The extensive list of projects proposed by the Kuwaiti government’s procurement body, the Partnerships Technical Bureau (PTB), has long tempted regional and international sponsors and lenders. The PTB has put forward power, water, key infrastructure, transport, communications and renewables projects since its inception in 2008. Kuwait has found the process of closing its first PPPs challenging, however, and legal and regulatory questions have proved troublesome. Financing, say observers, is the least of the programme’s problems, particularly given the recent political unrest in the country.

On 7 October 2012 the Emir of Kuwait disbanded the country’s parliament for a third time in less than a year, and thousands of demonstrators have taken to the streets in recent weeks to protest a change to the electoral law that opponents say amounts to a constitutional coup by the government. All of this disruption might be assumed to threaten further delays to the most advanced of the PTB’s projects, the Az Zour North independent water and power project (IWPP), but the deal looks to be nearing financial close.

Japan bests Korea on Az Zour

Az Zour will be the first independently-developed power plant in the country and consists of four of separate phases with a total capacity of 4,000MW. The PTB named an International Power/GDF Suez-led consortium preferred bidder on the 1,500MW first phase in March this year. JBIC is providing the bulk of the debt for the $2 billion project, with NBK leading a consortium of local banks, and Standard Chartered amongst a number of international lenders known to be contributing to the funding. HSBC is advising the government on the wider programme.

The full Az Zour North consortium comprises International Power, Sumitomo Corporation and junior member AH Al Sagar & Brothers. Along with a gas-fired combined cycle power plant, the site will also feature an associated water desalination plant with a capacity of 102 to 107 million gallons per day. The Kuwaiti Ministry of Electricity and Water will buy the plant’s entire output under a 40-year energy conversion and water purchase agreement. The deal will have an 80/20 debt/equity ratio.

JBIC’s support allowed the sponsors to fight off strong competition from Korean export credit agency-supported bidders to win the deal, with what has been described as a very aggressive bid. JBIC has missed out on a few deals in the region recently, with Kepco and Kexim snagging recent projects such as IPP3, Emal 2 and Baraka Nuclear. ECA support is now vital to deals in the sector, and Asian export agencies are particularly active. The Kuwaiti banking market has plenty of liquidity but little experience of long-term financing, making foreign debt providers desirable for developers. For JBIC, the competitive advantage of working on the first Kuwaiti PPP should help it build a strong relationship with PTB that it can exploit on future bids.

Those working on the project say that sponsors, lenders and government are determined to get the Az Zour deal closed in the next few months. PTB originally issued the request for expressions of interest for the transaction advisory contract in the third quarter of 2009 and launched the request for qualifications for the project back in 28 September 2010. One source close to the deal said: “This is the first real PPP in Kuwait so everyone is very keen. Not only does it have an impact on IPPs in the country but also on the wider PPP programme which is probably the most extensive in the world”. The most optimistic participants say the deal can reach financial close late in the fourth quarter of this year, with the more pragmatic pointing to early in the first quarter of 2013, but lenders have been working on documentation for the past three months.

Legislation and listings

The Az Zour project participants, and those involved with the wider PPP programme, have faced a number of challenges up to this point. The Kuwaiti government started centralising infrastructure procurement in 2008, a process that resulted in the creation of the PTB. Power projects in Kuwait were previously procured directly rather than through outside operators, but the government appears keen to catch up with best practice in other Gulf Cooperation Council countries such as the United Arab Emirates, Saudi Arabia and Qatar. Kuwait’s BOT Law instructed the PTB to work with the Ministry of Finance to tender a range of projects, and provided a legislative framework to promote PPPs to an international audience.

The programme requires all that project companies become a Kuwaiti public joint stock company, giving them a corporate structure that will eventually entail an initial public offering (IPO) and a listing on the Kuwaiti Stock Exchange. Smaller projects in which the project costs do not exceed KD250 million ($880 million) are exempt from this requirement. Among the initial projects that the PTB is tendering, the Kuwait Hospital concession will not require an IPO, but most of the other PPPs will be large enough to require a public offering.

In 2010 the government passed a specific IWPP law, which looked to narrow the legal parameters for power and water deals, and bring extra clarity to the tendering process. This additional legislation also requires project sponsors to purchase, at the bid price, any shares that do not attract subscriptions during the IPO. In the case of Az Zour, Kuwaiti public entities will own 10%, Kuwaiti nationals will own 50% after the IPO, and the sponsors will own the remaining 40% (International Power and Sumitomo to own 17.5% each, and AH Al Sagar & Brothers will take the remaining 5%).

Although Kuwaiti IPOs have a solid record of attracting sufficient levels of subscription, there remains uncertainty about whether the shares in Az Zour will find any buyers, and whether the government will stick to the letter of the 2010 law. Christopher Cross, a partner at law firm Hogan Lovells, which has been involved in the programme, says: “I expect a significant portion of the shares would remain unsubscribed if they were released into the open market. If this is a real risk the government might seek to avoid this and take up the shares instead, possibly with a view to distributing them amongst the populace at a later date.” Although the country has a population of around 2.7 million the large majority of these residents are non-nationals, with only 400,000 registered to vote in this year’s election. That makes for a small investor pool for any potential IPOs.

A lack of interest in any Az Zour IPO would reflect a wider apathy that Kuwait’s general public has shown towards the programme. The government is keen to improve the country’s infrastructure, and international investors are attracted to the proposals, but many ordinary citizens, suggest cynics, will wonder how urgent the need for a new metro network is, or whether developing Failaka Island into a premier leisure and tourist destination is worth substantial government investment. Power and water projects are much more vital, but the country still has enough capacity to meet peak demand up until 2014. Power demand is set to grow at around 7% annually, but Kuwait is far from an energy crisis.

From a sponsor’s prospective, Kuwait has the added inconvenience of democracy slowing the wheels of development. Sohail Barkatali, partner at Chadbourne & Parke, said: “Kuwait has embarked on a PPP programme that is integral to introducing know-how into the country and improving infrastructure. The political will for implementing PPPs is certainly there, but with the democracy that Kuwait enjoys comes a level of scrutiny to which other GCC governments are not subject.”

Rather than inflict delays on Az Zour, as might be expected, the dissolution of parliament has actually helped nudge it towards financial close. Sources close to the deal suggest that with a layer of scrutiny temporarily lifted, the PTB has been able to make progress on documentation much more quickly. This will have been a welcome development for the bureau, since it is understood to have lost key finance personnel in recent months. The bureau’s approach to hiring advisers has also prompted questions, after it surprised the market by issuing a tender for advisers on each phase of the Kuwait metro project, after already mandating a group of advisers to prepare documentation for all five phases.

Advisers to the fore

Among the 16 projects that the PTB initially proposed, the Kuwait Schools Development Program, Al Khairan IWPP and Public Post Office projects are all looking for technical advisers, Az Zour is nearing close, the sale of state-owned real estate is nearing completion and 11 other deals are at pre-tendering stage. These include the metro and national rail projects, the construction of a new waste treatment facility, the Al Abdaliyah integrated solar combined cycle and several property developments.

It is no surprise that an IWPP is the first project in the programme to move to financial close. Water demand will always remain strong in the Middle East for obvious climate-related reasons, and Kuwait’s existing plants need upgrading. GCC countries have proven themselves adept at procuring independent power or water and power plants, with deals stretching back to the Al-Manah IPP in Oman during the late 1990s.

Other types of PPP development have proved more difficult to nurture, however, as public ownership issues and concerns over the allocation of risk hold back major infrastructure financing. If Kuwait can close a string of infrastructure PPPs, its success could prove instructive for grantors in other parts of the Middle East. But the new legislative framework that Kuwait created for the programme will need to prove itself to be robust enough to support a variety of types of assets.

Kuwait is hoping to model the financing structure for Az Zour, not to mention other deals in the pipeline such as the Umm Al Hayman waste water treatment plant and the Al Kharian IWPP, by imitating the water and power projects that Oman has procured in recent years. IWPPs such as Barka and Salalah, and IPPs such as Sur and Raysut have attracted strong support, both regionally and internationally. Lenders and developers will be watching the progress of Az Zour closely, as a successful PPP programme would creat a significant number of additional opportunities in the region.

Observers admit that it could go the other way however, with further delays to Az Zour putting in doubt the rest of the programme. Christopher Cross is confident Az Zour and the other water and power deals will close, but argues that question marks will remain, for now, over many of the other proposed projects. He said: “I would describe the PTB pipeline as aspirational until they can engender market confidence with closed deals.”