In 2007, the Saudi Electric Company (SEC) launched a programme to procure three greenfield IPPs - with a total capacity of 5,200MW. The first of those, Rabigh IPP, has now reached financial close - setting a number of hopeful precedents not just for the SEC programme but also for the sector and the region.

The Saudi IPP programme appears to be on track to weather the global financial storm that hit shortly after the announcement of its three plant scheme - despite other, similar projects in the Kingdom of Saudi Arabia running for cover from the turbulent banking markets.

Saudi Arabia's Water and Electric Company earlier this year pulled its plans for the world's largest IWPP at Ras al Zour, taking the project EPC only in the face of financing problems. The other major power utility in the country, Marafiq, has since done the same with its Yanbu IWPP project.

The SEC has proceeded unperturbed, however, with its programme - boldly setting the wheels in motion for the next of its three projects, the US$2.5 billion Riyadh IPP, while Rabigh was still pulling together its financing.

Despite some delays in the procurement process - the RFP stage was delayed by three months at the back end of 2008 - Rabigh is now on track to start producing power in 2012, as originally planned. The sponsors behind the project company, and their advisers, can take a lot of credit in reaching financial close in the current climate just four months on from being appointed preferred bidder.

Procurement

As the first of a series of three projects - which are in turn expected to be just the first phase of a run of SEC procurements - the Rabigh procurement garnered an especially high level of developer interest.

Before that process began, however, the SEC appointed its financial, legal and technical advisers for the entire three-project programme. For the financial advisory mandate, Citigroup won out over three locally-based institutions: the Gulf Investment Corporation, Gulf International Bank, and Saudi banking group Samba.

For the legal advisory mandate, three consortia of local and international firms were in the running. The Law Office of Mohammed Bin Saud Al-Rasheed, in association with Baker Botts, won the day, over teams including White & Case and Akin Gump Strauss Hauer & Feld. Fichtner won the technical advisory mandate, ahead of Mott Macdonald.

In December 2007, a call for expressions of interest (EOI) went out to developers. By the January 2008 deadline, fully 45 parties had registered their interest - of which 24 qualified for the RFP, published in March 2008.

According to the procurement documentation:

"The successful developer or developer consortium will own 80 per cent of a special purpose project company that will build, own, and operate (BOO) the 1,200 MW Rabigh IPP project. The remaining 20 per cent of the shares in the project company will be held by SEC.

The plant will be operated by firing Heavy Fuel Oil (HFO) which will be provided to the plant by SEC.

The project company will sell its entire capacity and output of power to SEC (as a sole off-taker) under a 20-year Power Purchase Agreement (PPA)."

The RFP deadline was originally set for 31 August 2008, but was pushed back twice, finally passing on 1 December 2008. Just two eligible bids were opened the following day, as follows:

Acwa Power/Kepco:

• tariff - SR0.1259/kW
• legal adviser to sponsor - Allen & Overy
• legal adviser to lenders - White & Case
• EPC - Sepco III/Dongfang Electric (China)
• MLAs - Samba, Al-Rajhi

International Power/Suez/Saudi Oger:

• tariff - SR0.1656/kW
• legal adviser to sponsor - Clifford Chance
• legal adviser to lenders - Milbank
• EPC - GS Engineering & Construction (South Korea)
• MLAs - BayernLB, BNP, Calyon, Standard Chartered, Banque Saudi Fransi, National Commercial Bank, SMBC

Despite the Acwa-Kepco bid's clear price advantage, Infrastructure Journal reported at the time that: "International Power has not given up on winning the tender … pinning its hopes on having secured both offshore and Saudi bank lending, as well as its Korean wrapped EPC contractor GS Engineering & Construction."

Nevertheless, the lowest bid was pronounced preferred bidder on 14 March 2009 - marking the first time that Chinese contractors had been picked to build an Independent Power Project in the Middle East.

Financing

As well as being the first IPP in the region to use Chinese contractors, the Rabigh project set another precedent that could potentially have been an obstacle to financing: it will be the first Middle Eastern IPP with an offtake agreement without a government guarantee.

The project was always going to benefit from the deep Saudi banking markets, where liquidity has held up exceptionally well despite the global financial crisis. Along with its original MLAs, Acwa and Kepco picked up the Saudi banks backing the rival IP-Suez-Saudi Oger bid, and more.

Nevertheless, there was no guarantee that Saudi IPPs could get funded - proved in dramatic circumstances in April when the Kingdom's Water and Electric Company (WEC) pulled the Ras al Zour IWPP project - deciding to procure it on an EPC basis only.

While that project had its own specific problems on the sponsor side, it was also a question of debt. Five international banks had signed up as MLAs, but when their mandates expired they did not renew them. Nor, it should be noted, did Acwa and Kepco go on to pick up any of those lenders for Rabigh.

Without a doubt, a major factor behind Rabigh's success in getting funded was the relatively manageable size of the project and lower level of complexity when compared with Ras al Zour, which would have been the world's largest IWPP.

The absence of Ras al Zour may well have freed up more Saudi Riyal funding for Rabigh. In the event, the project took almost three quarters of its debt from local sources.

The project's Far East connections also came through for it. Kepco's participation ensured Korean ECA KEIC came on board to cover the dollar-denominated tranche, which ended up at around US$400 million. The biggest contributor to that was Bank of China, thanks to its relationship with the EPC contractors. Then there were three further international banks, two of which had originally backed the losing bid on Rabigh:

• HSBC - committed US$75 million
• Standard Chartered - committed US$75 million
• Calyon - committed US$40 million

All of those banks have since been scaled back from their commitments, as has Bank of China which committed US$300 million. This has meant even the cover provided by KEIC being scaled back, to match the lending by the international banks.

The remainder of the US$1.9 billion debt package has come from six Saudi banks:

• Alinma
• Al Rajhi
• Banque Saudi Fransi
• National Commercial Bank
• Samba
• Saudi British Bank

A precedent for the sector and the region

The Rabigh project's move from the request for EOIs to financial close took a little more than 18 months - which compares favourably with projects even pre-credit crunch, let alone one which picked its preferred bidder at the height of the financial crisis.

Just getting the project financed in the current climate is good enough, but to do so while setting two precedents in the Middle East power sector makes this a special achievement for those involved.

The decision to go with a bid using Chinese contractors has - so far at least - paid off for SEC, even easing the financing burden with Chinese money joining the project. China EXIM also expressed an interest in joining the lending, though in the event was not involved.

The use of Chinese contractors has long been seen as an inevitable move in the region, but it still took one project to take the plunge and set that precedent. Assuming the project construction proceeds smoothly, we can expect to see Chinese EPC far more frequently - and the biggest players up to now being squeezed.

SEC also proved that it didn't need a government guarantee for its project to be credible with international lenders - albeit in this case, that their lending is covered by ECA insurance. The precedent set will doubtless make financing the rest of its IPP programme that much easier.

Indeed, such was SEC's confidence that Rabigh would get financed that it did not hold back in launching the procurement for the second IPP in the programme, PP11 in Riyadh. The EOI went out for PP11 in September 2008, with the RFP coming out at the beginning of this month.

After PP11 will come another 2,000MW IPP at Qurayyah - but those three are likely to be just the first phase in SEC's IPP programme.

However, despite the Rabigh financing went so smoothly, it remains to be seen just how bottomless the coffers of Saudi Arabia's domestic banks really are.

Future projects will likely need more participation from foreign banks than Rabigh did, but the precedents set by this project should mean lenders coming in to the rest of the SEC's programme with increased confidence.

The project at a glance