The Salalah IWPP is the last of a series of Middle East power plants to reach financial close this year - each of which has been remarkable in its own way. The Salalah deal offers a number of 'firsts' - but also suffered perhaps the biggest delays in its procurement as a result of the credit crisis. IJ Power reporter Tom Bowker takes up the story…

The Project

The project was launched in 2006 by the Oman Power and Water Procurement Company (OPWP) as a power and water desalination plant, having electricity generating and water desalination capacities of around 400-430 MW and 15 MIGD respectively.

The gas-fired project, using reverse osmosis for the water desalination element, is located in the Taqah area in Salalah. This is in the south of Oman and around 1000km from Muscat, the capital.

OPWP would sign a 15-year PWPA with the winning project company, and then sell the power on to the Dhofar Power Company, a utility in the south of Oman.

Procurement - take one

In July 2006, OPWP hired BNP Paribas as its financial advisor on the project, Denton Wilde Sapte as legal advisor and Fichtner as technical advisor. Dhofar Power Company engaged Dewey & LeBoeuf as legal counsel.

According to OPWP's original timetable, the RFP was due out in 2006 and the project was due to be awarded in 2008 - however, this timeline slipped as time went on.

A qualification stage kicked off in the Spring of 2007, and in September 2007 a shortlist of qualified bidders was announced:

• General Electric
• International Power/ Mubadala/National Trading Company
• Malakoff (Conditional Pre-qualification)
• Marubeni Japan
• Mitsui/Saudi Oger/W.J.Towell (Conditional Pre-qualification)
• Sembcorp Utilities
• Transfield Services Infrastructure (Conditional Pre-qualification)
• Union Fenosa

The Request For Proposals (RFP) was launched on 26 November 2007, with a deadline of 25 February 2008 - though that was to be pushed back numerous times, ostensibly due to a tight EPC contractor market.

The final RFP deadline fell on 16 June 2008, when three full bids were submitted:

International Power/Mubadala/National Trading Company:

• Legal adviser to sponsors - Shearman & Sterling
• Legal adviser to lenders - Milbank
• EPC - Hanwha
• MLAs - Natixis, Mizuho, WestLB, KfW, DZ Bank, Arab Bank, National Bank of Oman

Saudi Oger/Mitsui/WJ Towell:

• Legal adviser to sponsors - Ashurst
• Legal adviser to lenders - Norton Rose
• Financial adviser to sponsors - SMBC
• EPC - SG/Mitsui
• MLAs - Calyon/SMBC

Sembcorp/Oman Investment Corporation (OIC):

• Legal adviser to sponsor - Lovells
• Legal adviser to lenders - Trowers & Hamlins
• Financial adviser to sponsors - Standard Chartered
• EPC - SEPCO III / Hyflux
• MLA - Standard Chartered

By September 2008, OPWP's advisory team had analysed the bids and made its recommendation to the procurer - that Sembcorp should be offered the project.

No formal decision was made by OPWP, however, and then in December 2008 it was announced that its decision would be delayed by three months while a potential conflict of interest was looked into.

The Sembcorp bid was made in partnership with the Oman Investment Corporation (OIC), part-owned by Bank Muscat. Bank Muscat was also represented on the board of the OPWP, leading to questions being asked about the impartiality of the project award.

Financing - take one

Meanwhile, the global financial situation was in meltdown - which ultimately meant that the financing of Salalah, like Al Dur and Shuweihat 2 before it, would have to take its plans back to the drawing board before it could reach financial close.

Sembcorp's bid for the Salalah project was originally backed by just one bank, Standard Chartered, which had promised to underwrite the whole US$750 million lending. However, underwriting had in the credit crunch become a dirty word in project finance - and no one wanted to be doing it.

In January 2009, IJ News reported that OPWP had informed Sembcorp that it was preferred bidder - though OPWP never made an official announcement to that effect, and nor did it inform the other bidders of its decision.

As preferred bidder, Sembcorp and Standard Chartered got to work on putting together a bank club to finance the deal, instead of Stan Chart underwriting the whole facility.

The tenor on the financing was brought in to expire at the same time as the PWPA - scrapping initial plans for a merchant tail. (For the record, no Middle East power deals have closed this year with a merchant tail).

However, they decided against following the mini-perm route used by GDF Suez on the Al Dur IWPP in Bahrain.

Though the eventual financing of the project ended up quite different to what was being planned at the beginning of this year, some fundamentals were already in place - such as the likely participation of Chinese lenders, and that a significant amount would come from Omani banks.

However a Coface-covered commercial bank tranche, consisting of up to 10 international commercial lenders, never did materialise. In the event, Chinese largesse meant that the international commercial tranche could be entirely subscribed by Standard Chartered, SMBC and KfW.

Procurement - take two

OPWP may have come to rue not entering into an official agreement with Sembcorp, as the financial crisis saw the Singaporean firm go back to the procurer asking for an increased tariff to reflect current financing conditions.

The informal nature of Sembcorp's preferred bidder status did mean, however, that OPWP could then go back to the project's other bidders to see how their bids looked in the light of the new financial realities.

In April 2009 OPWP did ask all three bidders to 'revalidate' their bids in what Sembcorp told IJ News was a 'benchmarking exercise'.

By June 2009, Sembcorp was again in exclusive negotiations with OPWP, having remained the most attractive offer - but IJ News in August revealed the two parties were still in talks over the final tariff.

That issue was resolved by September 2009, allowing Sembcorp and Standard Chartered to go to a 'select group of lenders' to find finance for the project - working towards what looked like an ambitious target of financial close before the end of the year.

Financing - take two

By this stage, Chinese ECA Sinosure had indicated it was ready to provide cover for a sizeable tranche of Chinese lending for the project. It engaged Shearman & Sterling as its legal advisor for all the Chinese lending on the project.

In the event, Bank of China and the China Development Bank came in with a US$350 million loan, covered by Sinosure. It was priced at 300bp over Libor, with the MLAs taking a 225bp participation fee and 130bp commitment fee.

An Omani Riyal tranche was put in place, led by Bank Muscat, which totalled the equivalent of US$130 million. Joining Bank Muscat on the tranche were Sohar Bank and the National Bank of Oman. It was priced at between 7 per cent and 10 per cent, with a participation fee of 115bp and commitment fee of 40bp.

Finally, Standard Chartered corralled SMBC and KfW, along with Bank Muscat again, into a US$280 million international tranche, priced between 285bp and 395bp over the 17-year tenor.

The pre-completion margin is 300bp, falling to 285bp for the first six years of operation. It then steps up to 320bp in years 7-10, 355bp years 11-13, and 395bp thereafter. Standard Chartered received a 350bp fee, with the others pocketing 300bp.

All of the financing had a 17-year maturity, allowing for a 2-year construction period prior to the 15-year PWPA. All loans are fully amortizing over the period, with no cash sweeps or balloon payments.

Groundbreaking Chinese participation

The Salalah project was beaten to the punch in terms of being the Middle East's first IPP to use Chinese constructors. That honour went to the ACWA/KEPCO-promoted Rabigh IPP in Saudi Arabia earlier in the year.

However, the Salalah project did not have the same resources in terms of local bank lending to draw upon, with the Omani banks having somewhat shallower pockets than their Saudi counterparts.

That meant that while Rabigh could eventually get away without Sinosure participation, Salalah became the first project in the region to be supported by the Chinese ECA - and will surely not be the last.

The project's example, of using Chinese contractors to secure the lowest tariff and then Chinese lenders to get the deal financed, will surely be one that is followed repeatedly as the Middle East continues building its power generation capacity apace.

An opaque procurement

The process by which the project was awarded was at times confusing - and may well have left a bad taste with some participants.

OPWP's reluctance to publicly name its preferred bidder was arguably vindicated when it allowed the procurer to go back to all the bidders after Sembcorp requested a change in the tariff.

However, all the bidders did at times feel left in the dark by OPWP - which was dealing not only with a changed tariff due to altered financing conditions, but also a question of a conflict of interest.

All of that appears to have made OPWP nervous about officially awarding the contract - but increased transparency might have contributed to greater confidence among all the actors in the project's procurement.

All's well that ends well - the deal has now reached financial close, and the project's construction will be full steam ahead in the New Year.

OPWP, meanwhile, is procuring at least four more IPPs and IPWPs - with the Barka 3 / Sohar 2 RFP attracting a record-breaking eight bidders. The private power sector's appetite to do business in the Sultanate remains undimmed.

The project at a glance