The project finance restrictions that the Kuwait Authority for Partnership Projects (KAPP) is applying to the developers bidding for Al-Zour North 2 independent power and water project (IWPP) will push up development costs, sources have told MEED.

KAPP has imposed strict restrictions, ruling out refinancing and equity bridge loans.

Miniperms, which have a seven-year term followed by refinancing or a cash sweep and higher interest rates, and balloons, where the majority of debt is paid on maturity, are also excluded. With liquidity concerns growing in the GCC, these structures could be useful to keep the cost of finance down.

These are new conditions which did not apply to Kuwait’s last IWPP, Al-Zour North 1.

The sovereign guarantee for the offtaker, the Ministry of Electricity & Water (MEW), has also been reduced from 100 per cent of tariffs to 90 per cent.

Lenders are also concerned about collateral for the debt. Kuwaiti law means that if a power purchase agreement (PPA) is terminated, the land reverts to the state. This would leave lenders with no recourse.

There is also a requirement that Kuwaiti investors be guaranteed 13 per cent returns on the project. Shares in the project will be distributed to Kuwaiti citizens after the plant is commissioned.

These factors together are pushing up the cost of finance for the project. Developers are also expected to increase their internal rate of return (IRR) to provide a larger buffer.

This will result in a very high levelised cost of electricity (LCOE).

KAPP could reconsider these conditions, according to industry sources. KAPP did not respond to requests for comment.

Of the seven prequalified developers, four are expected to bid in three consortiums:

• Acwa Power (Saudi Arabia) / Mitsui & Co (Japan)
• Marubeni (Japan) / Fouad al-Ghanim (local)
• Sumitomo (Japan)

They are lining up finance from Japanese, local and European banks, as well as export credit agencies (ECAs) including the Japan Bank for International Cooperation (Jbic).

Al-Zour North 2 IWPP will have a power generation capacity of 1,500MW and a desalination component of at least 102 million imperial gallons a day (MIGD).

The bidding deadline has been extended five times and is now 21 June 2016.

Adel al-Roumi, the founder and head of KAPP since its formation in 2008, was replaced by Mutlaq Mubarak al-Sanei as general manager on 1 April. Al-Sanei was previously director of follow-up at sovereign wealth fund Kuwait Investment Authority (KIA).