Before 2009 consultants were queuing up outside the offices of Dubai government bodies to suggest they let the private sector develop infrastructure projects. Back then, they were swiftly sent away.

Dubai was doing well with its strategy of using cheap short-term borrowing to fund its long-term infrastructure spending. Many government agencies were even opposed to the idea of letting the private sector take on infrastructure delivery.

Inevitably, problems arose from a mismatch in Dubai’s short-term liabilities and long term assets, prompted by the drying up of bank lending in the wake of the global financial crisis.

Private partnerships for infrastructure projects

Since then, Dubai has had to look for a new way to fund its infrastructure plans and the door to partnerships with the private sector has been opened. Spearheading this drive is Dubai Electricity & Water Authority (Dewa), which has launched the emirate’s first independent power project (IPP) to be built at Hassyan.

Successful transactions for ICD, the RTA and Emirates will set things up nicely for Hassyan … later in the year

Dubai-based banker

Considered one of the most creditworthy entities in Dubai and a well-known borrower in the capital markets, Dewa launched the request for proposals for the 1,500MW Hassyan project on 22 May to 18 prequalified developers. It was less than a year since the utility had appointed a UK team of HSBC, Mott MacDonald and Clifford Chance as advisers on the scheme.

The pace with which progress has been made on the Hassyan scheme has surprised them. “We have been very pleased with the speed with which this programme has come out,” says Duncan Allison, director of project finance at HSBC. “That shows the level of support that this is getting within Dewa and the government of Dubai.”

The timescale envisioned for the project is for bids to be submitted on 18 October, the shortlisting of a preferred bidder in December, the signing of the power purchase agreement (PPA) in January 2012, and financial close in March 2012. First power is due to be delivered in 2014.

If that timetable is stuck to, it will be a significant boost to Dubai and its plans for other entities to launch projects in partnership with the private sector. However, it could prove to be a difficult journey to reach financial close on the Hassyan project.

Concerns still linger about the emirate’s debt problems and it faces several large maturities over the next couple of years that could unsettle investors.

There are signs that Dubai’s reputation among investors is slowly being rehabilitated. In early June, Dubai-headquartered Emirates airline completed a $1bn bond issue that was massively oversubscribed. At the same time, Investment Corporation of Dubai (ICD) and the Roads & Transport Authority (RTA) were at work on deals that totalled more than $3bn. In the wake of the Emirates airline deal, Dubai’s credit default swap (CDS) rate fell to 320 basis points, its lowest level since November 2009.

“Successful transactions for ICD, the RTA and Emirates will set things up nicely for Hassyan to come out to the banks later in the year,” says a Dubai-based banker at an international lender.

Investor caution for UAE

While the recent news flow out of the emirate has generally been positive, a degree of caution persists. Several banks active in project finance say they are interested in the Hassyan deal, but expect to face difficulties with their internal credit committees about getting authorisation to lend to the project.

Another concern is how export credit agencies (ECAs) will view the deal. Although it has not used project finance before, Dewa has borrowed from ECAs in the past and has an established relationship with many of them. However, Dubai’s debt problems in 2009-10 affected ECAs as well, particularly Japan Bank for International Cooperation (Jbic). It was involved in providing finance for the Dubai Metro, which was built by a Japanese consortium and ran into payment problems from the RTA. Jbic was at one point left with about $3bn of late payments. The issues were eventually settled with Jbic’s assistance, but the deal may weigh on its appetite for taking on further Dubai exposure.

The lender is understood to have told Japanese firms, which may bid on the Hassyan project, that it will consider providing them with financial support, if the project is well structured and bankable.

Bank negotiations for UAE independent power project

With a strong list of developers interested in taking on the project, the next issue to overcome will be financing the scheme.

Dewa’s advisers have already started talks with several ECAs and commercial banks to prepare them for financing the deal.

Bidders must have 33 per cent funding in place from two international banks plus local banks. The tenor on the financing must be 15-23 years.

“There has been a lot of interest from developers and that is good for Dewa, but it is the availability of the financing that will be the real test for this project,” says one project finance banker in the region.

Although Dewa is a strong company and the Hassyan project has a Dubai government guarantee, banks are still nervous. “It will be a tough deal to get through the market, and everyone is aware of that, which is why talks with all the banks and ECAs have started early,” says a source close to the project.

There has been a lot of interest … but it is the availability of the financing that will be the real test

Project finance banker in the region

The project is of strategic importance for Dubai. Not just in terms of power, although a further six private projects could be developed at the Hassyan site if the first is successful. The real importance will be in shaping the future procurement of infrastructure in the emirate. Already the RTA is looking to use private sector partnerships for the development of transport projects.

The emirate’s Department of Health and Medical Services is also planning to develop hospitals with the private sector. If Dewa struggles to get the Hassyan project developed, it will set a bad precedent for the rest of Dubai’s proposed projects.

Huge stakes

But if the Hassyan deal goes well, it will mark the latest stage in Dubai’s resurgence after almost defaulting on its debts in 2009. It will also lay the groundwork for a raft of other projects out of Dubai that do not benefit from a sponsor as strong as Dewa.

“There is a real determination to make sure this project succeeds,” says Allison.

“Dewa could develop it on its own balance sheet, but there is a desire to develop a programme for the future and to be able to roll it out to a lot of other sectors afterwards. So the significance goes beyond just this project.”

The success of the emirate’s recent financing deals, including bond issues by the Department of Finance, show that there are still a lot of investors who consider Dubai a creditworthy name and are willing to buy into its long-term future. Not every investor may agree and the debt may not be as cheap as Dubai was used to, but so far the emirate has shown it has enough friends left to get money when it has to.