When is an underwriting commitment not an underwriting commitment? In today's market – always. Since the emerging prominence of material adverse change (MAC) clauses from the third quarter of 2008, 100-plus page underwriting contracts have been sprinkled with clauses such as "subject to internal approval" or "subject to further technical due diligence" or "subject to a successful bookbuild".

The worst kept secret in the market is that there is no such thing as a firm underwriting commitment. Underwriting has always been contingent on other factors – it is just that most contingencies were invariably met until the crisis in the money markets.

Compared with 2007, MAC clauses are now more thoroughly drafted and the window in which banks are committed to an underwriting has shrunk to a maximum of six months.

The first big casualty of evaporated liquidity was the original long term financing of the Shuweihat 2 (S2) IWPP. Although the banks could have formally invoked a MAC clause, ultimately their commitments elapsed. Several concessions were made to get the deal closed: A $945 million bridge backstopped by Suez and ADWEA was put in place; the PWPA was extended from 20 to 25 years; there was a slight increase in the tariff from bid; ADWEA accepted a return less than the pro forma 13% minimum stipulated in the tender documentation on its 60% equity stake; and Suez sold half its stake as a quasi-distressed sale to Marubeni so that the deal could tap JBIC for a $1.1 billion direct loan.

Despite the concessions on S2, ADWEA's future tendering documentation will almost certainly stay the same. "ADWEA will want to send a message to the market that it is business as usual" says a London-based lawyer active in the region. "ADWEA takes great pride in the fact it has not changed its tender documentation in 10 years, so it's unlikely to start now as the period of heightened volatility was an aberration."

While ADWEA will keep to its tendering documentation for the forthcoming RFP on the Taweelah C IWPP, which is expected imminently, and on the following RFP for Shuweihat 3 (S3) IWPP, expected toward the end of 2010, it is unclear whether there will be changes to the tendering procedures outside of Abu Dhabi.

Like S2, concessions had to be made to get the Al Dur IWPP in Bahrain and the Salalah IWPP in Oman – both legacy deals – financed. For both deals, concessions were made by the tariff payer in return for a share in the refinancing gains.

Despite encouraging signs from the bank market, the recovering liquidity needs to be marshaled with care by procurers and their advisers to achieve competitive tension among bidders. The most high profile case of what can go wrong is currently the region's first transport PPP, the $2.65 billion Mafraq-Ghweifat road.

Mafraq road muddle

The way the Mafraq road tender has been run has come in for heavy criticism from international bankers. Ernst & Young, the financial adviser, refuses to comment on the criticism. The chief concern is that the bidders are not precluded from signing banks into commitments on an exclusive basis. This means that one or two bidders could corner the bank market and put the rest of the bidding field at a significant disadvantage. And that is exactly what appears to have happened, with the Irtibaat consortium, led by Macquarie, securing bank commitments from around 16 banks, many of which are on an exclusive basis.

Under the terms of the bidding documentation, bidders only need to cover 25% of the debt financing requirement with letter of comfort letters from banks. Despite the good intentions of removing the requirement for full underwriting commitments in recognition of the size of deal and scarcity of bank liquidity, these intentions are completely undone by the fact that equity has to fully underwrite its bid. The circular result is that rather than taking a risk on debt pricing, bidders will seek to obtain as many underwriting commitments as possible, and, if they can, sign banks on an exclusive basis and place their rivals at a competitive disadvantage.

In the power and water sector, procurers have lessened their requirements for underwriting. In the upcoming PP11 tender in Saudi, SEC has reduced its requirement for 100% underwriting to 50%. On the opposing side of the spectrum, Oman does not stipulate that bidders obtain any underwriting commitments.

Most experienced bidders go far beyond the minimum requirements so that they have a firm handle on the debt pricing on which to base their financial models. For example, the three frontrunners for the Barka 3/Sohar 2 gas-fired IPPs in Oman, the groups led by IP, Suez-Mubadala and Marubeni, have all secured close to 100% bank commitments.

As a consequence of constrained liquidity, a few top tier banks are choosing to back more than one bidder on the Omani tender. These banks are HSBC, Calyon, BayernLB, Natixis SMBC and WestLB. On the upcoming PP11 bid some of these banks, as well as the likes of BTMU, Mizuho, BNP Paribas and SG, are thought to be backing multiple bids.

"I have major issues with banks backing more than one bidder," says an active sponsor in the region. "Despite the use of Chinese walls there are huge confidentiality issues regarding the technical and financial aspects of our bids. It is a move we would try to resist."

Banks that are backing multiple bids are splitting their teams by office, between London and Paris or London and Dubai. "Although we get the extra fees as an initial lead arranger by backing a winning bidder, the net income is about neutral given the extra man hours for running two teams," says a London-based banker: Another motivation for top PF banks is too keep multiple relationship clients happy.

For the Barka/Sohar IPPs bid the Omani authorities have tried to ape the Sembcorp/OIC Salalah IWPP concession, which recently closed, by giving bidders the option to enter a refinancing share due to the government. However, someone close to the tender says that all bidders have "trashed" this request.

The tender documentation also does not include a direct guarantee for the Omani government for the PPA. This was necessary to get Salalah banked and will be needed again. "Following what's happened in Dubai, sub-sovereign is completely discredited," says a lawyer. "There will be huge pressure on governments to directly backstop PPAs and termination liabilities, rather than ask banks to rely on a tacit guarantee."

The one possible exception to this is the SEC projects in Saudi. SEC is rated at sovereign grade and has closed the Rabigh IPP without a Ministry of Finance guarantee. In that deal banks are protected by a ratings trigger – if SEC's rating drops below BBB, an investment grade replacement entity must be substituted by the Saudi Ministry of Finance (MoF). "Saudi has taken this step at exactly the wrong time and it has certainly affected international bank liquidity – they should be doing the reverse and putting in guarantees to help liquidity," says one banker.

It is doubtful that the Ministry of Finance will go back and reinstate the guarantee on SEC projects. Although non-export Saudi projects are cosseted by local bank liquidity, guarantees will be needed for future WEC IWPPs and SEWEC sewage and wastewater projects as both procurers are under capitalized shell companies that are unrated and rely on heavy subsidies from the government.

Technical troubles

Although asking for unfeasibly large underwriting commitments, failing to prohibit exclusivity agreements and removing government guarantees is damaging to the competitive tension of a tender, arguably more damaging is lack of clarity on the technical scope of the project.

To this category can be added a slew of poorly conceived, barely outlined projects that include Mafraq road, Mekkah-Medina rail, Saudi Landbridge, Abu Dhabi's nuclear tender and Jizan refinery. "These projects were simply inviting bidders to throw something at the wall to see if it sticks," says one senior project finance banker based in Dubai.

The rationale for a loosely defined RFP is probably to encourage technical innovation from the bidders, but it usually leads to a very protracted tender phase where iterations on documentation are issued, with each iteration clarifying the technical scope of the project, or completely discourages international-grade sponsors. Abu Dhabi's nuclear tender has taken two years since first bid to reach a final bid phase. A French consortium of Total, Areva, EdF, and GDF Suez submitted a final bid for two reactors on 9 December, and are pitted against Kepco, Westinghouse and GE-Hitachi. There are no clues as to when the Abu Dhabi authorities will make the award, but regional news sources say it will not be before March 2010.

The vagueness of the technical scope of the Jizan refinery tender is said to be the main reason why there are no bids from international oil companies for the project. The refinery should have been a prized asset as the first 100% privately owned refinery tendered in Saudi for years. The refinery is scheduled to start operations in the first quarter of 2015 at a capacity ranging between 250,000-400,000 barrels a day. The crude feedstock from Aramco is sold at market prices.

Projects that are first of their kind will invariably suffer from some sort of delay, because contracts are worked on from scratch. As the region's first transport PPP – and with a capex over $2 billion – the Mafraq road is a challenging credit aside from the underwriting issues. A combination of these issues has put back the bidding deadline three times and now stands at 24 December. The difficulty of financing the project is compounded by the concessionaire's need to manage some segments of road that have been traditionally procured by the government. So the concessionaire is dealing with additional contractual and counterparty constructor risks beyond those for a large, emerging market PPP project.

Bahrain's first wastewater PPP, Muharraq, has also had its deadline extended while the technical scope of the project has been altered and new project documentation issued. The scheme is two projects rolled into one – a sewage treatment plant and the associated sewage transmission system. The projects will be procured under 27-year BOO and BOT contracts respectively. The bidding deadline has been extended from 27 October to 25 January 2010. HSBC is advising the Bahraini authorities.

Five bidders have lined up for the project: Veolia/Keppel, Degremont/Sumitomo, Acciona/KFH, United Utilities/ Samsung and YTL Wessex Water. Bidders have to enter fully underwritten bank commitments for around $200 million of the expected debt requirement, but this could increase because of the refined technical scope.

One of the peculiarly challenging technical aspects of the project is that a large 3km trunk main must be built under the city. The scheme was changed to a deep sewer gravity type plant and extra soil samples were provided to bidders so that they could accurately cost the installation of the pipe. Bidders had also sought more clarity on the population growth of the catchment area – although the project is availability based, the amount of sewage it processes effects its useful life.

Projects that set precedents or encounter peculiar technical issues will invariably be delayed, though these hurdles are usually surmountable unless a tender is put together that is so far away from being bankable that it is near impossible. Perhaps the most high profile example of a poorly run tender that eventually failed is the Landbridge rail concession in Saudi. The Landbridge rail bid had a very clearly defined concession agreement that had to be accepted word for word, but an extremely vague RFP package. Poorly defined technical criteria allied to an opaque evaluation procedure invariably ends in a moribund project. Saudi now has a worrying three-project trend of pulling project financings of large infrastructure assets and instead traditionally procuring the projects (Makkah-Medina rail, Landbridge and Ras Al Zour IWPP).

One suggestion to counter delays due to technical and legal woolliness would be for the procurers to work out a detailed technical base case solution and ask bidders to bid against that or provide an alternative technical solution to the same detail. This way technical innovation will not be stifled and delays due to technical scope will be erased. Procurers would invariably incur more advisory costs and take longer to launch RFPs, but less haste may result in more speed.

Pumping out projects

For established advisers and experienced sponsors and equipment suppliers, technical criteria should be the principal concern for projects. In reality it is a component within a cost-benefit analysis, the balance for which is currently being tested, perhaps more than ever, across all aspects of Middle East project financings, from choosing advisers to selecting a sponsor-EPC group.

This balance is being tested by a wave of new potential sponsors into the IPP/IWPP and financial and legal advisers. In the recent tender for the advisory mandates the Al Duqm IPP, Oman Power and Water Procurement authority departed from its traditional formula of placing all bidders on an equal footing after passing the technical criteria and awarding on price. Instead, KPMG won the financial adviser mandate, despite posting a $1 million bid that was higher than both PwC's ($825,000) and Feedback Ventures' ($675,000) bid.

Similarly, procurers, particularly in the power sector, are beginning to accept bids backed by new EPC contractors and new sponsors. Both the Rabigh IPP and Salalah IWPP have pushed Chinese EPC contractor Sepco III into the mainstream as a viable EPC alternative to the more established players.

While the Ras Laffan C IWPP model in Qatar was probably the biggest innovation in tendering in recent years – with the Qatari LNG model applied to the power sector of the government entity raising debt after the private sponsor has been chosen. This has not taken off elsewhere. There is still a disparate approach to tendering across projects and regions.

High-level talks would help to harmonise outline aspects of the most frequent tenders such as power and water projects. Bidding timetables, shortlisting criteria, bid bond size, and possibly underwriting requirements could all be standardised, but there would still be a large amount of variation due to differences in sovereign rating, whether the government is a shareholder, the country's security of feedstock supply and its stance on utility liberalization.

Sponsors, procurers and advisers need to marshal returning bank liquidity with care – in 2010 and 2011 there are over ten IPPs or IWPPs to be financed in the region, as well as two large Saudi refinery schemes (Jubail and Yanbu), Mafraq road and possibly two mega petrochemical deals (Chemaweyaat and Ras Tanura) among others. The financing requirement for these projects could top $50 billion.