Groundbreaking documentation has been developed in Kuwait for the KD114 million ($377 million) Sulaibiya wastewater treatment and reclamation project, believed to be the largest of its kind in the world. The arrangers are National Bank of Kuwait (NBK), The Bank of Kuwait and Middle East and Gulf Bank. Each bank will provide debt for the project on a pro rata basis, KD38 million, priced at a floating rate of 200bp over kibor. NBK also acts as facility agent, security agent and account bank. The project enjoys a lengthy 30-year concession, awarded by the Ministry of Public Works.

Sponsors Al-Kharafi, Kuwaiti family-owned multi-million dollar group (74% equity investors) and Ionics, a US publicly-traded company (25%) step in respectively with design and construction, and membrane technology, with a debt/equity split of 85/15. A special purpose vehicle, Utilities Development Company, led by George Labib and advised by ABN Amro, has been set up to execute the project. The banking group will also act as underwriters for the project. The sponsors have signed a fixed-price, turnkey, EPC contract for the plant.

The project's most innovative, and benchmark feature, involved developing a build-operate-transfer (BOT) model, the first of its type in Kuwait and thought to be the first done solely in regional currency. It also uses new technology to produce an unprecedented high quality of brackish water ? so much so that it could be used for drinking, although that purpose is secondary.

Financiers are enthusiastic about the rising demand for water in the Middle East, with a growth in population and an increase in expectations calling for more and better water services. The 2.5-year construction phase on the Sulaibiya water plant starts next month and will see Kuwait provided with an additional 375,000 cubic metres of brackish water per day.

The project is state-backed, with incoming domestic and industrial water inflow supply guaranteed on a basis payment of volume up to 300, 000 cubic metres. This is, in effect, a form of security package. As a financial guarantee on liabilities at a minimum default, it provides comfort for lenders, especially as, in practice, water flows vary greatly according to time of day and year. As plant capacity will run to 375,000 cubic metres and supply is guaranteed for 300,000 cubic metres, 80% of the capacity payment is guaranteed.

The volume of water produced from the plant is also paid for according to an agreed rate per cubic metre from the government in cash. ?The entire project has been developed using Kuwait Dinars as no long-term forward hedging for the domestic currency and international currency exists, although typically KDs are the oil currency', says David Kyler, who is heading NBK's involvement alongside Graham Parker. It would therefore be impossible to match up projected revenues using international lending. The decision to retain the country's currency was also in part driven by the concession agreement. As such, a uniquely long maturity for Kuwait of 25 years was allowed as the tariffs are set in local currency. Projected total revenues exceed $2 billion

The project uses a new type of water technology developed by Ionics. The technique, called ?Ultra filtration reverse osmosis' or UF-RO, uses procedures thorough enough to make brackish water drinkable, although this ?drinking water' will not be adopted in the Middle East, says one source close to the deal, due to a cultural reluctance to drink recycled water. The project has huge environmental benefits. It is hoped that this move to recycle wastewater will result in a dramatic decline in sewage disposal in the Gulf, presently a major concern for the Middle East. ABN Amro's Ruben de Haseth, of the power and utilities division, says: ?There is an urgency for this project. Currently a diversion of waste is needed. It could be used for better purposes.?

Total project cost includes the construction of three 25km pipes to carry wastewater from the city to the plant for UF-RO processing. Once at the plant, the water will undergo traditional biological process combined with the new UF-RO technology.

To date many infrastructure projects in the Middle East have been straight government projects, so the BOT model is a new concept. It has been greeted keenly in Kuwait and the new documentation is expected to act as a template for further deals in the region, although nothing is expected to come to market yet.

Bankers say the financial structure broadly resembles UK PFI, with the state shadowing the end service, and terms and conditions such as performance and availability in place. However the concession agreements differ in practice.

It is expected that given the high quality revenues available the sponsors will take the position of keeping the current loan in place, and not take the re-financing route. Sulaibiya should be cash generative within a year of operation.

ABN's de Haseth says: ?This has been a ground-breaking deal. It represents a benchmark. The long concession ? 30 years ? is a result of the BOT structure, which allows for long-term funding. Also the parties involved are well-established and experienced.?

German-based company Philipp Holzmann will construct the plant with Al-Kharafi. ILF, an Austrian engineering company, will design the plant. Ionics will supply the purification systems. Operation is expected to start in 2005. UK's United Utilities will come on board during the concession to jointly operate and maintain the plant. The operational period is scheduled to last for 27.5 years.

Selldown is a possibility now, but a market player thinks this unlikely, commenting: ?This is a closed market, with a limited number of companies having access to a Kuwaiti Dinar funding base.?