The long-awaited completion of the $1.4bn financing of Kuwait’s first independent water and power project (IWPP), Al-Zour North phase 1, is expected to open up further opportunities for project finance deals in the country.

“With the success of Al-Zour North, the next phase of projects should become easier,” Craig Nethercott, partner at Latham & Watkins, the UK law firm that advised the project sponsors, tells MEED. 

The scheme is the first to be procured by Kuwait’s Partnerships Technical Bureau (PTB) as part of its public-private partnership (PPP) programme, which aims to attract private investment into infrastructure. But the process has been far from smooth.

Project delays

Work on the $2bn, 1,500MW gas-fired combined-cycle facility began in 2010 with the appointment of France’s BNP Paribas, the US’ Chadbourne & Parke and Germany’s Lahmeyer International as project advisers. The scheme then encountered significant delays, due in large part to repeated changes in parliament and lengthy waits for sign-offs from various government bodies. In mid-2012, parliament voted to scrap plans for the IWPP, but was later dissolved and replaced, leading to its decision being ignored.

In January 2013, a decision to postpone four other planned PPP schemes struck another blow to Kuwait’s plans to attract private investors to fund infrastructure developments. Four projects, including the national railway, the metro system, the communications network and telecoms system and the part-privatisation of the public post office, were placed under review and remain so today. The decision dampened the enthusiasm that followed the PTB’s naming that month of a group headed by the UK/French GDF Suez Energy International as the developer for the project.

It took almost another year before an energy conversion and water purchase agreement, known elsewhere in the region as a power purchase agreement, was officially signed with the consortium in early December, followed by the financial close with the banks. “Bringing Kuwait’s first project to the market under its PPP programme was challenging, but we managed to get to the finish line,” says Sohail Barkatali, a Dubai-based project finance partner at Chadbourne & Parke.

The lenders involved in the project financing were Japan’s Sumitomo Mitsui Banking Corporation and Bank of Tokyo-Mitsubishi UFG, along with the UK’s Standard Chartered and National Bank of Kuwait. Japan Bank for International Cooperation also provided a tranche of funding ,while Japan’s Nippon Export Investment and Insurance provided insurance for the commercial bank portion.

The lending group reflects a growing reliance in the regional project finance market on Japanese and South Korean banks and their export credit agencies. Local banks are also a vital source of funding, particularly due to the dearth of international banks from Europe and the US, which retreated from the region during the global financial crisis.

Now that it has closed, the Al-Zour deal will act as a framework for future PPP transactions in Kuwait and the market is eager to see which schemes will move forward and which will languish on the drawing board.

Kuwait is expected to focus on infrastructure projects, particularly power and water. Increasing capacity to meet growing utilities demand is a government priority. There is also a strong history of using project finance to support private power and water projects in the GCC. Other proposed PPP projects relating to transport or social infrastructure are less likely to be prioritised.

“There is an impressive line-up of projects that will be tendered to the market this year, with power, wastewater and waste-to-energy schemes among the most advanced,” says Barkatali.

Challenging structure

Barkatali says a PPP model could be a challenging structure to use to finance an existing asset like a post office. Such a project incorporates a range of risks that PPP structures could struggle to mitigate, such as employment issues and moving an incumbent workforce from a public organisation to a privately-owned one. “Structuring these PPPs will have different challenges than say a greenfield power project,” he says. “Reaching a consensus among government stakeholders on how to deal with some of these issues is a lengthy, involved process.”

Schemes more likely to progress this year include the Al-Abdaliya integrated solar project, the first solar thermal power plant in Kuwait. The UK’s HSBC was appointed financial adviser in October 2013, and the project could cost up to $3bn. Another project expected to approach the banking market this year is the Al-Khiran IWPP, which is a conventional thermal power and desalination plant with a minimum capacity of 2,500MW. The same advisers as for the Al-Zour North phase 1 project were appointed to work on the scheme in March. A request for proposals is expected this year for phase 2 of Al-Zour North.

“Using the PPP model for the development of social infrastructure has been less successful in the region,” says Derek Kirton, a senior associate at Chadbourne & Parke, based in Dubai, who also worked on Al-Zour North. “However, the structure remains hugely popular with regional governments. We expect to see an increase in the use of PPPs.

In numbers

$1.4bn: Financing closed on Al-Zour North phase 1 independent water and power project

$3bn: Expected cost of planned Al-Abdaliya integrated solar project

Source: MEED