The Ajman connection

25 January 2002

Ever since international developers turned their attention to the Middle East in the early 1990s, the northern emirates have been a favoured port of call. Attracted by the near absence of hydrocarbon reserves and the lack of state-of-the-art infrastructure, private investors have inundated local government offices with offers to build and finance everything from power and desalination plants to wastewater networks. Although politely received, none of the proposals had ever materialised into a firm project. Instead, after an initial burst of interest, their fate was usually confined to the top shelf to gather dust.

That all changed on 19 December, when the Ajman government awarded a group comprising the US' Black & Veatch Corporation and the UK's Thames Water a full concession for the Gulf's first integrated wastewater project. Under the terms of the twenty seven-and-a-half year agreement, the soon-to-be formed Ajman Sewerage (Private) Company will invest $140 million in establishing a wastewater network for the emirate. In 2004, the first residents should be connected up to the system and by 2006, an estimated 80 per cent of the population will be on the network.

The idea of a privately funded wastewater network in Ajman has been around since 1995, when a consortium including Black & Veatch signed a memorandum of understanding with the government. Despite considerable time and effort being expended, the project appeared doomed in early 2001, following the withdrawal of the prospective operator.

It was then that Black & Veatch, which had originally been involved in the consortium as the engineering partner, decided to take up the scheme. The move fitted in with the company's new strategy of placing greater emphasis on its development business, as a means of supporting its engineering and engineering, procurement and construction (EPC) activities.

Black & Veatch's initial task was to carry out a comprehensive assessment of the project. It liked what it saw. Ajman had a population of 120,000 and was growing fast. The public/private partnership (PPP) concept was advancing in the region on the back of the power restructuring programmes in Abu Dhabi and Oman. And the Ajman government appeared keen to push ahead with the project.

The company also saw that the five years of previous negotiation had not gone to waste. 'All the previous discussions had improved the understanding of what a concession is all about in the minds of government officials,' says Black & Veatch's vice-president Paddy Padmanathan. 'They certainly understood the meaning of force majeure, termination clauses and tariff structures.'

Having established that the project was viable, Black & Veatch went back to the government to put down its marker. However, by that stage, other international developers had entered the fray armed with similar offers. The government responded, by stating that whoever came up first with a concrete proposal would be granted the concession.

After having received assurances from the government that it was in a position to implement a concession agreement, Black & Veatch moved quickly to appoint Fuji Bank, now part of the Mizuho Financial Group, as financial adviser.

Says Padmanathan, 'We wanted to be convinced that the numbers worked and to make sure that we could get the debt financing at the right margin and tenor. The tenor was particularly important as this is a sanitation project and it is in Ajman. People were talking of seven to 10 years, which in my view was ridiculous, given that the project is so capital intensive. I was looking for 12-15 years and Fuji Bank was willing to push the envelope out.'

Having developed a financial model and a technical solution, Black & Veatch then turned to the concession agreement, appointing Denton Wilde Sapte as its legal adviser. A first draft was completed in June and by mid July, the bulk of the agreement had been concluded.

Black & Veatch's next goal was to bring on board an operator. 'It is difficult to negotiate a position with too many people round the table,' says Padmanathan. 'Our strategy therefore was to take the agreement to the wire, with as much detail as possible, and then present it to an operator.' The company had originally planned to tender the position. However, as it was preparing to send out the preliminary information memorandum, Black & Veatch was approached by the UK's Thames Water, resulting in a negotiated deal. The joint development agreement was signed on 18 December, just a day before the concession was granted.

Both signings would have been impossible without the preparation of a new sewerage sector law for Ajman, which sets out the obligations on the company, the government and residents, as well as the tariff structure. The law is due to be passed in February, following approval of the draft in mid-December.

The concession agreement provides for the Ajman Sewerage (Private) Company to be formed within 60 days of the concession signing. The company will have a capital of $30 million-40 million and will initially be a 50:50 venture between the two co-developers. Just before financial close is reached, the company will be restructured. A further three to four shareholders will be brought on board, including the Ajman government with a 20 per cent stake.

The total financing requirement amounts to $100 million, of which $30 million will be provided in equity. The remaining $70 million will be covered by a commercial loan, which is expected to be structured as a club deal. Fuji has already done considerable work on assessing market appetite for the loan and is confident that financial close can be achieved by late March. Prior to closure, the company intends to award the EPC contract, which will allow Black & Veatch Construction to get on with the preliminary work and begin digging as soon as the loan has been signed.

'We have a very tight deadline from financial close to the delivery of services and there are some fairly hefty incentives for achieving those targets,' says Padmanathan.

Black & Veatch Construction will be assisted on the EPC contract by its UK affiliate Patterson Candy for the mechanical works and Belgium's Six Construct, the civils subcontractor. Under phase one of the development programme, a 48,000-cubic-metre-a-day sewage treatment plant will be built, along with 15 pump stations and the installation of about 300 kilometres of pipeline. 'While it will be a challenge to put in a brand new system, it will not be horrifically complicated as much of Ajman is new. The main problem will be that there are quite a lot of services - power, water and telephone - which are not mapped,' says Padmanathan.

Any household within 60 metres of the network will be connected up to the system, while those falling outside the range will have the choice of being connected or continuing to use their septic tanks. Within 30 months of construction starting, the company is obliged to have 60 per cent of all those registered for connection by month 24 connected to the network. By 48 months, the target is to have all customers registered as of month 42 connected.

The project company will be responsible for revenue collection, which will involve customers paying a connection fee, payable in four instalments, and a monthly service charge. 'There is a good track record of customers paying for services in Ajman. And we will have means of enforcement,' says Padmanathan. 'It has been agreed with FEWA (the Federal Electricity & Water Authority), that if customers don't pay for wastewater, their electricity will be cut. If they still don't pay, then they will be taken to court.'

The service charges are likely to be slightly above the regional average. Nevertheless, there will be an upside, not only in quality of service. 'Property prices will rise once a fully operational sanitation system is in place,' says Padmanathan. 'Landlords will also be able to do more with their land in terms of the type and height of buildings they can build.'

Water re-use will also increase. At present, sewage is dumped in a pit. Under the new project, effluent will be treated to tertiary level, which will provide water suitable for irrigation. According to the concession agreement, the project company will give 350,000 gallons a day (g/d) of treated water to the municipality which will be used for beautification purposes. The body also has the option to take a further 300,000 g/d at a preferential price. The remainder - an estimated 12 million g/d - will be marketed by the company in the local construction and agricultural sectors. 'Water is an extremely valuable asset and from the sustainable point of view, everyone should be encouraging its re-use,' he says.

Coming just a year after the signing of the ground-breaking Sulaibiya project in Kuwait, the Ajman scheme has further pushed back the boundaries for private wastewater development in the Gulf, being the first to contain a retail element. With the impasse now broken, a steady flow of integrated wastewater projects, backed by private capital, is expected. And having pioneered the first, Black & Veatch intends to be at the forefront. 'If a such a project can be done in Ajman, it is doable in other places,' says Padmanathan. 'Ajman is the gateway project. We would like to do it in other emirates.'

Angus Hindley

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