The Foundation Wind I and II (FWE I and II) financing is the final innovative twist to Pakistan’s renewables cost-plus structure. An upfront tariff system will replace it on future deals, with four financings already in the pipeline.

One of the key differences between the two systems is that the cost-plus projects had the comfort of a wind speed guarantee from the Pakistan government. That comfort created the environment in which a number of market-making transactions reached financial close and created sponsor and lender familiarity with the sector. This familiarity has allowed the market to move on to the new system.

The FWE I and II financing is part of a larger slate of projects that benefited from cost-plus – Zorlu Enerji Pakistan was the first such deal – and the wider development of a robust underlying concession structure for Pakistan. But the deal still involved significant innovation on the part of the Asian Development Bank (ADB) and the Islamic Development Bank (IDB).

By acting as partial credit guarantor for the IDB, which is taking 100% of the credit exposure, the ADB was able to participate in its first fully shariah-compliant project financing. The deal thus broadens the lending base for Pakistan wind developers, a base that is likely to be tapped again as the number of license applications continues to grow.

The sponsors of the two projects are Fauji Foundation, Tapal Group, and the Islamic Infrastructure Fund (which is backed by the ADB and IDB and was introduced to the deal by them), though the shareholder structure on each project is slightly different and thus there is no cross-collateralisation of cashflows between the plants.

Fauji Foundation owns 30% of FWE I (formerly called Beacon Energy) along with Fauji Fertilizer Bin Qasim (35%) and Islamic Infrastructure Fund (35%). The Foundation Wind Energy II (formerly called Green Power) shareholders are Fauji Foundation (20%), Fauji Fertilizer Bin Qasim (35%) Islamic Infrastructure Fund (25%) and Tapal Group (20%), which sold its original majority stake in the project to Fauji in 2010.

Financed with a 75/25 debt to equity ratio, the project cost for FWE I is $125.9 million and FWE II is $124.91 million. The two 50MW farms are located in the Gharo wind corridor in Sindh province, 54km south-east of Karachi. The sites are within 6km of each other and are being simultaneously built by the same engineering, procurement and construction contractor – Descon – to benefit from economies of scale. Nevertheless the two projects are still legally, economically, and contractually distinct.

The deal also benefits from a 20-year take-or-pay power purchase agreement (PPA) that each project company signed with the National Transmission and Despatch Company (NTDC), Pakistan’s national grid operator, through its Central Power Purchasing Agency. The government of Pakistan is guaranteeing the PPA.

The projects are being built under a date-certain, lump-sum, fixed-price engineering, procurement and construction contract with Descon and turbine supplier Nordex, which is supplying 40 proven Nacelle N 100 2.5MW HCV turbines. Dispatch from both projects to the national grid will be through a 132kV line to be built and operated by NTDC.

The projected levelised tariff for the farms, which is dollar denominated, is around $0.15 per kWh, which compares favourably with $0.19–0.23 per kWh, the incremental cost of furnace oil or diesel- based power generation.

Under Pakistan’s cost-plus system the cost of debt is passed through in the tariff, which fluctuates in line with any changes in the currency exchange rate and six-month interbank rates. The tariff system also offers the sponsors a guaranteed return on investment of 17% based on the government’s provision of a wind risk guarantee.

The 12-year project debt for the two schemes is both dollar- and rupee- denominated – $66.86 million and Rp3 billon each. The dollar debt is priced at 460bp over six-month Libor and the rupee debt at 295bp over six-month Kibor.

The deal features two Islamic structures – an ijarah (lease) and a musharaka tranche (a partnership structure with profit-sharing elements).

The lead arranger of the musharaka, denominated in rupees, was National Bank of Pakistan, with participation from Faysal Bank, United Bank, Allied Bank and Meezan Bank (also shariah adviser) and comprises around one-third of the debt.

Under the ijarah, which is dollar- denominated, the IDB will advance money to each project company during construction for developing and procuring certain project assets. During operations, each project company will pay rent to IDB for the use of those assets with the amount equivalent to principal plus interest payments under a conventional loan.

ADB’s partial credit guarantee will cover any non-payment by the project company to IDB, which includes initial disbursements by IDB, plus rental payments and other additional associated costs. ADB’s guarantee will cover half (around $33 million on each project) of the amount of IDB’s financing to the project company. On the remainder, IDB will take full project risk. Both partial credit guarantees have a tenor of 12 years and match the tenor of the IDB financing. Drawdown of the project debt is expected in the next month. 

Foundation Wind Energy I and II
STATUS
Financing signed 22 May 2012; government implementation agreement signed 20 December 2012; full financial close imminent
SIZE
$250 million
DESCRIPTION
First Islamic project financing with ADB participation
SPONSORS
Fauji Foundation, Fauji Fertilizer Bin Qasim, Tapal Group, Islamic Infrastructure Fund
LEAD ARRANGERS
Asian Development Bank, Islamic Development Bank, National Bank of Pakistan
DOMESTIC LENDERS
National Bank of Pakistan; Faysal Bank, United Bank, Allied Bank, Meezan Bank
SHARIAH ADVISER
Meezan Bank
LENDER LEGAL COUNSEL
Shearman & Sterling (international); Haidermota & Co (local)
BORROWER LEGAL COUNSEL
Orr Dignam & Co
LENDER TECHNICAL ADVISER
Lahmeyer International
BORROWER FINANCIAL ADVISER
Bridgefactor
EPC CONTRACTORS
Nordex, Descon