YTL Wessex Water/Al Jomaih/Hitachi, MMC/ADIC/GS and Metito/BerlinWasser. The bidders for the RO scheme are Aqualine/United Utilities, Acciona/Al Rajhi/Instrata and Metito/BerlinWasser.

Nakheel and the Palm Water/Palm Utilities team have been pushing the concession model on other sewerage schemes but on two have been pushed back to the EPC route. Degremont was awarded the contract on the US$450m Gulf Estates scheme late last year and then Samsung/Metito was awarded the contract on the US$600m International City scheme this summer. As construction has started on both, a project financing might have to wait until completion.

There are various other infrastructure initiatives across the Gulf and North Africa. On the airports side, Jeddah Airport has received a US$315m Islamic financing based on a 20-year concession (for full case study see PFI issue 387, June 11). Further afield, in Jordan the Queen Alia airport has received a US$280m project financing, backed by the IFC, on a 25-year concession (for full case study see PFI Yearbook 2008). And Aqaba Development Corporation (ADC) has invited expressions of interest (EoIs) for its US$500m new port project under a 30-year concession.

In Tunisia, TAV has financed, with the IFC, the €300m Enfidha airport scheme backed by a 40-year concession (for full case study see PFI Global Infrastructure Report 2008). And Egypt has embarked on an ambitious public-private finance initiative programme for hospitals, schools, roads and utilities (for full details see PFI issue 385).

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