Sponsor OHL, arranger Dexia and the Inter-American Development Bank have completed the $38.5 million financing for the Antofagasta desalination plant. The deal has been five years in the making, and illustrates the difficulties that water sponsors still have to overcome to realise their projects. But it also includes an interesting piece of innovation – an expandable B loan – that the IDB should consider offering to its other customers.

Antofagasta is located in Region II the northern part of Chile, a dry and desolate part of the country dominated by the copper industry. In the early nineteenth century the first set of copper miners were forced to use primitive, and not very fuel-efficient, plants to produce usable water. Since then, however, communities at the coast have relied upon fresh water carried by pipelines from the Andes, 300km to the east. These are now operating at capacity.

The concession awarder, and offtaker, for the project is local utility, Empresa De Servicios Sanitarios De Antofagasta (ESSAN). The utility's business consists of unregulated sales to mining companies and regulated sales to residential customers. Essan is responsible for both supply and sewage treatment services in the Antofagasta area, and can sell excess raw water to the mining operations.

However, for the most part, the Chilean water industry is regulated by the Superintendencia de Servicios Sanitarios (SISS), which sets the rates that utilities can charge based on a formula that reflects the cost of service. ESSAN decided that since the area's population was due to increase by 40% by 2020, a desalination plant was the cheapest option to make up the projected shortfall.

On 17 October 2000, ESSAN selected Obrascon Huarte Lain and Endesa to run the concession in a joint venture, but Endesa soon withdrew from the venture, leaving OHL to develop the concession on its own. OHL, while most active in the roads business in Chile, also has a water business, known as Inima. Inima, an agglomeration of several privatised Spanish developers, and several of OHL's own businesses, runs roughly 30% of Spain's desalination capacity.

The project is to be built in four modular phases, each producing 13,000 cubic metres per day, or 150 litres per second. It uses reverse osmosis technology, and will produce potable water. There are several other similar facilities in the area, including several run by Cascal, a Nuon/Biwater joint venture, and one by OHL, which treats brackish, rather than sea, water.

The plant is the subject of a 20-year build-operate-transfer concession, but was unlikely, for reasons of both size and operational profile, to be able to access local capital markets. Given the issues that even multilateral lenders have experienced in neighbouring Argentina, this reticence is understandable. Thus, the sponsors turned to the IDB at an early stage to help finance the project.

However, while the IDB worked through agreeing an acceptable financing package, OHL worked with relationship lender Dexia Sabadell Banco Local, Dexia's Spanish subsidiary, to put in place a bridge facility to supplement the roughly $26 million in equity from the sponsor. This enabled the sponsor to start construction on the project, which is now operational.

The fundamentals of the project are sound – the region is experiencing growth, and the copper producers are the beneficiaries of strong demand. Antofagasta has a population of 300,000, and among the mining companies that are potential customers of ESSAN are subsidiaries of BHP Billiton, Anglo American and Antofagasta, a miner that shares the name of the location of its principal assets, but it listed in the UK.

But the project's credit profile underwent some strain as a result of the privatization of ESSAN in 2003, during which Antofagasta bought the concession. It paid $185 million to buy ESSAN, which enjoyed turnover of $39 million equivalent in 2002, through its FCAB Railway subsidiary. The move made sense for Antofagasta, which would be a major customer for the utility.

As such, the privatization in large part involved checking that the change in ownership did not undermine the concession documents. It also meant that the desalination concession did not enjoy the implicit support of the government. However, the strategic alignment between the owner of the offtaker and the offtaker's customers makes lenders a little more comfortable. The project also benefits from a relative abundance of gas-fired electrical capacity, adding, albeit in a limited fashion, to the project's economics.

However, as the financing progressed over the next few years, it became apparent that OHL would find it difficult to close the deal without offering some form of support to the project. Word leaked out from participants that the sponsor was having trouble making up its mind. It was a luxury that it could afford however, since the corporate parent was guaranteeing the bridge loan.

The IDB approved the A and B loans in December 2003, and Dexia, since its role predated in some respects that of the IDB, was mandated to provide the B loan. The two are not large sums – the A loan on the IDB's account is $7 million and the B loan amounts to $7.8 million. The debt amortizes in a mortgage-style profile.

But the most important feature of the B loan is that the documentation includes the possibility that the sponsor can raise additional debt under this facility. The plant can be expanded in 13,000 cubic metres per day increments, and the concession includes tariff structures that accommodate such expansions. The assumption on the part of the IDB is that such expansions are likely to require fresh debt, and would likely require its consents, and so its best option was to include expansion language in its own documentation.

This is believed to be the first time that the IDB has made such an allowance, but given the nature of the region's infrastructure projects, it is one that the IDB should consider offering again.

Desalant SA
Status: Closed April 2005
Size: $38.5 million
Location: Antofagasta, Chile
Description: 600 litres per day reverse osmosis desalination plant
Sponsor: OHL
Equity: $26 million
Arrangers: Dexia, IDB
Debt: $7 million A loan, $7.8 million B loan
Maturity: 14 years (A loan), 12 years (B loan)
Sponsor legal: Simpson Thacher & Bartlett (international), Carey Y Cia (local)
Lender legal: Fulbright & Jaworski (international), Yrarrázaval, Ruiz-Tagle, Goldenberg, Lagos & Silva (local)
Independent engineer: RW Beck