Against the background of a dilapidated sewage system and a growing need for fresh water, the government of Ajman in the Emirates initiated a programme to develop a wastewater treatment plant for its population. It enlisted Thames Water (60%), Black & Veatch (10%) and Sixconstruct (10%) as project sponsors. Together with the government (20%) the combination forms project company Ajman Sewerage (Private) Company.

The $115.5 million Ajman wastewater plant financing was led by HypoVereinsbank (HVB), BayerischeLB, Mashreqbank and United Arab Bank. Debt amounted to $77.5 million breaking down into two tranches plus a working capital facility. The first tranche of $50 million is provided by HVB ($22.5 million), BayerischeLB ($22.5 million) and Mashreqbank ($5 million) with a commitment fee of 90bp over Libor.

The second tranche is in local currency ? AED101 million ($27 million equivalent). This was put up by Mashreqbank (AED64.3 million) and United Arab Bank (AED36.7 million). Financial adviser Mizuho Corporate Bank selected HVB to provide the debt portion.

It is being constructed on a build-operate-transfer (BOT) basis, with a concession of 27.5 years. Bankers found the deal to be complex, as it was a pioneering project for the region. Thames Water Middle East is the operator and maintenance contractor for the project. Black & Veatch International is the EPC contractor.

The main risk to contend with in the early stages of the deal is the collection risk, which Black & Veatch identifies as the retail risk. The project company is not only responsible for operating and maintaining the plant but also for collecting the tariffs.

This was mitigated almost fully by the recent passage of a sewage law which places an obligation on 95% of Ajman residents to hook up to the system and supports the project company's rights to terminate service to customers. It has provided a security package of sorts for lenders who might otherwise have found exposure to retail risk too much. This hook up will take place in batches and gives an exclusive concession. The contract stipulates that 60% of Ajman residents in the service zone must be connected within two years (150,000 people). By month 48, the remainder of that population must be connected.

The project company will eventually collect all sewage in Ajman, meaning 49,000 cubic metres square will be treated per day, operating on about 255km of pipelines running from the city to the plant. It required huge amounts of due diligence beforehand. ?This was a classic corporate utility risk as opposed to fixed fee, take or pay obligations,? comments Eriks Atvars, assistant vice-president at HVB.

Another risk to mitigate was technology. New technology is being developed on a continuous basis to improve the quality of water. The output from Ajman's wastewater plant will be used for irrigation purposes, and is classed as ?more of a byproduct than a primary purpose? by bankers. As such there is no offtake agreement, and output has not been worked into the project economics.

Water from the plant will go into the landscape and farming, serving to improve the economy of Ajman as well as provide a basic human service. Those working on the deal were unwilling to go into detail, but it is thought that water output is based on a tolling type of arrangement. It is likely that as the water is much needed in the region, favourable rates will apply.

The government is backing this project as necessary infrastructure for the future: currently, the essential problem is that Ajman is based on a septic tank system for each building and premises. Tanks are porous and sewage can leak into the ground. The sludge portion of tanks is trucked out to sewage lagoons in the desert.

Government officials decided that there was more than an environmental need for change in the system. It became apparent five years ago that industry growth was being slowed by the limitations a septic tank system imposes ? for instance, high-rise buildings and large premises were impractical. The larger buildings need tanks emptying once a day.

Both loans have a 14-year tenor. ?Fourteen years is a very good tenor for the region, compared to the IWPPs [independent water and power projects], which enjoy direct government support. Here with this deal the government supports through guaranteed rights, but no federal guarantee,? says Atvars.

Neighbouring Emirates have suffered the same problem with sewage, but have dealt with it in different ways. Those involved in the Ajman deal now hope that its documentation will set a precedent for neighbours. Atvars says: ?There is a definite need for projects of this kind. We're hoping they use our documentation as a blueprint, and that other neighbouring Emirates may look to Ajman.?

Repayments will be made after a grace period of 4.5 years for the duration of the construction period, plus six months.

Ajman Sewerage (Private)

Company Ltd

Status: closed December 2002

Location: Gulf Emirate of Ajman

Description: Sewage collection and wastewater plant

Size: $115.5 million

Sponsors: Thames Water (60%), Government of Ajman (20%), Black & Veatch (10%) and Sixconstruct (10%)

Debt: $77.5 million

Lead arrangers: HVB, BayerischeLB, Mashreqbank and United Arab Bank

Tenor: 14 years

Financial advisor: Mizuho Corporate Bank

Lawyers to the lenders: Allen & Overy

Lawyers to the sponsors:

Denton Wilde Sapte

Independent engineer to sponsors: Halcrow

Model auditor: KPMG

Technical advisor: WS Atkins