Gaza: Empowering Enron
The Gaza Power Project which reached financial close in June of
this year is, by any standards, a remarkable achievement ? the
first IPP in the region against what, arguably, may have seemed
insurmountable odds.
The genesis of the transaction lies within the 1993 Interim Agreement signed with Israel. Among the many historic provisions to emerge from the Interim Agreement was the right afforded to the Palestinians by the Israelis to be responsible for their own power generation.
Why were the Israelis were willing to yield control of such a vital commodity as electricity to the Palestinians at a relatively early stage in negotiations? The development is a practical necessity given the Israelis are struggling to meet the power demands of the Palestinians. Gaza is experiencing ?grey-outs' on a daily basis as power is rationed between the various regions within the Gaza Strip.
Even in developed countries with established regulatory and legal systems, power projects are complex. It is therefore not surprising that a power project in a region which has yet to achieve de jure status as a country should take a significant period of time to materialise and would not be without certain complications.
The Gaza Project began life soon after the Interim Agreement in 1994/1995 and is not due to reach full operational completion until October 2001, although initial operation in simple cycle is due to commence in October this year. Progress was slow until April last year when the US international developer, Enron Corp became involved and used their significant international experience to pull the various strands of the project together in order to reach financial close earlier this summer. Gaza represents Enron's first power project in the Middle East which it is now successfully following up with its involvement in the prestigious Dolphin project. The other principal sponsor is the ubiquitous Middle East contractor, Consolidated Contractors International (CCC).
The Project is a 140 MW combined cycle plant which can operate on both oil, as will be the case at its inception or gas, as is hoped at some stage in the future. The likelihood of a gas supply to the plant is likely to be some years off until either the proposed pipeline from Egypt to Jordan materialises with the requisite spur to Gaza or progress is made with the BG International concessions off the coast of Gaza ? the first exploration wells are due to be drilled imminently.
The Project is a 20 year concession with an option to extend for two further five year periods and is based on the BOT model. The concession grants exclusivity in the Gaza Strip although excess capacity may be ?wheeled? into the West Bank subject to appropriate agreements being reached with the Israelis with respect to crossing their network. However, this is unlikely as it is anticipated that demand for electricity within Gaza will equal or may exceed 140MW by next year and already there are plans for a second phase expansion of a further 140MW.
An offtake agreement has been entered into with the Palestinian Energy Authority (PEA) pursuant to which the PEA has contracted to purchase the available capacity of the plant. The PEA is also responsible for the fuel supply to the project company, Gaza Power Generating Private Limited Company (GPGC) which effectively makes the power purchase agreement more akin to an energy conversion agreement. The fact that there is a full offtake obligation on the PEA and that the fuel risk is removed from GPGC has assisted in making the Project bankable and attractive to international companies such as Enron, ABB and CCC.
The EPC Contract that has been granted to ABB through its subsidiary, ABB-STAL, (now Alstom Power Sweden Limited) on a fixed price US$100 million turnkey basis. Alstom have also entered into a long term maintenance agreement and an Enron entity is the O&M Contractor.
The corporate structure is also intriguing and represents another first for this Project. In addition to being the first IPP in the region, it also incorporates an IPO which has been extremely well received by the Palestinian public and which closed three times over subscribed. The immediate parent of GPGC is Palestine Electric Public Shareholding Company Limited which is owned one-third by Enron, one-third by a club of Arab sponsors (including CCC and the listed Palestinian company, Padico), and one-third by the public through the IPO. GPGC will, post IPO, be capitalised at $60,000,000. The debt has been fully underwritten by Arab Bank at $90,000,000 comprising a one-year bridge facility of $45,000,000 and a 12-year term facility of $45,000,000. The bridge is intended to facilitate the eventual entry into the project of OPIC. There is considerable interest in the project from regional banks that will have the opportunity to join the financing through sub-participation agreements.
From a legal perspective, the project proffered several intriguing issues. The first is the fact that the Palestinian Autonomous Territories (PAT) has not yet achieved full country status and the associated problems inherent therewith: for example, it cannot be a signatory to any international conventions including those on international arbitration and the enforcement of arbitral rewards.
Related to this issue is the necessary due diligence that was required in respect of Israeli law and in particular with respect to such matters as environmental issues. Another interesting legal problem, that is not often encountered, relates to trying to determine precisely what is the applicable law in a region.
Different laws and legal systems apply in Gaza and the West Bank. Gaza is still subject to the UK British Mandate Companies Act of 1929, whereas the West Bank derives its legal system from Jordan and, for example, the relevant company law there is Law No. 12 for 1964. The situation is made more complicated by certain practitioners taking a view that British Mandate law must necessarily have ceased to be valid when the British Mandate ceased. Other interesting legal aspects related to the security to be granted and its registration with the relevant local authorities ? some of which was being done for the first time and the complications that inevitably arose as a result of part of the equity being raised by means of an IPO.
The PAT may not be the most attractive place in the world for international banks and developers to do business, but for the few that have taken the risk, there are other projects in the pipeline and they could reap the rewards. All these projects are being implemented prior to any formal peace settlement being reached with Israeli. If an agreement is reached with the Israelis, it is reasonable to expect the number of projects and inward investment to increase significantly.
The genesis of the transaction lies within the 1993 Interim Agreement signed with Israel. Among the many historic provisions to emerge from the Interim Agreement was the right afforded to the Palestinians by the Israelis to be responsible for their own power generation.
Why were the Israelis were willing to yield control of such a vital commodity as electricity to the Palestinians at a relatively early stage in negotiations? The development is a practical necessity given the Israelis are struggling to meet the power demands of the Palestinians. Gaza is experiencing ?grey-outs' on a daily basis as power is rationed between the various regions within the Gaza Strip.
Even in developed countries with established regulatory and legal systems, power projects are complex. It is therefore not surprising that a power project in a region which has yet to achieve de jure status as a country should take a significant period of time to materialise and would not be without certain complications.
The Gaza Project began life soon after the Interim Agreement in 1994/1995 and is not due to reach full operational completion until October 2001, although initial operation in simple cycle is due to commence in October this year. Progress was slow until April last year when the US international developer, Enron Corp became involved and used their significant international experience to pull the various strands of the project together in order to reach financial close earlier this summer. Gaza represents Enron's first power project in the Middle East which it is now successfully following up with its involvement in the prestigious Dolphin project. The other principal sponsor is the ubiquitous Middle East contractor, Consolidated Contractors International (CCC).
The Project is a 140 MW combined cycle plant which can operate on both oil, as will be the case at its inception or gas, as is hoped at some stage in the future. The likelihood of a gas supply to the plant is likely to be some years off until either the proposed pipeline from Egypt to Jordan materialises with the requisite spur to Gaza or progress is made with the BG International concessions off the coast of Gaza ? the first exploration wells are due to be drilled imminently.
The Project is a 20 year concession with an option to extend for two further five year periods and is based on the BOT model. The concession grants exclusivity in the Gaza Strip although excess capacity may be ?wheeled? into the West Bank subject to appropriate agreements being reached with the Israelis with respect to crossing their network. However, this is unlikely as it is anticipated that demand for electricity within Gaza will equal or may exceed 140MW by next year and already there are plans for a second phase expansion of a further 140MW.
An offtake agreement has been entered into with the Palestinian Energy Authority (PEA) pursuant to which the PEA has contracted to purchase the available capacity of the plant. The PEA is also responsible for the fuel supply to the project company, Gaza Power Generating Private Limited Company (GPGC) which effectively makes the power purchase agreement more akin to an energy conversion agreement. The fact that there is a full offtake obligation on the PEA and that the fuel risk is removed from GPGC has assisted in making the Project bankable and attractive to international companies such as Enron, ABB and CCC.
The EPC Contract that has been granted to ABB through its subsidiary, ABB-STAL, (now Alstom Power Sweden Limited) on a fixed price US$100 million turnkey basis. Alstom have also entered into a long term maintenance agreement and an Enron entity is the O&M Contractor.
The corporate structure is also intriguing and represents another first for this Project. In addition to being the first IPP in the region, it also incorporates an IPO which has been extremely well received by the Palestinian public and which closed three times over subscribed. The immediate parent of GPGC is Palestine Electric Public Shareholding Company Limited which is owned one-third by Enron, one-third by a club of Arab sponsors (including CCC and the listed Palestinian company, Padico), and one-third by the public through the IPO. GPGC will, post IPO, be capitalised at $60,000,000. The debt has been fully underwritten by Arab Bank at $90,000,000 comprising a one-year bridge facility of $45,000,000 and a 12-year term facility of $45,000,000. The bridge is intended to facilitate the eventual entry into the project of OPIC. There is considerable interest in the project from regional banks that will have the opportunity to join the financing through sub-participation agreements.
From a legal perspective, the project proffered several intriguing issues. The first is the fact that the Palestinian Autonomous Territories (PAT) has not yet achieved full country status and the associated problems inherent therewith: for example, it cannot be a signatory to any international conventions including those on international arbitration and the enforcement of arbitral rewards.
Related to this issue is the necessary due diligence that was required in respect of Israeli law and in particular with respect to such matters as environmental issues. Another interesting legal problem, that is not often encountered, relates to trying to determine precisely what is the applicable law in a region.
Different laws and legal systems apply in Gaza and the West Bank. Gaza is still subject to the UK British Mandate Companies Act of 1929, whereas the West Bank derives its legal system from Jordan and, for example, the relevant company law there is Law No. 12 for 1964. The situation is made more complicated by certain practitioners taking a view that British Mandate law must necessarily have ceased to be valid when the British Mandate ceased. Other interesting legal aspects related to the security to be granted and its registration with the relevant local authorities ? some of which was being done for the first time and the complications that inevitably arose as a result of part of the equity being raised by means of an IPO.
The PAT may not be the most attractive place in the world for international banks and developers to do business, but for the few that have taken the risk, there are other projects in the pipeline and they could reap the rewards. All these projects are being implemented prior to any formal peace settlement being reached with Israeli. If an agreement is reached with the Israelis, it is reasonable to expect the number of projects and inward investment to increase significantly.
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