The home of the swashbuckling pirate Sinbad the Sailor was an obvious place to start when the government of Oman established commercial areas in order to diversify the country’s income away from its dependence on oil

To fuel this economic expansion requires electricity and water and so a plan was drawn up to construct the Sohar Power and Water facility, which is intended to service the equally imaginatively-titled Sohar Industrial Estate (SIC), that will be the mainstay of commercial development in the area.

Sohar is located close to the strategically import Straits of Hormuz, that guard the entrance to the Persian Gulf, and in the centuries after the birth of Mohamed it grew rich enough on the trade between east and west to be described as ‘the greatest seaport in Islam’ by the 10th century geographer and explorer al Istakhri.

While the vagaries of time and the changing of international trade routes make it unlikely Sohar will ever reach those heights again the politicians who created the Public Establishment for Industrial Estates (PEIE) in 1993 saw the area’s potential for growth and ear-marked it as key to meeting the government’s industrialisation targets.

The Omani government wants to increase the industrial sector’s contribution to GDP from its current rate of 4 per cent to 15 per cent by 2020 and the SIE, along with three others located in Rusayl, Raysut and Nizwa, is the preferred means to meet this ambitious target.

Currently 21 manufacturing businesses are in place in the SIE producing goods ranging from tomato ketchup to toothpaste, and there are plans afoot to increase this number to 40.

Industries need power and water and with the Sohar Refinery (IJ News, 16 January 2004) up and running and the Sohar Port berthing its first ship in 2005, there was an obvious need for a new facility to provide both essentials, and ensure economic expansion was not held back by an unreliable utility supply.

The project The solution to this infrastructure problem came in the form of engineering company        Suez-Tractebel. The Belgian firm was selected, by the Ministry of Housing, Water and Electricity, to construct a combined cycle gas turbine plant capable of producing 585MW of electricity and processing 6250 cubic metres of water an hour for use by the SIE.

The Sohar project will be constructed on a BOO basis, with the first 360MW phase of the project due to come onstream, and start supplying the local grid, on 1 April 2006.

This date is clearly no joke for Suez-Tractebel – in addition to the Sohar facility the Belgian firm is also constructing the similar Al Ezzel power and water facility in the tiny sheikdom of Bahrain, thereby consolidating the company’s strong presence in the Middle East power market.

That two projects of this type were being worked on at the same time is unusual and presented benefits for the teams working on the financial and legal aspects of the deal, according to Stephen Peppiatt, partner and leader of the Shearman & Sterling team that advised the lenders on the project.

Peppiatt said: ‘It’s rare for any for any developer to close two deals so close together – the same teams worked on both projects and this meant their were some obvious synergies and economies of scale.’

When theUS$549m Sohar facility is running at full capacity it will supply the Oman Power and Water Procurement Company under a 15 year power and water purchase agreement (PWPA) that starts April 2007, with returns dollar-linked.

The length of the PWPA was a key part of the contract ensuring a strong take-up by the banks for the project, according to Max Henrik Blom, vice president at BNP Paribas and member of the team that was the one of the two global co-ordinators on the project.

‘Not only do you have a 15-year PWPA but the asset life of the Sohar facility vastly exceeds this – meaning you have cashflows to take into account beyond the expiry of the PWPA and you can involve this in your calculations,’ said Blom.

Construction of Sohar will be carried out by Suez-Tractebel as the EPC contractor with Korea-based company Doosan the main sub-contractor for both the water and power sections. When it is completed, the facility will be operated and maintained on a 50:50 basis between Suez and Sogex.

Financing

With a history of successful foreign investment in Oman and a government that is considered a safe bet by international bankers the question was how, not if the project would be financed.

‘There was a lot of liquidity in the markets, and the banks were very hungry for assets’, says Blom. ‘It was well structured in a country that the banks have worked in before and were familiar with the systems in place and the regime in charge.’

As competition mounts in the international power market, so the companies that finance these projects have had to become more imaginative with ways to make them competitive and the Sohar project was no different.

Sohar contains an in-built re-leveraging that Blom regards as a unique feature. ‘It’s extremely unusual, I’ve never seen it on a power project in the Middle East before,’ he said.

‘The re-leveraging is essentially a built in re-financing. Usually you have a given cover ratio that is built into the base case the sponsors will then want to re-finance with a lower debt-coverage ratio.

‘In this instance we have just built this in; there is now a swathe of cash that can be returned to shareholders as a special dividend, subject to certain performance criteria. What this means is that the sponsors can build this into their pricing, and provide a very aggressive tariff,’ said Blom.

Another motivation for early re-financing of the project is the requirement of Omani law that 35 per cent of the companies of this kind must be offered to the public via an IPO, in this case within four years of incorporation.

‘This is a potential issue for the sponsors,’ says Shearman’s Peppiatt, ‘And in some ways is the most interesting aspect from a structural perspective,’ he added.

‘If you re-finance after the IPO, all shareholders – not just the original sponsors benefit. Timing is the key – you must re-finance after the facility is up and running but before the IPO,’ says Peppiatt.

Conclusion

Innovations are inherently ahead of their time and it remains to be seen how commonplace in-built re-leveraging will become in future power projects in the region. Other features of the Sohar financing will be rolled out on an industry-wide basis on a much shorter time-scale.   On the other hand the use of an equity bridge loan in financing the Sohar project is a device that is becoming increasingly familiar in power projects, with developers keen to reap the benefits it offers, and is one that is likely to become more widely-used in the future.

Blom said: ‘The EBL was necessary to enhance shareholder returns – it defers the cash injection from the sponsors and by as many years as it is in place making the bid more competitive.’

The use of EBLs is led by developers keen to get the best price they can and Blom predicts it is ‘not unlikely’ that this feature will become more common in power projects: ‘The change in financing is being driven by developers – sponsors are demanding it,’ he said.