The financing of the Salik toll collection system in Dubai was a groundbreaking transaction for the UAE and GCC markets and demonstrates the strong international and local bank market appetite for well structured transactions with strong underlying fundamentals.

Project Background

In July 2011 the Government of Dubai Department of Finance successfully closed a US$800 million equivalent financing based on future revenues of the Salik toll collection system. The financing proceeds will be used to support the Government of Dubai Roads & Transport Authority’s future infrastructure projects.

The Salik toll collection system is one of the premier infrastructure assets in Dubai, with traffic volumes that have remained robust, even during the recent financial downturn. The system was introduced by the Roads & Transport Authority in 2007 and utilises the latest technology to achieve free traffic flow operation with no toll booths, no toll collectors, and no impact to traffic flow, allowing vehicles to move freely through the tolling points at highway speeds.

There are four separate toll gantries located on three sections of the existing Sheikh Zayed road and the Al Maktoum Bridge. The four toll gantries were introduced on a phased basis as follows:

• 1 July 2007: Al Barsha and Al Garhoud Bridge
• 9 September 2008: Al Safa and Al Maktoum Bridge

The Sheikh Zayed Road (E11), the main highway on which the Salik toll collection system operates, is the primary road transport artery of Dubai. The E11 starts at the border with The Kingdom of Saudi Arabia and forms the key strategic route connecting the Saudi Arabian border with Abu Dhabi, the major port of Jebel Ali, and the area around Dubai Marina, with the Dubai International Airport and major commercial districts in Dubai. Alternative routes to the E11 generally include traffic light junctions and involve reduced travel speeds.

Revenue associated with the Salik system comprise all amounts paid by Salik users and Salik sales agents to either purchase Salik tags, recharge Salik cards or pay fines relating to non-payment of Salik charges or other violations.

Financing Considerations

The Department of Finance sought to monetize the cash flows associated with the Salik system whilst meeting a number of predefined financing objectives. In its role as Structuring Advisor, Citi worked with the Department of Finance to develop a financing structure that achieved those objectives, namely:

• Operational control of the road and toll collection system assets to continue to reside with the RTA;
• Ownership of the assets to remain with the RTA
• Structure a financing that is attractive to local and international investors
• Raise a significant portion of the funding in US Dollars

The Roads & Transport Authority’s desire to retain operational control (including the setting of toll levels) meant that the transaction had to be structured to balance the flexibility required by the Department of Finance and Roads & Transport Authority on the one hand, whilst putting in place the necessary lender protections.

The Structure

The Transaction structure is, in essence, a monetisation of future Salik revenues. A turnover agreement between the borrower and the Roads & Transport Authority and the Department of Finance governs the transfer of all Salik revenues into the borrower’s account. This arrangement remains in place until the debt facilities, including any additional debt, is repaid in full.

On a monthly basis cash flows attributable to that period are applied according to a cash flow waterfall. One of the key features of the water fall structure is that debt service is effectively senior to operating and maintenance costs, which remain a direct obligation of the Roads & Transport Authority.

The other material agreement is the undertaking from the Department of Finance. The Department of Finance undertaking was designed to protect lenders from any adverse cash flow impact arising from events that fall outside the scope of standard traffic risk, such as operational and maintenance issues and legislative or administrative changes related to tolls and competing road infrastructure.

In line with Department of Finance’s stated financing objectives, the Islamic tranche structure, which essentially involves the forward sale to Islamic investors of road usage time, did not create any encumbrances over assets. Instead, Citi designed a structure based on the concept of Salik vouchers; an intangible asset having an identifiable economic value. The structure is the first of its kind and achieved pari-passu ranking with the conventional tranche. Under the structure, the Roads & Transport Authority, acting as Distributor, distributes Salik vouchers on behalf of the financiers and collects revenues to make payments under the facility.

The Transaction

The US$800 million equivalent facility comprised three tranches:

• AED conventional tranche of US$200 million equivalent
• US$ conventional tranche of US$400 million
• AED Islamic tranche of US$200 million equivalent

The facility has a tenor of six years and a weighted average life of around 3.5 years.

The Department of Finance obtained fully committed financing in March 2011 from four Initial MLAs - Citi, Commercial Bank of Dubai, Dubai Islamic Bank and Emirates NBD. General syndication was launched to a select group of regional and international banks on 7 April 2011 and completed in early July 2011.

The transaction was well supported and was ultimately well over two times oversubscribed in both the AED and US$ tranches. The strong demand resulted in the margin being reduced by 25 bps. The currency mix was well balanced with 50 per cent in AED and 50 per cent in US$, thereby achieving the Department of Finance’s stated objective of goal of raising significant US$ funding. The bank group comprised 41 per cent international banks, 10 per cent regional banks and 49 per cent local banks, evidencing a strong bid for the transaction from outside of the UAE.

Transaction Highlights

• First ever toll road financing in the Middle East and North Africa region and the first ever Islamic toll road financing
• Established asset with no construction risk and demonstrated traffic volumes which have remained robust even during the financial downturn
• Transaction combines a key infrastructure asset with a relatively short tenor and fully amortising structure
• The transaction achieved the Department of Finance’s objectives of allowing the Roads & Transport Authority to retain operational control of the roads and tolling systems and policy
• The transaction was over two times oversubscribed and received a strong bid from outside of the UAE demonstrating strong international and local bank market appetite for well structured transactions with strong underlying fundamentals.

Concluding thoughts on Salik: A new model for infra financing?

The Salik transaction was a first in many ways and may set the trend for future infrastructure financings in the region, particularly given the recent renewed focus by many governments in the region on value for money.

Whilst the Salik transaction was based on existing assets with strong underlying cashflow fundamentals, the structure could be adopted to suit greenfield transactions. Adopting such a structure for greenfield transactions, that would typically be financed using a PPP model, would be an interesting development in the regional infrastructure financing market and would allow procuring authorities to disaggregate the traditional PPP procurement model which could enhance transparency and value for money.

Matthew Hollandis the Director, of Infrastructure & Energy Finance and his co-author Rizwan Shaikh is the Managing Director of EMEA Loans at Citibank.