Sur IWP: Thirst for first

The first independent water project (IWP) in Oman, the $172 million 22 year financing for Sharqiyah Desalination Company's Sur project/acquisition was both aggressive and tightly structured despite the lack of precedent. The deal's tenor is a record for an Omani project and a benchmark for the Omani government's drive to the liberalisation and privatization of its utility industries.

Two out of six pre-qualified bidders submitted proposals on 24 July 2006 for the project/privatisation – Veolia and UDCH. The Veolia-led consortium won and formed project company Sharqiyah Desalination Company together with National Power & Water Co.

The deal includes the buyout of the existing 2.66 million-gallons-per-day (MIGD) Sur desalination plant from the state, the development of a minimum 17.6 MIGD plant (including the capacity of the existing plant) and the option for the state to request the sponsors to further expand capacity to 30 MIGD.

The project company is also required to float 35% of its shares in the local Muscat securities market within four years or sell them to the Ministry of Finance at an agreed price if the IPO does not go ahead.

The $172 million 22-year debt package comprises a $145 million base facility, a $15 million cost overrun facility, an $8.5 million term loan and $3 million in working capital. The senior debt priced at 75bp over Libor from years 1 to 8, 85bp from year 9 to 12, 100bp for years 13 to 16, 115bp for years 17 to 20 and 130bp from years 21 to 22. The participation fee was 70bp and commitment fee 40bp. The structuring and due diligence banks, Societe Generale and Royal Bank of Scotland, brought four other banks into the deal: Bank Muscat, Natixis, Mizuho and Oman Arab Bank.

The project is backed by a 20-year post construction water purchase agreement with the Ministry of Housing, Electricity and Water, so there is no operational tail on the debt. The loan will be amortised using a straightforward mortgage-style repayment schedule.

Though the deal has similarities with previous Omani IWPPs that have been banked, the feedstock on IWPPs is gas and on Sur it is electricity. Born of Oman's utility deregulation, Mazoon Electricity (100% owned by the state but run as a separate commercial entity) is suppling feedstock for the project, so the deal does involve supply risk on a de facto private company in a relatively new regulatory regime.

Both bidders were sufficiently comfortable with the regulatory regime that neither sought direct government support on the feedstock. Furthermore, although the project company bears supply risk, the existing plant comes with diesel generators that will continue to be maintained.

The structuring was also complicated by the privatization element in that the acquirer assumed operating performance risk of the existing three desalination units. The Barka 2 IWPP deal included the acquisition and rehabilitation of the Al-Rusail power plant, but that deal involved a complex holding-company structure because the procuring authority would not allow cross-collateralisation between two distinct projects. These complex issues were largely avoided on Sur IWP because the assets were purchased direct from the state rather than via an acquisition of a company.

The new plant will supply drinking water to the 350,000 people resident in the Sharqiyah region. It is due for completion in 2009 and will serve the Sharqiyah region through a major regional water transmission scheme which is currently under construction. Water transmission risk – beyond the control of the project company – is mitigated by a payment guarantee from the Omani government if the transmission system fails.

Veolia has stated that the concession should bring in Eu434 million in revenue for Veolia Water. It will be built by Veolia Water Solutions &Technologies (VWS), in a consortium with Bahwan Engineering Company, for Eu111 million. VWS is in charge of process design and equipment purchasing, with Bahwan Engineering Company responsible for construction and equipment installation.

Most of the seawater will be drawn from 20 wells sunk along the coast, with additional water taken directly from the sea. The seawater will be subjected to pre-treatment by air flotation and pressure filtration to remove algae and residue, irrespective of the water quality. It will then be desalinated by forcing it under very high pressure through two stages of reverse osmosis (eight reverse osmosis trains in the first stage and four in the second).

Although the project assumes seawater supply risk, performance requirements and tariffs are adjusted to reflect different qualities of seawater and the deal benefits from force majeure relief when seawater quality is below a given level.

Sharqiyah Desalination Company (SAOC)
Status: Financial close 15 May 2007
Description: Financing for the first Omani IWP
Sponsors: National Power & Water Co LLC; Veolia Water AMI
Initial mandated lead arrangers: Societe Generale; Royal Bank of Scotland
Mandated lead arrangers: Bank Muscat; Natixis; Mizuho; Oman Arab Bank
Financial advisers to the Ministries: Bank Muscat; SBI Capital; Project Financing Solutions
Financial adviser to the sponsors: Societe Generale
Legal adviser to the Ministries: Denton Wilde Sapte
Legal adviser to sponsors: Berwin Leighton Paisner
Legal adviser to the lenders: Clifford Chance
Technical adviser: Mott McDonald
EPC: Veolia Water Solutions & Technologies; Bahwan Engineering Company