Memoire Online - Développement du Financement de Projet et de la Privatisation dans la Péninsule Arabe

Development of the Financing of Project and Privatization in the Arab Peninsula

Financing of Project

Privatization is defined as the transfer of the goods, or the responsibility of a service, governmental control towards the private company. Primarily, it is acted well in fact of transferring the commercial risk towards the private sector. The consequence of such a transfer is that it is accompanied by a symmetrical transfer by control and decision-making towards private organizations. Political perceptions, as much as the inescapable consequences in social and economic terms bring the governments to a great prudence before slackening their control completely. This is why, with the Middle-East, privatization is carried out only by stages during which, at least at the beginning, the government maintains a level of undeniable framing in the catch of the decisions.

Project Financing, or financing of project, is generally included/understood as being the financing of a project in which the financial organizations are based on the incomes generated by the exploitation of the project for « to guarantee » the refunding of their loans^1(*). Without being unaware of the identity of the future shareholders (sponsors), one can say that the organizations lenders are based much more on the economic and industrial feasibility of the project that on the assessment or the merits of the aforesaid shareholders.

Since the middle of the Nineties, the Middle-East opened in the world of the financing of project. Insofar as the legal environment and the rules governing the creation of companies evolve/move and improve, the banking world more was interested in this type of financing in the area. Indeed, the States started to show a keen desire to draw aside their assessments certain great projects of public interest, and the Middle-East at once became the favorite hunting ground of the international financial organizations. Between the financings of already closed projects and those which are under development, the work-in-progress Project Financing rises today with nearly 90 billion dollars US.

This is particularly true in the fields of oil, gas, and electricity. The governments are increasingly reticent to engage the mobilizing government stocks in great projects of heavy capital, particularly because of the variations of the price of the oil barrel, and thus of the incomes coming from oil. They thus launched out in the search for private means of financing. It does not have them escaped that the financing of project makes it possible to the sponsors to decrease their general exposure by transferring certain project risks towards other parts.

This memory concentrates more particularly on the privatization and the development of the financing of project to the Middle-East in the field of the production of electricity. In the years which come, one expects in this sector has a growth without precedent, and with corresponding investments in all the area, because the governments try to diversify and relieve an economy primarily based on oil. The need for power electric is the determining factor of the evolution towards the privatization of the manufacturing units and the intervention of producers independent of electricity (IP^2(*)) and water (IPWP^3(*)).

The programmes of privatization under development to the Middle-East proceed in general of a common strategy. It is characterized by a progressive transition from a monopoly of state (often heavily subsidized) towards the private property (and thus hoped profitable) of the means of production. The best means of illustrating the evolution of the financing of the IP to the Middle-East consists in examining the efforts made in the direction of privatization by Abou Dhabi, Jordan and Saudi Arabia.

Abou Dhabi : the regional leader for the privatization of electricity

Abou Dhabi, the main thing of the seven emirates^4(*) which constitute the United Arab Emirates, continues to be the regional leader for the reorganization and the privatization of the sector of the production of electricity. It is Giat Industries which, during its work to try to discharge Offset obligation contracted at the time of the sale of 436 Leclerc tanks to the Emirates, (but, as would say Kipling, this is another history), proposed the idea of privatization, carried out feasibility studies thorough on the Mirfa power stations then of Taweelah B, and produced in 1994 and 1995 of and the text draft agreements of law allowing the installation of such a privatization. The business was alas without a future for Giat Industries, but colossal produced work constitutes still today the base of the programme of privatization in the emirate.

Indeed, in 1996, Abou Dhabi began its program by the publication from the Decision N° 1, which created the Committee of Privatization of the Sector of Water and Electricity. After completion of work of the Committee, Deputy Ruler, Sheik Khalifa bin Zayed Al Nahyan, enacted the Decree of the Emir N°. 7 of 1997 which establishes the idea of operation of the government to arrive at the reorganization and privatization. It was about :

In February 1998, the WED was replaced by ADWEA (Abu Dhabi Water and Electricity Authority). The flow chart of ADWEA is shown in the following page. ADWEA immediately created a subsidiary company, ADWEC (Abu Dhabi Water and Electricity Company), which remains the exclusive supplier/purchasing of produced water and electricity. ADWEC is also responsible to establish projections in terms of need for output, which matches of a responsibility in the establishment of the invitations to tender allowing creation for new IPWP. Lastly, ADWEC is the central merchandizing of gas necessary to the operation of the electricity/manufacturing units water.

The role of ADWEC consists in buying water and electricity at certain independent companies (of which the IPWP) through in the long run called contracts of purchase PWPA (Power and Water Purchase Agreement). ADWEC then sells water and electricity at two distributive firms through TRANSCO, governmental company of transmission of water and energy.

This sale is carried out according to a tariff « in bulk and wholesale », but which includes/understands the cost of the generation, the operating costs of ADWEC, and the cost of the transmission. The companies of distribution must then establish a tariff (not subsidized) applicable to the end-user, tariff which must be based on « economic cost », which includes the price invoiced by ADWEC, increased cost of the distribution.

In theory, the subsidies granted by the government are carried out only through one refunding poured directly by the State with certain groups of customers. A company of independent regulation supervises the correct operation of the companies lately create and the calculation of the tariffs.

Since 1998, competition was actually introduced into the activities of production of water and electricity. Three projects IPWP up to now reached the installation of Project Financing : Taweelah A2 in 1999 (CMS), Taweelah A1 in 2000 (TOTAL & Tractebel) and Shuweihat 1 in 2001 (CMS & International Power).

Although ENRON and consortium TRACTEBEL/TOTAL, led by the Belgian group, were a long time in the group of head, it is with American group CMS Energy Corporation that Taweelah A2 was allotted in October 1998. It was about first project IWPP in the world, which represented an amount of about 760 million dollars^6(*). The financing, assembled under the leadership of the leader BARCLAYS BANK, was accomplished with a delay, considered acceptable, six months compared to the initial objectives. It was about one « dry credit », i.e. without participation of the agencies of credit export, one 17 years duration (a record for L `time^7(*)). It did not comprise cash a sweep^8(*) (mechanism outrageusement favorable for the lenders) and thus excluded the risks from obligation of refinancing or not-payment of dividends, because the government wished to draw up a new point of long-term reference for the attribution of loans in the country. On the other hand, the system included/understood one « security package » resting mainly on the goods and incomes of the company-project, like on direct agreements signed by the bankers with the Joint Venture selected to build the factory turn-key^9(*) and with the company in charge of the exploitation of this one^10(*).

But it is well following privatization, Taweelah A1, gained this time in May 2000 by consortium TOTALFINAELF/TRACTEBEL, led by Middle East Management of the French tanker, which opened new grounds with the Middle-East for the financing of project. It was about a project of the form build-own-operate, or BOO, which included/understood the restoration, the handing-over with technical height and the extension of an existing factory producing of electricity and water freed of salt in order to obtain an installation able to produce at least 1430 MW and 84 MIGD^11(*) (approximately 25% of the needs for the emirate in terms of water and electricity).

The transaction contained gravitational financial terms equivalent to those which could have been found in Europe for a business of the same type, which means that they were quite higher than those available at the time on the American money market. For one « deal » total of 1,4 billion dollar, the financing amounted to 1,015 billion (ration debt/equity 75 : 25), for the one duration of 18 years and half, longest in the area. There still, the agencies of credit export missed device, which was, him also, a first with the Middle-East : the banks (leaders : BNP Paribas and CITYBANK) admire that the shareholders pour their contribution in own capital stocks only after the complete pulling of the banking commercial debt^12(*). The conditions were so interesting that the loan was sursouscrit with 250% at the time of the international syndication. Several local banks took part in this syndication, and in particular National Bank off Abu Dhabi and Abu Dhabi Investment Corporation. The fact deserves to be announced as a mark of progress of the financing of project to the Emirates because, before, the local banks agreed of the loans only in exchange of personal guarantees provided on their own goods by the borrowers. To also note that it is the project Taweelah A1 which set up the contractual system of escrow account^13(*) (for the payment of the price authorized for the purchase of the existing factory), which functioned so that it became one of the contractual bases in the book of invitation to tender emitted for the fourth privatization, Umm Al Nar. The financial engineering of Total Fina Elf for the project Taweelah A1obtint six international prices, decreed by the financial press, whose «Project Finances Deal off the Year» (Euroweek), «Power Deal off the Year» (International Project Finance), «Middle East and Africa Deal off the Year» (Project Finance Magazine), «Emerging Markets Deal off the Year» (Euromoney).

It is in December 2001 that the financing of following privatization, Shuweihat 1, goal definitively « buckled ». It was about a factory grassroot BOO of 1500 MW and 100 MIGD to be built in the extreme West of the emirate, with 250 kilometers of the capital, which was allotted to the consortium between CMS Energy (the USA) and International Power (the U.K.). At an overall cost of about 1,6 billion dollar, the financing to be obtained rose at 1,285 billion over one duration 20 years. Its syndication, impetus says one the day before September 11, 2001, was largely disturbed by the events which one knows. However, thanks to the more or less underground support provided by the ADWEA, and to the appearance of a substantial portion of Islamic financing, the banks^14(*) ended up following. The project obtained even the prices « Project off the Year » (MEED) and « Middle East Power and Deal Toilets off the Year » (Euromoney Project Finances).

In these three cases, the government retained the majority to a total value of 60% of the shareholding, and hears privatiser gradually this share by offers of sale (IPO, or « Initial Offerings Public ») reserved to the citizens of the E.A.U.

While at the same time the duration of the loans authorized for these businesses was greeted like a mark of the maturity reached by the market, about many financial organizations are worried by the growing appetite of the area for so long terms. Indeed, this appetite could more be able to be satisfied, taking into account the number of the transactions until one waits in a future close relation. A British leader of one of the large banks of the Golf observes that if one continues with « to push » of the businesses in financing « without envisaging a refinancing at the end of ten or twelve years, the building will break down ». ^15(*)

Currently, Abou Dhabi is in the last phase of privatization of the factory Umm Al Nar (« Mother of Fire ») including/understanding the repurchase of certain existing units for an amount which, according to International Power, would exceed the billion dollar, while at the same time the estimate of its competitor TOTALFINAELF would show a clear residual value of about 670 million dollars...

TOTALFINAELF proposes a financing, completely subscribed^16(*), of a traditional type from now on : 1,35 redeemable billion dollar over 20 years as from the commercial starting of the factory, ratio debt/equity 75 : 25 being able to reach 80 : 20 if the real costs of the project are reasonable. It is in fact the first offer with the complete financing received until now by ADWEA. Moreover, the Islamic financing could be actuated with height of 200 million dollars by Abu Dhabi Islamic Bank and 300 million per National Bank off Abu Dhabi.

International Power has a more complex structure, but also more « fuzzy » in the duration. It includes/understands :

The decision of ADWEA should intervene during March 2003... if the Iraqi question allows it.

Electric outputs installed with Abou Dhabi
Company Owner	Machine	MW	% of the foreign share (40%)
			CMS	Int' L Power	TFE	TBL
Shuweihat CMS Int' L Power.	Shuweihat 1	1500,00	60,00%	40,00%
GTTPC	TAW A1	1430,00			50,00%	50,00%
Taweelah Power Corporation	TAW B	1069,00
Umm Al Nar Power Company	Umm Al Nar	1215,00
Emirates CMS Power	TAW A2	763,00	100,00%
Baynunah Power Company	Al Ain	426,00
RASCO	Remote Areas	286,00
Mirfa Power Company	Mirfa	246,00
Mirfa Power Company	Madinat Zayed	134,00
Baynunah Power Company	Abu Dhabi	533,00
Umm Al Nar Power Company	Banyas	120,00
Total Capacities Megawatts		7722,00

The privatization of the distribution and the transmission is much less advanced. The regional companies of distribution are authorized to practice only one very limited competition and until now no private investor was solicited. As for the transmission, it remains, at least for the moment, the monopoly « naturalness » of the state. Because it is well this monopolistic position of the government which allows him to be established like the intermediary of right between the firms of production and the companies of distribution, and also to preserve a narrow control on the level of the granted subsidies, not to even say on their existence.

* ¹ Guide for the Financing of the International Projects Oil and Gas, Milbank Tweed

* ⁴ Abu Dhabi, Dubai, Sharjah, Ajman, Fujeirah, Close-cropped Al-Khaimah and Umm Al-Qwain.

* ⁷ until this moment, one considered that for the area one 12 years duration was extremely ambitious.

* ⁸ as under consideration at the origin in this case : all the funds of the company are regularly transferred firstly at the organization lender. The possible distribution of dividends is done only then. The requirements in working capital are the subject thus of separate financings.

* ¹⁰ in fact, a subsidiary company of CMS created of any part to this end, in order to maximize the rate of return of the Americans.

* ¹² « back ended equity » : this system can be adopted only if the shareholders have a very strong credit.

* ¹⁴ Capital Barclays, Citibank, Bank off Tokyo-Mitsubishi, Kreditanstalt fur Wiederaufbau, Royal Bank off Scotland, National Bank off Abu Dhabi, Abu Dhabi Investment Company, Crédit Lyonnais, HSBC Investment Bank, Sumitomo Mitsui, Abu Dhabi Islamic Bank.