Public-private partnerships are gaining a foothold as a project delivery mechanism, with more governments adopting the model to deliver new wastewater infrastructure
There are many reasons why utilities in the region have decided to use public-private partnership (PPP) delivery models to build new wastewater infrastructure.
The advantages include deferring capital expenditure, outsourcing asset management, transferring construction risk and benefiting from technology transfer. However, there are concerns that PPPs are more expensive in the long term since it takes longer to raise the initial construction finance for projects. Also, although some utilities are keen to pass on the operational risks, they are less prepared to relinquish control of their assets.
So far, banks have shown a good appetite for PPPs in the region as long as all risks are well considered
In the Middle East, engineering, procurement and construction (EPC) contracts remain by far the most common delivery mechanism for new wastewater facilities. But the use of PPPs, particularly build, operate and transfer (BOT) arrangements, has increased in recent years, especially on some of the largest schemes.
“Essentially, BOTs are when the government is looking to build an infrastructure asset but it wants to use the private sector,” says Muneer Ferozie, acting regional manager for PPPs at the Washington-headquartered World Bank’s International Finance Corporation’s advisory services. “[The government will] ask the private sector to design, build, operate and finance the scheme, and transfer it back to them at the end of the concession period.”
A typical concession period for new assets under BOT is 25-30 years. During this time, the special project vehicle set up by the concession firm to build and operate the new infrastructure is paid incrementally by the government to treat an agreed volume of wastewater to an agreed quality standard.
This method is much like the arrangements for independent power projects (IPPs) and independent water and power projects (IWPPs), which have been successfully producing power and water in the Gulf for decades.
The project companies involved in the PPP are responsible for how the quality and quantity criteria are achieved. This is a key difference between traditional procurement and PPPs. In a BOT, the project firm is incentivised to minimise its costs not just at the capital stage, but throughout the life of the scheme.
A feature that makes PPPs attractive to investors is the tariff paid to the project firm during the concession
“One of the advantages of a BOT or concession model is we are responsible for that [technology] choice,” says Rami Ghandour, executive director of UAE-based Metito. His company is engaged in concessions worth $1.4bn worldwide through its Metito Utilities business, including the first BOT in the UAE at Dubai Investments Park, which it signed in 1999.
Rather than prescribing a specified plant or technology, BOT allows the operator to find the most efficient solution for the long term, says Ghandour. “We look at the total lifecycle cost in our analysis, so we do need to take the operating costs into account, not just the capital expenditure,” he says. “The BOT model has been successful because it aligns interests and ensures that the most efficient technology or solution is fit for the purpose.”
Another major difference between BOT and traditional procurement is that the project firm finances construction of the new infrastructure. This requirement has seen project finance become part of wastewater construction deals, along with equity from the concession companies and the client, and in many cases loans from credit export agencies. So far, banks have shown a good appetite for these deals as long as all risks are well considered.
Samra wastewater plant
One of the region’s early wastewater BOTs, and the first in Jordan, was the Samra scheme. In December 2003, the Irrigation & Water Ministry signed a deal with the Samra Wastewater Treatment Plant Company (SPC), made up of France’s Suez Environmental and Degremont, and the US’ Morganti Group.
The concession period was 25 years and construction cost $169m. To finance the project, the ministry wanted to ensure that tariffs would cover the long-term operational costs, so it opted to provide 54 per cent of the initial construction costs using a $78m grant from the US Agency for International Development (USAID) and $14m of its own resources. SPC then contributed $17m and the remaining $60m came from an eight-party banking syndicate led by the local Arab Bank.
This year, Jordan has repeated the BOT structure to expand the Samra works and has once again opted to invest heavily during the construction phase. The 98,000 cubic-metre-a-day (cm/d) upgrade will use another 25-year concession period and is supported by US financing.
The US government’s Millennium Change Corporation (MCC) has granted $93m to the $225m scheme, with a further $20m coming from the Jordanian government. SPC and nine local banks raised the remaining $108m. Once again the debt portion of the deal was led by Arab Bank. The grant finance has been critical to the success of the Jordanian deals and has made the project much more attractive to the private sector. It is the first time that the MCC has contributed to a BOT scheme and the organisation says it plans to continue working closely with the private sector.
For states that do not qualify for such generous assistance, other financial structures and sources are used to finance PPPs.
Sulaibiya wastewater scheme
In the case of Kuwait’s Sulaibiya wastewater PPP, which reached financial close in July 2002, there was a huge $368m debt pool. The project consortium Utilities Development Company, consisting of the local Mohammed Abdulmohsin al-Kharafi & Sons Group and the US’ Ionics (now part of GE), raised the money from local lenders including National Bank of Kuwait, Gulf Bank and the Bank of Kuwait and Middle East.
The total construction value for the 375,000 cm/d plant was estimated at about $430m, making the debt-to-equity ratio 85:15 (higher than the usual 80:20).
Bahrain was also heavily reliant on debt for its first wastewater PPP, the 100,000 cm/d Muharraq plant. This time, export credit agency finance played a key role in securing the deal.
The Muharraq Sewage Treatment Plant Company, a joint venture between South Korea’s Samsung Engineering (45 per cent), the UAE’s Invest AD (35 per cent) and the UK’s United Utilities (20 per cent), brought with it considerable support from the Korean export credit agency K-Exim. This came in the form of a $120m direct loan, and cover for a further $80m of commercial lending. Three local banks also participated in the debt, which in total is understood to total about $250m. The debt-to-equity ratio is 80:20.
The PPP approach used on Muharraq is a build, own and operate (BOO) agreement over 29 years, which includes the construction period. BOO is the same as BOT, but during the concession period, the concession firm owns the infrastructure. This arrangement is also known as build, own, operate, transfer (BOOT).
Abu Dhabi employed BOOT for four wastewater facilities packaged into two contracts: Independent Sewage Treatment Project (ISTP) 1 and ISTP2, the first of which opened for treatment earlier this year.
The Al-Etihad Biwater Wastewater Company has constructed a 80,000 cm/d facility at Al-Saad in Al-Ain, and another 300,000 cm/d plant at Al-Wathba. At the same time the Al-Wathba Veolia Besix Waste Water Company is developing a second 300,000 cm/d plant at Al-Wathba (Wathba 2) and a 130,000 cm/d plant at Allahamah.
The use of PPPs in these schemes builds on Abu Dhabi’s use of the IWPP model for harnessing private investment in power generation and water desalination. As in the power sector, the government has taken an equity stake in the projects through the Abu Dhabi Water & Electricity Authority (Adwea), allowing it to provide substantial equity finance for the schemes.
Ferozie says this arrangement, where the client effectively becomes part of the project company, often makes the scheme more attractive to investors. In the case of Abu Dhabi’s two PPPs, this set-up ensured that the concessionaires were able to raise about $550m in debt.
Another component that makes PPPs attractive to investors is the tariff that will be paid to the project firm over the life of the concession. This tariff is used to pay back the loans and as such its structure is heavily scrutinised along with any risks that might make the concession company fail to meet its performance criteria.
In some markets and in full PPP concession models, the tariff is solely made up of the rates collected from customers. In the Gulf, however, where householders and businesses benefit from heavily subsidised services, the tariffs are paid by the government offtaker.
The calculation of the tariff will include components related to the construction, operation and maintenance costs and the availability of works to treat the required volume of wastewater and ensure the effluent meets the required quality standards. It is also usual to include an escalation formula that considers changeable costs such as power and chemical prices.
“It’s very important for us in our projects to have a tariff escalation formula because they are over 20-25 years; there’s a huge variation,” says Ghandour. “They are designed typically to reflect our true cost and to adjust the tariff in line with the cost.”
Although there is a raft of PPP arrangements the Middle East could opt to utilise, it is already showing a preference for BOT and BOO(T) deals. Full concession models have limited potential in countries where wastewater services are usually free.
The region’s experience so far is proving that the deals can be closed even in a period of uncertainty. However, there remains some resistance to PPPs from certain government entities, especially in locations where raising finance is not a major concern.
It is telling that states such as Jordan, Egypt and Kuwait, which have each launched successful wastewater PPPs in the past, are now repeating the experience.
Bahrain may be the next to follow as it considers how to move ahead with a new 200,000 cm/d plant at Tubli. Whatever decision the Bahraini government comes to, PPPs will continue to play a major role in the regional wastewater market.
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