Two of the Gulf region's most recent water projects to close, the $115.5 million Ajman and the $377 million Sulaibiya projects, were financed using a build-operate-transfer (BOT) model. Moreover, they did not include a power element as opposed to the ? once more prevalent ? independent water and power project (IWPP) model. If wastewater projects gain in popularity, they could provide a wealth of new opportunities for sponsors and lender with lower regional exposure. Established sponsors however, are less sure.

?I've not seen any sign of a moving away from the IWPP model,? says Chris Thiele, director of global finance at CMS Energy, 20% sponsor of Shuweihat, an Abu Dhabi-based IWPP closed in December 2001 with International Power (20%). Consistent with an IWPP, state-owned Abu Dhabi Water & Electricity Authority (ADWEA) took the biggest stake, at 60%. It was the UAE's largest project financing at that time, at $1.6 billion over 20 years. CMS Energy also sponsored another ambitious Abu Dhabi IWPP, Al Taweelah A2, which closed in 1999, ahead of its sister project Al Taweelah A1, which closed in December 2000.

However, ?there is about to be a move towards BOT than big IWPPs,? says Paddy Padmanathan, vice president of Black & Veatch's Europe division, which worked on the Ajman BOT water project late last year. Black & Veatch was a 10% sponsor, as was Belgian construction company Sixconstruct. Thames Water held 60% while the Government of Ajman was a minority shareholder (20%). Thames has worked on BOT projects in Turkey, and is a good example of a water-, rather than power-, focused entrant that may benefit the project market.

HVB, BayerischeLB and Mashreqbank led the $77.5 million debt financing. Padmanathan adds: ?BOTs will become more popular, more and more will come this way ? particularly as the governments can feel that they have some element of participation. It gives security and comfort and allows them to participate even during the operational phase.?

Jeremy Barratt, partner at Norton Rose, explains the essence of the BOT model in comparison to the IWPP: ?In a BOT scheme the government will grant a concession or a franchise to a company to build-own-operate and transfer. Money is made by having the right to operate it for a period. In an IWPP the governments are always actual shareholders.? The BOT model is more suited to pure wastewater plants, because offtake payments per unit tend to be lower.

Those on the IWPP side say that it is a firmly entrenched template. It has a number of key attractions on the sponsor side, says Peter Barlow, director of corporate finance at International Power. He describes the main points of IWPP versus BOT: ?In an IWPP from a standalone company you have strong contractual support for the financing, which means longer tenors at slightly cheaper rates. It means you don't have to use your own capital to do that. You have to have a world class contractor who will finish the project on time and budget and the foreign parties ? in the case of Shuweihat ? are involved. It's a way of attracting expertise and investment into the country.?

There is not much practical difference, but with a BOT (which has been described by some market observers as ?loosely resembling UK PFI?) there is a facility to be transferred at the end of the 25 years. The advantage of an IWPP is there are no issues with keeping it in contractually satisfactory condition to the end of the project. With an IWPP the sponsors still have control of the facility, so maintaining and operating it well indefinitely is important. With a BOT that is being handed back to a government this has to be enforced by contractual and legal means. The only technical difference is you don't get the facility after 25 years. Barlow of International Power adds: ?We will do BOTs in the future if they come along. We have no problem doing them if the opportunity arises.?

Sikander Zaman, managing director of project finance at Citibank, says: ?my view is that whether it is IWPP or BOT is not important. It's more about the contractual structure and how strong the parties are. As a lender we look at the risk profile. We look at the contracts and the counter parties behind those contracts, ie the offtaker, the gas supplier if it's gas-fired, the EPC contract and all those inter-relationships. The lenders are more concerned about the risk profile than the IWPP or BOT issue. It's really what is behind those structures that counts.?

Citibank has done IWPPs in lead and adviser roles, and was mandated as financial adviser to ADWEA on the Reverse Osmosis water project (known as RO Taweelah) in Abu Dhabi. In terms of projects done Citibank ? along with other major internationals ? led Shuweihat and Taweelah A1 (but not A2). The only BOTs Citibank has undertaken in any role are in Turkey, and says Zamaan, this is purely incidental.

Explaining IWPP as an attractive model for lenders, Zaman adds: ?You have to worry less about the political risk aspects in an IWPP. In a BOT you have concession agreements which are typically with the government agencies ? whereas in an IWPP all the agreements are commercial and may or may not be directly with government agencies. From that perspective it is easier for the lenders to develop the project.?

BOT is likely to be the framework for upcoming wastewater projects, and bring with them a new set of operating and commercial risks. These include a lower number of potential uses (treated water cannot be used for drinking or crop-growing), and therefore lower essentiality. Another factor to consider is the suitability of proven technology to working in a warm climate.

Similarly, Abdul Hakim Mostafawi, Head of Corporate & Institutional Banking, HSBC Qatar and member of the HSBC project finance team says: ?Each project is on a standalone basis driven by economics. But there is a definite shift in the approach to new projects, from 100% State ownership towards IWPP and BOT. From talking to officials, the impression we get is that IWPP & BOT is the way forward. Qatar has opened the doors for foreign investment with the offering of greater incentives to foreign investors and liberalisation of economy. Opening of the oil and gas sector in the past so many years has proven to be an attractive initiative in Qatar for both foreign and local participants and therefore is being directed towards other industries including the Power sector.

ADWEA has a reverse osmosis desalination project in the works and has retained Citigroup, as well as Mott MacDonald and Simmons & Simmons, to look at selecting a bidder. The authority has apparently received bids from several interested parties, although the field is slightly different to the IWPP programme. The project is now in a second round of bidding, after Oneo, Vivendi/Mitsui and Cadagua did not produce low enough bids the first time round. Reverse osmosis can be difficult to operate in the Gulf, since the high heat leads to blocked pores and frequent stoppages.

The project has a projected cost of $300 million, and may come to market as the large Umm Al Nar IWPP and a mooted refinancing of Taweelah A2. Given this size, it may be more attractive to regional arrangers, although such names as BNP Paribas and ANZ have lined up behind potential bidders. Nevertheless, bankers familiar with the market say that new potential bidders may lead to influx of new relationship banks.

The main concentration of water projects has to date been in Abu Dhabi. But this geographical remit is expanding rapidly, into Kuwait, Ajman and Qatar in particular. The recent BOTs in the region ? taken from the Turkish trend, which itself has now shifted into build-own-operate (BOO) structures ? are Ajman and Sulaibiya, triggering market speculation that this kind of structure could be the new template for water projects.

June 2002 saw Kuwait's Sulaibiya water project. It was the first project of its kind to close in the Middle East and was well received in the market. National Bank of Kuwait, Bank of Kuwait and the Middle East and Gulf Bank led the $377 million debt transaction (local currency equivalent KD114 million) with an 85/15 debt to equity ratio.

Said ABN Amro's Ruben de Haseth, who worked on the power and utilities team advising the sponsors, Al-Kharafi and Ionics: ?This has been a ground breaking deal. The long concession ? 30 years ? is a result of the BOT structure, which allows for long-term funding.? Given the dinar-denominated debt profile, however, few internationals had the opportunity to participate. Other wastewater projects could follow the same route, with the result that regional and local banks could take the lion's share of new business.

In terms of projects in the pipeline, there is a new IWPP coming up in Qatar, and this is currently going through the feasibility stage. Those putting the deal together will most likely look to other IWPPs that were financed in that region as a template, such as the $700 million Ras Laffan project, which closed in December 2001 under a joint venture of AES Corporation (60%) and Qatar Petroleum (40%). Typically the debt/equity ratio was 80/20. Debt is being raised by mandated lead arrangers ANZ Investment Bank, Arab Banking Corporation, Barclays Capital, BNP Paribas, Gulf International Bank, HSBC Middle East, Qatar National Bank, SG, BOTM and Industrial Bank of Japan.

The next major financing to reach the market is likely to be Umm Al Nar, which is expecting close shortly. It has suffered some minor setbacks, although those close to the deal characterize these as diversions at worst. International Power leads the Umm Al Nar consortium with Mitsui and Tokyo Electric, as part of a joint venture with ADWEA.

There are four IWPP projects coming up in Saudi Arabia, whose large potential gas reserves make it a key candidate for the technology. Three of the projects are expected to have capacities of 2,000MW and one will have a 700MW capacity approximately. Saudi Electric, a state-owned company, and Saline Water Conversion Corporation are sponsoring the project on a 50/50 joint venture basis. Currently the deal has gone out to advisors.

Those thought to be shortlisted in the bidding for the advisory mandate are HSBC Investment Bank, Gulf Investment Bank and SG. Technical contracts and the EPC contract will be awarded in 2004, awaiting approval to independently develop the projects. However, past plans for outside private investment in Saudi infrastructure have frequently stalled. Bankers will be keen to see any signs of increased commitment on the part of the authorities. CMS for one is keen on expanding its presence here.