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Backing private participation in water and wastewater projects

Private participation in water and wastewater development. Winston & Strawn Partner Jim Simpson and Associate Chris Shelton show how the GCC experience can be applied elsewhere in the Middle East, Turkey and Africa (META) region

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Clean water, Wastewater, Water infrastructure, Water Security Strategy 2036, IWPP, ADWEA, NWC, OPWP

In an effort to combat future water scarcity GCC countries are increasing their investment into water and wastewater infrastructure.

The United Arab Emirates is widely recognised as a leader in the development of water production and treatment. In late September 2017 the UAE unveiled its Water Security Strategy 2036 which seeks to ensure sustainable access to water during both normal and emergency conditions.

The strategy aims to: reduce the total demand for water resources by 21%; increase the water productivity index to $110 per cubic meter; reduce the water scarcity index by three degrees; increase the reuse of treated water to 95%; and increase national water storage capacity up to two days.

In line with this strategy, the Abu Dhabi Water and Electricity Authority announced plans in December 2017 to tender for the eagerly anticipated Taweelah IWP, which is expected to have a capacity of 760,000 cubic metres per day (m3/d).

Other countries at the forefront of water and wastewater investment include Saudi Arabia and Oman. Saudi Arabia recently announced new water projects, worth a reported $1.3bn, in an effort to boost local water production and distribution.

Of particular note is the Rabigh 3 IWP project which will be a 600,000 cubic metres per day (m3/d) reverse osmosis seawater desalination plant, expandable to 1,200,000m3/d.  The Kingdom is also seeking to develop the Shuqaiq 3 IWP which will have a capacity of 380,000 m3/d, and the Yanbu 4 IWP which will have a capacity of 450,000 m3/d.

In the wastewater sector Saudi’s National Water Company has appointed a Mizuho-led consortium on the procurement of a wastewater treatment projects. The consortium will advise on three projects in Jeddah, Dammam, and the Northern Border region.

Oman is also aggressively pursuing investment into the water sector, with the Oman Power and Water Procurement Company (OPWP) projecting water demand to increase at a rate of 5% a year to 2023, from 746,000m3/d in 2016 to 1.1 million m3/d by 2023.  In February 2018, OPWP issued a request for qualifications for the Ghubrah III IWP, which will be located next to the existing Ghubrah II IWP in the Muscat region. The plant will have a capacity of 300,000m3/d and is expected to be operational in 2022.

Traditionally GCC countries have focused on large scale power and water desalination projects, through the IWPP (independent water and power project) model.  One of the most recent success stories to incorporate private participation is the Abu Dhabi Water and Electricity Authority’s Mirfa IWPP which achieved commercial operation in November 2017.

Despite the success of the IWPP model, we are increasingly seeing a shift from IWPPs to stand alone IWPs (independent water projects).  This can largely be attributed to a number of factors, including, a focus of renewable energy, advances in technology such as reverse osmosis becoming more efficient and cheaper, and an increased capacity on the grid (especially in the United Arab Emirates due to the imminent completion of Abu Dhabi’s first commercial nuclear power plant unit).

Of particular note is Oman’s IWP programme which saw three projects reach financial close in 2016. These included the Sohar IWP (250,000m3/d), Barka IWP (280,000 m3/d) and Quurayyat IWP (200,000m3/d). Each of these projects included private participation at the sponsor and financing levels. Other IWPs in Oman include the Salalah IWP, Sharqiyah IWP and Duqm IWP. IWPs currently under consideration include the Khasab IWP and Wadi Dayqah IWP.

The GCC’s ability to mobilise private participation, as demonstrated by its IWPPs and IWPs, can be exported to the wider META region through five fundamental pillars:

A clear, fair and consistent independent regulatory regime: The GCC experience demonstrates the benefit of having a clear and consistent independent regulatory regime built to respect political realities, facilities private investment, and ensure fair regulatory oversight for both the public and private sectors.

A transparent procurement process: A transparent procurement process is essential to encourage market participation. Project procurement should be by reference to specific non-discriminatory criteria and open to appropriate public scrutiny. For example, the opening of financial bids should be on a bid submission date and should take place in public.

A well-structured and consistent contractual template: It is also important for projects to be well-structured and follow contractual templates that effectively deliver bankable projects while not requiring extensive reworking for each new development.

Stability and strength of off-take arrangements: The key to a successful project seeking to encourage private participation is ensuring there is a bankable contractual structure. The contracts should ensure a source of revenue over a tenor which is sufficient to ensure repayment of the project finance loan and provide returns to investors. In this respect the careful selection of creditworthy counterparties is one of a number of critical factors which will determine the bankability of a project. This may involve governments being required to provide payment and/or termination guarantees.

Making use of the multitude of financing sources: Projects in the GCC have been able to mobilise and leverage all possible financing resources, from domestic capabilities to multilateral partners. These have included export credit agencies, multilateral financing institutions, development finance institutions and political risk insurances providers. All these sources are likely to be vital for the development of projects throughout the META region.

Power projects and water and wastewater projects tend to share a number of similar features, such as project structure, risk allocation regime and contractual documentation. However, in order for a water or wastewater project to be successful, specific features unique to those projects will need to be considered.

For instance, wastewater projects will typically feature “all or nothing” completion requirements and novel technical considerations. Financing considerations may also differ due to, amongst others, lower capital costs and a variable input (influent) as opposed to a steady fuel supply found in power projects.

The GCC’s ability to successfully engage private participation in their water and wastewater sectors has created a bankable blueprint that can be exported to other parts of the META region. As countries seek to guarantee their future water security and wastewater infrastructure, it is broadly expected that this blueprint will be exported throughout the META region.

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