IFR Middle East Report 2011

Young and fast-growing urban populations across the region, together with a historical pattern of under-investment, have created significant pressure on regional governments to boost investment in infrastructure.The current economic background – with increasingly constrained public budgets, and the desire across the region to bolster long-term economic growth and private sector employment – is also leading governments to encourage private sector involvement towards “basic” infrastructure projects and social infrastructure, and away from the less critical (typically real estate-driven) projects under way before the financial crisis.In principle, such projects – including mass transit, ports and airports, utilities, education and healthcare – lend themselves well to public-private partnership (PPP) structures.Indeed, project volumes announced in the region are enormous, with many intended to use the PPP model: notably in Qatar (with planned metro projects alone totalling more than US$25bn) and Abu Dhabi (US$68bn planned for its Surface Transport Master Plan). Kuwait’s Partnerships Technical Bureau is also putting forward a number of PPP projects across various sectors and Dubai, after some delay, is progressing with its PPP Law.However, with exceptions in certain sectors, and also in countries where oil and gas revenues allow for government funding or support (and give general investor comfort), there has been a notable lack of success to-date in developing private sector infrastructure on a PPP basis.A number of high-profile delays or perceived failures of regional PPPs have brought into question the potential for successful partnerships across the Gulf and the wider Middle East. This includes (still-unconfirmed but widespread) reports that the US$3bn Mafraq–Gweihat highway in Abu Dhabi will not proceed on the originally intended PPP basis, after taking bidders through a lengthy tender process, and a similar story for the US$10bn Landbridge in the Kingdom of Saudi Arabia.The overall picture appears striking: that PPPs have simply failed to take off in the region, and when they are attempted, they often appear to be plagued with the same issues. Why is this the case?The successesWe should begin with the positive stories of private infrastructure provision in the region, which should not be understated. There have been great successes in the power and water sectors in many countries (eg, the UAE, Saudi Arabia, Oman) that have brought significant private investment.These have been generally model transactions (even if it can be argued whether they are strictly PPPs, given no interface with the end-user). Well-run and highly competitive bid processes have led to low-cost independent power/water plants, generally built to schedule and budget and operated to the highest standards. Project structures have passed on real risk (construction, technical and financial) to the private sector – as banks noted to their cost when construction prices were escalating fast in the region.In addition, some countries including Egypt and Bahrain have closed significant PPP projects in recent years, and several (Egypt, Kuwait, Turkey) have formed central units to drive the PPP concept forward and expand its reach across different sectors. In North Africa, notwithstanding the ongoing political issues, Morocco and Tunisia among others are looking to PPP-type structures to encourage more – and more efficient – investment.Madinah Airport in Saudi Arabia is another example of success. Although not yet financed, this was recently awarded after a hotly contested bid. The project passes significant risk – including traffic risk – to the developer, with a revenue share for the government going forward; a good example of how a well-structured project can succeed in the region.Again, however, the problems cannot be ignored. Mafraq–Gweihat was considered a bellwether for PPPs in Abu Dhabi: given that last year the Emirate’s Department of Transport said that up to

With Egypt in the eye of the storm, it was widely expected that, in the aftermath of the Arab Spring, the already-static Egyptian project finance market would tail off even further. In fact, the private sector’s self-imposed moratorium on investment activity that was expected to ensue has not materialised. Instead, investors’ appetite for project finance deals in Egypt has gone from strength to strength, buoyed by a number of successful financings in the region. This has been made possible, in large part, by the liquidity of Egyptian banks.Foremost among these projects is the US$298m debt financing for Egypt Hydrocarbon Corporation’s ammonium nitrate plant located at Ain Sokhna near the Suez Canal on the Red Sea coast of Egypt. The deal, which signed on November 22 2010, is shortly to reach financial close.Funded entirely by the local bank market, the EHC project represents the enthusiasm, and the ability, of Egyptian banks to take project risk in the expectation of solid returns based on sound industrial projects. Moreover, as one of three projects being developed by EHC’s main sponsor, Carbon Holdings, the ammonium nitrate facility represents the first stage in the development a multi-billion dollar petrochemicals complex that is tipped to transform the Egyptian petrochemical industry beyond recognition. Local is going large.The EHC projectThe project consists of the construction and operation of a plant for the production of low density ammonium nitrate. It comprises a nitric acid unit and ammonium nitrate unit, together with associated infrastructure and facilities including storage tanks, pipelines and utilities. Once complete, the plant will convert the ammonia feedstock into 850 metric tons per day (mtpd) of nitric acid. This will then be processed to produce 1,060 mtpd of mining grade ammonium nitrate (MGAN), for use in the mining and construction industries.The MGAN produced by EHC will be primarily for export to foreign markets. Here, the geographical location of the project near the Suez Canal is expected to come into its own. It has strategic access to mature markets in Europe and North America, coupled with a freight cost advantage in supplying the high growth Asian and MENA markets.Global demand for MGAN has been forecast to outstrip supply between now and 2020, meaning there is significant scope for EHC to plug the gap. The fact that there is only one other ammonium nitrate plant in Africa (at Secunda in South Africa) is seen as a huge advantage in this respect.Major playersThe project company, EHC, has strong sponsor support in the shape of its shareholders. This includes Carbon Holdings, the key force behind the Egypt Basic Industries Corporation (EBIC) ammonia project. EHC’s other shareholders are Egypt Kuwait Holdings, Hayel Saeed Anam Group, Saudi Economic and Development Company and Tri Ocean Energy.The EPC contractor for the plant is Uhde GmbH, a wholly owned subsidiary of ThyssenKrupp AG, which will deliver the plant on a lump-sum turnkey basis. The notice to proceed was issued on August 20 with start-up scheduled for 2013. Long-term feedstock and offtake contracts have been executed with Transammonia, a worldwide group specialising in the international trade of ammonia and its derivatives.Local bank financingThroughout the development of the financing strategy for the EHC the financial adviser, Royal Bank of Scotland, maintained a dialogue with both the international and the local bank markets. At the beginning of 2010 it became apparent that the liquidity and credit appetite in the Egyptian market would make this the preferred route, with highly competitive terms including pricing and tenor. This was despite the requirement to finance in US dollars rather than Egyptian pounds.On the back of their keen interest in the project, Ahli United Bank SAE, Banque Misr SAE and Commercial International Bank (Egypt) SAE were signed up as mandated lead arrangers and underwriters in November 2010. The MLAs are expec

Middle East syndicated loan volumes totalled US$26.2bn for the first nine months of this year, marking a 31% drop from US$38bn for the same period in 2010, according to Thomson Reuters data. “The Middle East is still on a downward trend in terms of volumes versus last year. There hasn’t been a lot of new money across the region at all,” said one emerging markets loans specialist at a European bank.While liquidity remains limited, the loan market is open for certain blue-chip companies that are well known to lenders in the stronger economic states – notably Saudi Arabia, the United Arab Emirates and Qatar – but the eurozone crisis has resulted in price hikes.“The liquidity is there for a higher price,” said Raouf Jundi, senior vice-president and head of origination at Bank of Tokyo-Mitsubishi UFJ. Bankers say borrowing activity among Middle Eastern companies is not expected to pick up before 2012.“The significant risk in Q4 means it is not a good time to come to the market. If there isn’t an urgency to do the deal, it’s better to wait,” the emerging markets loans specialist said.Japanese and American players are expected to have a bigger presence in the Middle East in 2012, largely compensating for the relative absence of French banks following several credit downgrades.Handful of dealsThere have been a handful of sizeable deals in 2011, including Israeli Teva Pharmaceuticals’ US$4bn loan to back its US$6.8bn acquisition of US drug maker Cephalon and Saudi Arabian SABIC Capital’s US$1.25bn, five-year revolver, which were both agreed in June. Prior to that, in March, Kuwaiti telecoms group Zain signed a US$1.2bn loan.Abu Dhabi government-owned International Petroleum Investment Company (IPIC) secured a US$1.5bn bridge loan in August, and was followed by Dubai’s Port & Free Zone World (PFZW) with a US$850m, five-year loan refinancing in late September. In October, Egypt’s Orascom Construction Industries signed a US$2.2bn deal – its largest ever loan.This year has seen some positive developments for Dubai, which has been stabilising its finances following a heavy hit to its economy in 2008, which was compounded in November 2009 when Dubai World announced that it wouldn’t be able to repay its debts.In March 2011, Dubai World signed a final restructuring agreement with 80 creditors for nearly US$25bn of debt, and there was a further boost to the Emirate when Dubai’s sovereign wealth fund, Investment Corp of Dubai (ICD) launched a US$2.8bn loan in May that raised US$4bn, which would have marked Dubai’s biggest loan since the 2008 financial crisis.Although loan bankers were ultimately left disappointed, when in August ICD opted to cancel the US$4bn loan and instead repay the loan in full, the huge oversubscription reflected banks’ improving sentiment towards Dubai. “This is not a market where Dubai is off-limits anymore,” said a second European banker.M&A activity has stagnated in 2011 as a result of tough lending conditions and is not expected to pick up until early 2012 at the earliest.“With valuations down in developed markets, it means the Middle East is in the perfect position to acquire. However, confidence in the market would also need to return,” said Jundi.Qatar is “making acquisitions left and right”, but it is able to secure government financing, while Saudi Arabia’s liquid position means small to medium-sized enterprise mergers and acquisitions are do-able without international participation.Tough timesThe eurozone crisis and dollar funding issues mean that European lenders are highly selective of the deals they participate in and some are adopting a “sit on our hands and wait it out” strategy. Many lenders have adjusted positions on current deals as the implications of tightened liquidity have taken their toll.“Lenders have been quite clear on what they can or can’t do and some deals have been moulded around that,” said one Middle East-based loans banker, citing strong relationships and investment grade ratings as

Satorp, the joint venture between state-run Saudi Aramco and French supermajor Total, launched the world’s first project sukuk issue in September, completing a complex financing package for the Jubail oil refinery in Saudi Arabia. While the innovation in project financing may inspire imitators, the unique details of the deal mark it out as a hard act to follow.A 14-year Sharia-compliant offering of about SR3.75bn (US$1bn) achieved keen pricing of 95bp over six-month SAIBOR, meeting tight guidance of 95bp–105bp over the benchmark thanks to the financial and reputational support of its sponsors. Leads Banque Saudi Fransi, Deutsche Bank and Samba Capital took roadshows for the deal to an exclusively Saudi investor base, whose constituents were keen to recognise the credibility of the names behind the refinery project.“The sponsors are guaranteeing this, so the risk factor is very low; it’s a good investment and there’s a lot of cash in the Kingdom,” Fawaz Nawwab, chief executive of Satorp, told reporters in September when he announced a scheduled completion date for the Jubail project. The US$14bn greenfield development will process 400,000bpd of Saudi heavy crude when fully operational in December 2013.While the overall project enjoys a construction guarantee from both sponsors, Saudi Aramco acts as sole guarantor of the sukuk during the refinery’s construction phase. The energy behemoth requires little credit risk analysis from Saudi investors, who are able to take comfort in the guarantees that come with government ownership.“I think the Satorp sukuk holders would take comfort from the undertakings given by Saudi Aramco,” said Massoud Janekeh, head of Islamic capital markets at Bank of London and the Middle East.Satorp’s decision to invest time and effort, and make an unprecedented project sukuk issue was partly motivated by affairs of state. The standard five-year sukuk format is popular with Saudi investors, who buy them to hold, but the 14-year tenor makes this an entirely different offering.“It was important for Satorp to develop the capital markets in the Kingdom,” said one person close to the deal, who declined to be named. “It was in the national interest.”The Saudi Capital Markets Authority had been keen for some time to develop the Kingdom’s capital markets, so a combination of shareholder loans and a robust guarantee provided firm ground to develop and implement an innovative financing structure, which, it is hoped, will have what one DCM official called a “waterfall effect” and provide a template for future deals in the Kingdom.An intricate US$8.5bn overall funding package for the project, agreed in June 2010, includes loans from public investment funds, and export credit agency financing and commercial bank financing from both Islamic and conventional institutions. According to Satorp, commitments were received for more than US$13.5bn.“This is quite a complex structure because it is not a straightforward debt funding of an existing business. It involves construction and development of a new asset. It includes a number of funding banks for different aspects of the project in a complex intercreditor arrangement, and furthermore it is created as a joint venture between two equity investors in Saudi Aramco and Total,” said Janekeh.The structure of the joint venture follows the Islamic principle of musharaka, which provides guidelines on partnership and joint investment. Under this arrangement, Saudi Aramco holds 62.5% of Satorp and Total maintains a 37.5% stake. The purpose of the partnership, according to the sukuk prospectus, is “to earn profit from the application of the capital contributions of the partners in accordance with the business plan”.The final bond segment of the financing took longer to arrange than the rest of the package, so Saudi Aramco and Total provided senior shareholder loans of US$497.5m each. The sponsors’ US$995m loan allowed the construction process to continue while the bond portion was bein

Within the Middle East region, the instability caused by the global financial crisis has been compounded by a number of ongoing fundamental political, economic and technical shifts specific to the region that are driving changes in the energy sector in particular. These changes have an impact on the supply of energy, both primary (oil and gas) and secondary (power), and just as importantly, the demand for energy again at both the primary and secondary level.The changes are still being absorbed but the impact that they are having is beginning to become clearer and we are now able to see some clear trends in regional energy sector M&A activity. Our expectation is that these fundamental shifts in the regional energy balance will continue to drive an increase in regional M&A activity within the energy sector ahead of other sectors.First, to put the regional market in context, the Middle East, while a major player in the energy industry, remains relatively small in economic terms, with the entire Middle East and North Africa (MENA) region from Morocco across to Egypt and down to the Gulf accounting for barely 3% of global GDP in 2010. Inevitably, this means that economic activity, and M&A activity, is on a much smaller scale than other regions of the world.So, even in the last of the boom years, 2007, the Middle East represented only 3% of the global M&A activity, according to Dealogic, with deals closed of about US$150bn in that year. Given the importance of energy to the region it might be expected that it would represent a large portion of the activity but in fact, for reasons noted later, the energy business has typically accounted for less than 20% of all M&A activity in the region.DiagramsThe MENA region has, in line with the global slowdown, seen M&A activity drop precipitously and although M&A activity picked up last year, 2011 has again been a slow year – with just US$34bn of deals closed by the end of September, less than 25% of the total for 2007.Of course, on top of the effects of the global economic situation, the Middle East has also had to deal with the impact of the Arab Spring. While the political changes have certainly had very direct effects on markets such as Egypt and Libya, we have seen little impact on M&A activity outside of those specific areas.Certainly, the Gulf region has come through the unrest without any obvious impact on M&A activity and even in Bahrain (where we are currently running two sell-side mandates on energy assets) the interest of investors seems to be undimmed. It does appear that international investors have taken the view that the Gulf at least will continue to be an attractive region in which to invest for the foreseeable future, driven particularly by the strong growth expectations in energy spending in the region and the view that political stability can be maintained.But aside from the general economic and political environment, what factors are influencing activity in the energy sector specifically? Perhaps the biggest single factor within the sector that differentiates it from many other geographies is the dominant operational role played by national governments through the national oil companies.Within the oil and gas sector, governments continue to own and, more importantly, directly manage, the vast majority of the region’s hydrocarbon resources. While there is significant private sector involvement in the upstream business, particularly of oil majors, these are typically under long-term contractual arrangements with very limited, if any, ability for those companies to transfer these interests via a sale to third parties.There are exceptions in the region, of course, notably Egypt, Oman and Kurdistan in Iraq, where foreign investors have more flexibility in managing their portfolios and we continue to see activity growing in these markets. One factor driving activity in the smaller markets is that many of the oil and gas “juniors” that have ga

The term wakala is used in Islamic finance to describe a contract of agency or delegated authority pursuant to which the principal (muwakkil) appoints an agent (wakeel) to carry out a specific task on its behalf. The wakala concept is used frequently in financing transactions, including sale and purchase (where the agent can buy or sell assets on behalf of the principal that appointed it), borrowing and lending of funds and assignment of debt, guarantees and pledges. In this article, the authors explain the use of wakala in Islamic finance, summarise the key features of the relationship between the agent and the principal and provide a recent example of a wakala on which they have worked.BackgroundFinancial institutions have adopted various Sharia-compliant means of advancing funds to their customers for the purposes of generating income. These are termed modes of finance and are more fully described below:* Participatory mode – This mode involves the financial institution making a direct equity investment in the underlying business and sharing in the profits (or losses) of that business. Mudarabah, a partnership arrangement whereby one partner provides capital for investing in a commercial enterprise while the management and work is exclusive undertaken by another partner, is an example of a participatory mode of finance.* Non-participatory mode – Here, the financial institution does not make a direct equity investment in the enterprise but instead provides financing for a specific purpose. An example of this is a murabaha, which consists of a financial institution purchasing an asset (mal) and selling it to the customer, who will make one or more deferred payments over time to cover the payment for the asset plus the mark-up, which is the profit element for the financial institution.* Accessory mode – The final Islamic mode of finance involves the financial institution taking on some sort of role acting on behalf of the customer, for example, as agent (wakeel), trustee (amin) or guarantor (kafil). Accessory modes can be used in isolation or as part of a larger transaction involving, for example, a murabaha or other form of participatory or non-participatory structure. This article will focus on the accessory mode of wakala.Typical wakala structureThe structure of a typical wakala arrangement is set out below:Diagram* The principal appoints the agent by entering into a wakala. This agreement will document the terms of the agent’s appointment and the fees it will receive for carrying out its work, together with a list of its duties.* Following its appointment, the agent will undertake certain tasks as documented in the wakala as agent on behalf of the principal. These will include investing money received by it from the principal into the business in relation to which the agent has been appointed.* The agent will be contractually obligated to pass on any profits generated by the business to the principal. It must also perform its obligations according to the instructions of the principal.Characteristics of wakalaAny transaction employing a wakala structure should comply with the objectives of the Sharia. On that basis, it is essential that the Islamic prohibitions against interest (riba), uncertainty (gharar) and gambling (maysir) are complied with.In addition, to the extent that the wakala arrangements relate to the purchase of goods, it is important that the transaction adheres to the general principles applicable to sales contracts (bai’) and that the sales contract does not relate to any forbidden (haram) object (for example, alcohol, pork or impermissible financial instruments). The appointment of an agent for acts including fasting, prayer and giving evidence are also prohibited as these should be carried out by the principal.More specifically, certain rules and characteristics applicable to wakala are set out below:* Appointment of agent – The appointment of an agent by the principal constitutes offer and acceptance. Th

This past July, the Government of Dubai’s Department of Finance together with the Road Transport Authority of Dubai (together, the Government) successfully closed one of the most innovative infrastructure financings in MENA that can serve as a template for flexible structured infrastructure and real estate financings within and outside of the region.Infrastructure monetisations are often unappealing to government entities because of the resulting loss of ownership, control and revenue stream attendant to more traditional models, as well as the usual implications of issuing on the capital markets, if relevant.However, the Salik financing, which was structured as a dual-tranched (conventional and Islamic) secured syndicated bank financing, addressed typical sovereign concerns as it provided for limited recourse to the Government and no transfer of ownership or operations of the toll road asset. It additionally satisfied investor requirements and was consequently oversubscribed as it provided investors with a sound security package with recourse to the asset’s revenue stream.The toll roadThe Salik toll road system (Salik) is the first free-flow electronic tolling system in the Gulf region and is operated by the Government. Salik applies at four gates along the E11, or Sheikh Zayed Road, the principal highway that runs through Dubai to Abu Dhabi and the Northern Emirates and along which the emirate’s main commercial and residential districts, including the port of Jebel Ali and the Dubai International Airport, are located.Since becoming fully operational in September 2008, Salik has enjoyed consistent traffic volumes in excess of 800,000 trips per day and produced consistent revenues for the Government in excess of US$230m in both 2009 and 2010, despite volatility in the global economy.The financing structureThe Salik financing monetised tolls and other revenues associated with Salik, including revenues collected from users relating to the purchase of Salik tags, the recharging of Salik cards and the payment of fines relating to failure to comply with Salik rules and regulations.Under the Salik financing arrangements, the Government agrees to turn over gross Salik revenues on a weekly basis to a special purpose vehicle (SPV) in exchange for (a) an upfront payment by the SPV to the Government of approximately US$800m and (b) a series of monthly deferred payments comprised of the surplus Salik revenues after payment by the SPV of its financing expenses, principal and interest/profit repayments and the top-up of a liquidity reserve account.The SPV is initially funded by the upfront payment by the investors under the following tranches of senior debt facilities incurred by the SPV:* Dirham-denominated conventional tranche of US$200m equivalent;* US dollar-denominated conventional tranche of US$400m; and* Dirham-denominated Sharia-compliant tranche of US$200m equivalent.Citigroup, Commercial Bank of Dubai, Dubai Islamic Bank and Emirates NBD were appointed by the Government as mandated lead arrangers and bookrunners for the senior facilities debt. The financing structure is further described in figure 1 below.DiagramThe Salik financing is the first toll road financing in the MENA region and the first toll road financing globally to include a Sharia-compliant tranche. It was also the first use of a Dubai International Financial Centre Special Purpose Company SPV.The clear and positive response of the market to the Salik financing is indicative of the market’s appetite (at the level of both local UAE banks and international financial institutions) for projects with strong underlying economics and the flexibility that the market is willing to offer to such projects. This article seeks to identify a number of those areas of flexibility, which may in turn be helpful to other sponsors considering the feasibility of similar monetisation arrangements.Ownership and operational flexibilityGiven the importance of the Sheikh Zayed Road (and, by as

The request for proposals (RFP) for the 1,500MW Shuweihat S3 IPP (S3) in Abu Dhabi was issued by ADWEA in March 2010, some five months following the delayed financial close of the Shuweihat S2 IPP in October 2009. The finance bid requirements for the new project were, therefore, always likely to reflect lessons learned from the difficult Shuweihat S2 IWPP (S2) process and prevailing concerns about continued liquidity in the commercial bank market.The RFP for S2 had been published in November 2007, just ahead of the successful financial close of the Fujairah F2 IWPP the following month and, more pertinently, in advance of the start of the credit crunch that engulfed global capital markets in 2008.The S2 RFP continued the structure adopted on recent previous ADWEA IWPPs and required bidders to provide commitments for 100% of all equity and debt required for the project. During the course of 2008 it became clear that the banks supporting Suez, the winning bidder, were not willing to countenance the underwriting risk attached to their commitments of approximately US$2bn of debt.An interim solution comprising a US$900m bridge facility to allow the project to commence construction was closed in December 2008. There then followed the introduction of Marubeni into the international sponsor group to permit access to JBIC funding and an eventual full financial close 10 months later as each of ADWEA, Suez and Marubeni used their relationships with commercial banks to fill out the syndicate.The bid requirementsThe bid requirements in the S3 RFP therefore differed remarkably from previous ADWEA projects. While responsibility for and the risk of raising finance remained with the successful bidder as in all previous transactions, significant qualifications were made to ensure sufficient liquidity for multiple bidders as well as sufficient later liquidity for a bookbuilding exercise to be undertaken by the successful bidder with co-operation from ADWEA.To achieve this ADWEA required each bidder to have exactly two international commercial banks supporting its bid, with a minimum commitment of US$125m for each bank. Non-exclusive commitments or letters of support were not permitted and local and regional banks were not to be approached to support a bid.To partly compensate for the restriction on the number of committed banks each bidder was allowed to secure prior to the bid date, ADWEA offered to undertake to arrange a US$250m facility from local UAE banks and bidders were free to assume that the terms and cost of such funding would be pari passu with the terms and costs of their committed banks.Equally, however, bidders were required to assume that the terms and cost of uncommitted funding to be sourced from non-local institutions would be pari passu with the committed funding and to provide evidence to show that there would be sufficient market liquidity to source such funds on these terms.Also, as in previous ADWEA transactions, bidders were permitted to include government supported debt with only outline term sheets and/or preliminary commitment letters but with suitable acknowledgements that the structure of the proposed transaction, including the mark-up of the project documents and the insurance arrangements, were acceptable to the government institution.Early on in the bid process the consortium of Sumitomo Corporation (Sumitomo) and Korea Electric Power Company (Kepco) (together the consortium, advised by Consilium) formed a view that minimising the risk of raising additional funding post-bid was both efficacious to the consortium, since finance risk under the ADWEA model rests solely with the successful bidder, and likely to be a competitive advantage, since it would permit ADWEA to place a greater degree of certainty on the consortium’s financial assumptions and therefore on the levellised tariff included in its bid.The cornerstone of the finance plan adopted by the consortium was therefore JBIC, which since its first involvement i

Hailed not only as a pathfinder deal for PPP in Bahrain but also for the wastewater sector in the Middle East more generally, the Muharraq project has achieved close against the backdrop of the recent unrest in Bahrain and the continuing difficulties in the banking sector.Launched to the market with the full RFP in May 2009, the project involves the construction, ownership, operation and maintenance of a new 100,000m3/day wastewater treatment plant at Muharraq in Bahrain. The project will deliver critical new infrastructure for Bahrain, reducing the influent to and outflows from the ageing Tubli plant.In addition to the plant itself, the project requires the construction, ownership, operation and maintenance of a new 15.9km deep gravity sewer trunk main (STM), as well as an associated wastewater collection network (WWCN). Construction of the plant and the STM is scheduled to be completed in 32 months, with the WWCN, which replaces certain existing wastewater pumping stations that are to be decommissioned, to be completed 12 months later.Influent will be conveyed to the plant by the new STM and WWCN and/or by tanker. All treated sewage effluent (TSE) is delivered to the MoW at the plant boundary, with sludge being incinerated at the on-site sludge incineration plant and transported by the project company to a site in Bahrain to be made available by the MoW.After re-issue of the RFP documentation, binding bids were received in February 2010 from five consortia. After an initial technical evaluation, in July 2010 a consortium led by Samsung Engineering was declared preferred bidder and negotiations commenced. The consortium had submitted a levellised tariff of 0.550 BHD/m3, some 10% lower than the closest other bidder. The Sewage Treatment Agreement (STA) with the Ministry of Works of the Government of Bahrain (MoW) was signed in February 2011.Project structureThe project is being undertaken by Muharraq STP Company, a Bahraini joint stock company owned 45% by Samsung, 35% by Invest AD and 20% by United Utilities. The documentation for the project comprises the STA, which is a 29-year concession to build, own and operate the facilities, supported by a land lease agreement for the project site and other land documents for the pipeline corridor (see below), together with a Shareholders’ Undertaking Agreement (essentially a share retention agreement with the Government) and a government guarantee for the project from the Ministry of Finance.Construction of the facilities is being undertaken by Samsung as turnkey EPC contractor. The project will be operated and maintained by Muharraq Wastewater Services Company, a Bahraini limited liability company owned by Samsung and United Utilities.While the documentation draws heavily on the prior Bahraini I(W)PP documentation for the Al Ezzel, Hidd and Al Dur projects, there are still some notable differences. Some of these differences are not industry-specific. However, the different nature of the underlying Project nonetheless necessitated a number of departures from the Bahrain I(W)PP model, the most significant of which are explored below.Pipeline corridor and land issuesOne of the most challenging aspects of the project is that part relating to the STM and the associated WWCN. On almost all IPPs and PPPs undertaken to date in the region, the project company has exclusive possession of a clearly defined plant site, plus possibly some limited easements for access or utilities over adjacent land. The inclusion within the project scope of a 15.9km deep gravity sewer trunk main and WWCN passing through Muharraq town to be constructed, owned and operated by the project company entailed additional technical and legal challenges.From a technical perspective, it was reported that some potential bidders were discouraged by the inclusion of the STM and WWCN, as the tunnelling skills required were not core competencies for some of the bidders and therefore represented a risk they were not keen to wrap.

Furthermore, local exchanges, once expected to become the region’s leading financial hubs, are still struggling. From low liquidity to poor performing stock, the Gulf region’s exchanges and Dubai’s in particular are yet to fulfil their once grandiose ambitions.Although common across more developed markets, bookbuilding is still relatively new in the Middle East region. In the Gulf, UAE and Saudi exchanges have resorted to bookbuilt IPOs but the standard practice is to float a company at a fixed price. The price will usually be based on the company’s balance sheet, including assets and forecast profitability. Then the regulator, which will be very much involved in the process, will review all the given data and determine or approve the final price.With the fixed price method, the valuation of the company is divided into numbers of shares at an agreed nominal price such as US$10 or SR10 per share. This, ECM bankers say, allows issuers to cast the net wider and attract retail investors who are not familiar with the complexities of the markets.“Complex pricing deters smaller investors, which in turn means the IPO will not attract as many smaller investors as the company hopes,” said a locally based banker.Fixed-priced IPOs are therefore beneficial to investors from a broader section of society. Asked whether this method was confined to smaller family-run companies looking to go public, one banker said that it was more dependent on the issuer’s rationale.He explained that while large privatisations would be attractive to international investors, the aim of the listing was often to include a broader investor base and ensure investors on lower incomes would benefit from successful IPOs. He added that in the current febrile climate across the Middle East, ensuring that lower income investors benefit from privatisations had been high on some governments agendas.With large companies coming to market, prices usually surge upon listing, making smaller investors more likely to engage in future transactions. The bookbuilding method, however, has often been difficult given the nature of companies going public. Until recently, a majority of public offerings were of greenfield companies, which made adding a premium on the IPO price problematic.Bankers involved in prior deals say the fixed price method is very much a cultural phenomenon that remains popular because of the straightforward nature of the transaction, which makes it more attractive to potential backers with little knowledge of the mechanics of listing.No changes for the next two yearsWith a bookbuild process increasingly the norm across markets, should we expect to see more in the near future? Not necessarily, local bankers argue, it may have become obvious across Western markets that fixed price IPOs discouraged many companies that aspired to get a fair value for their shares to go public, but in the Middle East that is still not the case. The reasons for public offerings are often different in the region and therefore there is no such incentive other than to ensure more liquidity in the bourse and simply engage investors in the principle of buying into a listed entity.Other bankers point to the small number of offerings that simply don’t warrant a change in approach. They say that large companies looking to attract international investors will inevitably opt for a bookbuilt IPO as the transparency this process offers is likely to reassure non-regional backers. However, this would not apply to the Saudi exchange, where IPOs are only open to Saudi nationals or residents of the GCC.From an issuer’s point of view, bookbuilding would mean finding a fair price in the market that would attract enough investors for the stocks to be floated, which in turn would mean the price at which supply and demand are balanced, meaning there is no contained demand that would lead to a surge in the price simply in the immediate aftermath of the listing. In effect, it would mean the bookbuilding would