The project company, Utilities Development Company (UDC)- a consortium headed by the local Mohamed Abdulmohsin Kharafi Group, which includes the US' Ionics- is aiming to raise KD 125 million ($405 million).

The lead arranging banks are National Bank of Kuwait, Bank of Kuwait & the Middle East and The Gulf Bank (MEED 24:8:01). Commercial Bank of Kuwaitwas originally part of the group, but fell away as the deal evolved.

The Sulaibiya financing will set a number of new precedents. With a tenor of 25 years, it is the longest-term project finance deal ever provided in the Gulf. It is also the first full-scale, properly structured transaction denominated in one of the GCC's local currencies. In addition, it is providing finance for what is the first BOT project in Kuwait and the first private sector wastewater project in the region.

'From the banks' perspectives there are a number of new components that have had to be thrashed out and this is the main reason for this deal taking quite so long to reach fruition,' says a source close to the transaction. 'There are no experienced international banks involved and so there has been an element of the participants feeling their way along and taking their time to get comfortable.'

The transaction, which is not a corporate borrowing but a properly structured non-recourse project finance deal, could set an important precedent. 'By denominating this in KD [Kuwaiti dinars], the assets and the liabilities are being matched,' says a banker close to the deal. 'This removes the foreign exchange risk, but does exacerbate the interest rate risk.' There is no developed swaps market in Kuwaiti dinars that would mitigate the interest rate risk.

Despite the effective linkage of all GCC currencies to the dollar, the 25-year tenor on the deal does raise the spectre of currency risk. 'If it was a 10-year deal this would be less of an issue, but to take a 25-year view on currencies is not easy,' he says.

The other advantage of denominating the deal in dinars was the high level of liquidity among Kuwait banks.

Details of the pricing of the deal have not been released, but it is understood to be flat rather than having a step-up structure, and will be fixed as a spread over Kibor (Kuwait interbank offered rate).

UDC, which has ABN AMROas its financial adviser, has been contracted to build and operate a sewage treatment plant with a capacity of at least 300,000 cubic metres a day along with a reverse osmosis unit.