The Sur desalination plant in Oman is the first independent water project (IWP) to reach financial close in the Middle East and is a further milestone for the Omani government's drive to the liberalisation and privatisation of its utility industries. Bank perception of Oman's regulatory regime was so favourable that the financing achieved a record tenor in Oman of 22 years with no offtake tail.

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.

Conditions of the agreement ensure that no Omani worker at the existing plant will be made redundant and also require the project company to float 35% of its shares in the local Muscat securities market within four years of its establishment.

Though the deal has obvious similarities with the Omani IWPPs that have been banked, such as Barka 2 and Sohar, the feedstock on IWPPs is gas and on Sur IWP it is electricity. "The Sur desalination project is the first pure water project in the region, so there were no previous templates. However the IWPPs provided very good reference points," says Jeremy Dolphin, director at Project Financing Solutions, which assisted Bank Muscat in providing financial advice to the Government of Oman.

The $173 million 22-year debt package backing Sur IWP comprises $155 million of senior debt, a $15 million performance facility and $3 million in working capital. The project is backed by a 20-year 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.

The structuring and due diligence banks, SG and RBS, brought four other banks into the deal: Bank Muscat, Natixis, Mizuho and Oman Arab Bank.

Following the unbundling of the power and water sectors and the inception of an independent regulator in 2004 (through the Privatisation Law issued through the Sultani Decree 77/2004), nine entities were carved out of the state and are variously responsible for procurement, transmission and generation. One such entity, The Mazoon Electricity Company, is supplying electricity to the Sur desalination plant.

Though Mazoon is 100% owned by the state it is run as a separate commercial entity, so lenders are accepting risk on a de facto private company in a relatively new regulatory regime. Nevertheless, both bidders were sufficiently comfortable with the regulatory regime that neither sought direct government support on the feedstock.

"The feedstock risk is overdone," says Dolphin. "The supply of electricity is a well regulated function in Oman and the Government of Oman has a solid reputation for ensuring sufficient generation capacity is available to meet demand."

Aside from being the region's first IWP, another novel aspect of the deal is that it incorporates the acquisition of existing desalination units. The concession agreement transfers the operation and ownership of the existing desalination plant at Sur to Sharqiyah Desalination Company. Veolia Water, with a Suhail Bahwan subsidiary, will initially operate the existing plant (12,000 cubic meters/day), before moving to the new plant when it comes on line.

The structuring of the deal was complicated by the existing facilities in that the acquirer assumed operating performance risk of the existing three desalination units. The Barka 2 IWPP deal involved the acquisition and rehabilitation of 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 have a capacity of 80,200 cubic meters/day and 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.
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 pretreatment 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).

It is unlikely that there will now be a spate of independent water projects in the region. The Taweelah reverse osmosis plant in Abu Dhabi, first touted in 2003 was poised to be the region's first IWP but the project foundered and the Abu Dhabi liberalistation is still only a draft law.

Oman has the most liberalized water and power sector in the region, but IWPPs are likely to be much more common given the joint demand for power and water. Perhaps the preference for IWPPs is also given away by the name of the regulator – the Electricity and Related Water Sector Regulatory Authority.

Sharqiyah Desalination Company (SAOC)
Status: Concession agreement signed 17 January 2007, financial close imminent
Description: Financing for the first Middle East 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