Project Finance International October 17 201248

FEATURES

The groundbreaking ceremony for the As-Samraexpansion scheme took place three months aftera consortium of Suez Environnement SAS , InfilcoDegremont Inc and Morganti Group Incsuccessfully closed the financing of the US$223mproject. Thomas Langford, group vice-presidentfor investment and financial risk management atConsolidated Contractors Company, MorgantiGroup Incs parent, said: We are delighted towitness the commencement of the expansionworks, and are grateful to the Government ofJordan, the Millennium Challenge Corporation,Arab Bank and each and every one of our lendersfor their commitment and ongoing support.

Frederic Claux, the head of BOT projects atDegrmont, said: The Millennium ChallengeCorporation contribution was key to develop asustainable project, boasting an affordable tarifffor the community and the country while offeringhigh performance wastewater treatment service.

The build, operate and transfer (BOT)transaction is the first project financing of 2012 to have closed in Jordan. The participationof the Millennium Challenge Corporation (MCC), a US Government developmentinstitution, was instrumental in bringing theproject to close. It is the first major projectfinancing in which MCC has ever taken partanywhere in the world.

The template developed - namely, grantfinancing coupled with private finance from sponsors and debt finance raised on alimited-recourse basis - offers significant potentialfor the development of much-neededinfrastructure projects in developing countries inthe future.

Project backgroundThe initial As-Samra Wastewater Treatment Plant(Phase 1) was completed in 2008. With a capacityto treat average daily flows of 267,000 cubicmetres, it was designed to treat the wastewater of2.3m-equivalent inhabitants of Amman and thesurrounding areas. Phase 1 was a first-of-a-kindproject on several counts: it was the first to beexecuted on a BOT basis in Jordan, the first public-private partnership (PPP) for a wastewatertreatment facility anywhere in the Middle East,and the first BOT project supported by another of

the US Governments development agencies, the US Agency for International Development(USAID).

By 2011 the Phase 1 plant had nearly reachedits design capacity, and without an expansion toaccount for growing volumes of wastewater inthe region, the plant was likely to have becomeoverloaded, resulting in a deterioration in itsability to treat wastewater to acceptabledischarge standards. This, in turn could haveaffected downstream agricultural areas that relyheavily on treated water for irrigation. Without asource of adequately treated wastewater from theAs-Samra plant, this agricultural region wouldhave faced serious food safety risks together witha loss of markets for its agricultural products.

To address these challenges, the Governmentof Jordan, represented by the Ministry of Waterand Irrigation (MWI), procured an expansion ofthe As-Samra plant. In 2010, MCC committedUS$275.1m for development projects in Jordan,including substantial grant financing toward theexpansion of the As-Samra plant, among severalother projects in the water sector.

MCCs compact funding agreement with theGovernment of Jordan aims to achieve thefollowing results by December 2016: Increase network water consumption per capitafrom 65 to 96 cubic litres per day; Improve efficiency of network water deliverythrough the reduction of water losses in ZarqaGovernorate system input from 47% to 35%; Increase coverage rates of the residentialpopulation to the wastewater network from 72%to 82%; and Improve allocation of scarce water resourcesthrough increasing the substitution of freshwater fortreated wastewater in agriculture from 61% to 70%.

The US$223m expansion of the As-Samra plant will increase the initial plants capacity by 98,000m 3 a day (cm/d), bringing the totalcapacity to 365,000 cm/d, in order to servearound 3.5m people. The project will beconstructed and maintained under a 25-year BOT contract. Works on site began in September2012, and are scheduled for completion in July2015.

Payments from the project are based on availability and treatment, to the exclusion of any

AS-SAMRA SETS EXPANSION TEMPLATE A GROUNDBREAKING CEREMONY FOR THE AS-SAMRA WASTEWATER TREATMENT PLANT EXPANSION

PROJECT IN THE HASHEMITE KINGDOM OF JORDAN TOOK PLACE ON THURSDAY OCTOBER 11, MARKING

THE OFFICIAL COMMENCEMENT OF THE WORKS. BY RICHARD KEENAN , INTERNATIONAL PARTNER AT

CHADBOURNE & PARKE S DUBAI OFFICE, AND MARC NORMAN , ASSOCIATE AT CHADBOURNE & PARKE S

DUBAI OFFICE.

Project Finance International October 17 2012 49

AS-SAMRA

volume risk. A minimum payment is guaranteedby MWI for the availability of 160,000 cm/d forthe existing plant and 220,000 cm/d once theexpansion is operational. A treatment payment ispaid on top of this value. The payments areguaranteed through a reserve account, thereplenishment of which is in turn backed by theMinistry of Finance.

The expansion will significantly improve waterresources management in Jordan, one of theworlds most water-deprived countries, byproviding increased supplies of high-qualitywastewater for agricultural use, while freeing upfresh water for municipal uses. The expandedplant is expected to meet the wastewatertreatment needs of the Amman and Zarqa areasthrough to 2025.

FinancingA diverse mix of financing was required tosuccessfully finance the US$223m project cost.The combination of the following commitmentspaved the way to success: A US$8.6m equity injection from the projectsponsors;A US$17.9m contribution together with apayment of US$1.9m for interim capex from theGovernment of Jordan;A US$ 93m grant from MCC; andA JD105m (equivalent to circa US$148m) debtpackage from a syndicate of local banks led byArab Bank. Approximately US$42m of the debtpackage was used to refinance the outstandingloan on Phase 1.

The debt-to-equity ratio is 80:20. Cashflowsfrom the operation of the existing Phase 1 plantwere securitised in order to support the projectsponsors equity contribution towards theexpansion. This unique source of funding is oneof the key features of this transaction. MWI, thelenders and MCC accepted equity funding fromthese revenues based on the existing plantsproven performance and credit support providedby the project sponsors in the form of a corporateguarantee.

The Government of Jordans contribution ismade through the payment of the Phase 1 tariffand progress payments payable upon thecompletion of defined milestones. MCCs grant isdisbursed each month in conjunction with debtand equity.

The debt financing syndicate consists of Arab Bank, Jordan Kuwait Bank, Capital Bank, Societe Generale (local subsidiary), Social Security Investment Fund, Bank of Jordan, Investbank, Arab-Jordan Investment Bank and Bank al Etihad. The tenor on the debt is 13 years, extendible to 20 years. This tenor marks the longest maturity that Jordanianbanks have offered to-date for a Jordanian Dinar-denominated limited-recourse loan. Theinterest rate during construction is fixed (7.25%during year one; 7.75% during year two; and8.25% during year three), but shifts to a floatingrate thereafter (a rate based on the average of the prime lending rates announced by a syndicate of four local banks, minus 50 basispoints).

Part of the debt financing raised in connection with the expansion was applied torefinance the outstanding obligations inconnection with Phase 1. The refinancingcomponent created a timing challenge insofar asrepayments under the Phase 1 facility had tooccur on an interest payment date so as to avoidincurring breakage costs, although in the end,

AS-SAMRA WASTEWATER TREATMENT PLANT EXPANSION PPP

Status The project reached financial close on 18 July 2012

Description US$225m expansion of the As-Samra Wastewater Treatment Plant in Jordan, involving Millennium Challenge

Corporation, a US Government development institution.

Sponsors Suez Environnement SAS, Infilco Degremont Inc and The Morganti Group Inc

Arranger Arab Bank plc

Commercial Lenders Arab Bank, Jordan Kuwait Bank, Capital Bank, Societe Generale (local subsidiary), Social Security Investment Fund,

Bank of Jordan, Investbank, Arab-Jordan Investment Bank and Bank al Etihad

Development Agency Millennium Challenge Corporation

Sponsors' international legal adviser Chadbourne & Parke

Sponsors' local legal adviser Ali Sharif Zu'bi Advocates & Legal Consultants

Sponsors' financial adviser Alan Cairns of the UKs Mapstone.

Lenders' local legal adviser Obeidat & Freihat

Lenders' technical adviser Mott McDonald

Government of Jordan's international legal adviser Allen & Overy

Government of Jordan's local legal adviser Khalifeh & Partners

Government of Jordan's technical adviser Atkins Global

Insurance adviser Lockton

Model auditor Grant Thornton

EPC contractor Degremont SAS and The Morganti Group Inc

The expansion will significantly improve waterresources management in Jordan, one of the worldsmost water-deprived countries

Project Finance International October 17 201250

financial close did not occur on an interestpayment date and some breakage costs were paidto the existing lenders.

ChallengesFinancing of the expansion faced a number ofchallenges. The arrival of the Arab Spring in early2011 had a profound effect on market confidencein the region. While the events of the ArabSpring did not directly impact Jordan, theyinevitably prolonged completion of thetransaction.

The impact of the Arab Spring along with thecontagion of the European debt problems and theimplementation of Basel III by internationalbanks always threatened to constrain liquidity forthe expansion and other projects. The CentralBank of Jordan increased rates a number of timesearlier this year. Significantly, members of theJordanian bank syndicate held their pricing as pertheir 2010 commitments, which meant theproject sponsors avoided having to re-opendiscussions with MWI on the tariff in the lead-upto financial close.

The As-Samra expansion would not havehappened without the MCC grant. However, thedevelopment of a finance structure toaccommodate the MCC funding conditions,policies and other requirements presented theproject sponsors and lenders with a significantnumber of challenges.

MCC was created as an independentgovernment corporation by the US Congress inJanuary 2004 to provide grants to developingcountries whose governments are committed togood governance, economic freedom andinvestment in their citizens. Unlike an exportcredit agency or a multilateral donor, it is notestablished for the purposes of making a returnon its grant investments. However, many of theregulations and polices applied by MCC asconditions of the provision of its grants are notdissimilar to those typically applied by exportcredit agencies and multilaterals. MCC requiresstrict adherence to its policies and regulationsand many of these had a direct impact on thestructuring of the project and financedocumentation.

Environmental compliance is critical to MCCsparticipation in the expansion and this isreinforced by the terms of the compact (grant)documents and the terms of the concessionagreement. One of the byproducts of anywastewater treatment plant is sludge. Asignificant amount of time was spent by theproject sponsors, MWI and MCC and theiradvisers during the negotiations documenting the

responsibilities of the parties with respect to thetreatment, storage, management and disposal ofsludge. A viable market for sludge produced bythe plant is yet to be found, due in part to therestrictions that apply in Jordan and the MiddleEast with respect to the use of sludge producedby human waste. Until this happens the partieswill continue to store and dispose of sludge inaccordance with the terms of the concessionagreement.

Where PPP projects are partly paid for orfunded by government and partly from projectfinance, government authorities typically viewthe availability of debt finance as a sponsor riskand funding shortfalls do not usually trigger anyform of breach or ability on the part of thegovernment to exercise any rights under theconcession agreement unless they lead to anacceleration of the debt by the lenders or to the insolvency of the project company. However,the approach to the financing of the expansiontaken by MCC was more akin to that of a projectlender.

Probably the most challenging aspects of theexpansion financing are the conditions precedentthat must be satisfied by the project company inorder to be entitled to MCC funding. These arequite strict, even in comparison with some exportcredit agency or multilateral disbursementconditions. From a lender perspective they wouldbe exposed to a very significant funding shortfall inthe event any of these conditions are not satisfiedand MCC funding is not forthcoming. Thisnecessitated structuring the project and financedocumentation in such a way as to mitigate thisrisk to the lenders as much as possible.

Both MCC and the lenders were reluctant tofund ahead of each other - the initialdisbursement of MCC funding being dependenton the initial disbursement of funding by thelenders and vice versa. As a result, financial closeand satisfaction of the initial conditions to theMCC disbursement had to occur at the same time.This led to the devising of a creative solutionwhereby notices, certificates and drawdownrequests were simultaneously exchanged on theday of financial close so as to achieve satisfactionof the conditions precedent to initialdisbursement of MCC funds contemporaneouslywith first drawdown of the debt.

Similarly, the ongoing obligation on the part ofMCC to provide the MCC funded contribution is

Probably the most challenging aspects of theexpansion financing are the CPs that must be satisifiedby the projectco in order to be entitled to MCC funding

The As-Samra treatment plant

Project Finance International October 17 2012 51

AS-SAMRA

dependent on the funding commitment of thebanks. This resulted in the project sponsorshaving to accept MCC and lender drawdown testsdesigned to ensure that neither MCC nor thelenders are ever in a position where they havefunded in excess of threshold ratios of debt toMCC funding and other threshold ratios involvingequity investment and cash from operations.

The financing was further complicated byMCCs inability to enter into any directcontractual relationships with the projectsponsors or the lenders. This presented a numberof challenges including:The inability of the lenders to enter into anyform of intercreditor agreement with MCC; Structuring the project agreement such that theproject company has appropriate remedies in theevent of non-payment by the Government ofJordan of amounts contemplated to be received byit from MCC;Processing and administration of payments inaccordance with MCCs requirements; andThe absence of any form of MCC credit supportin the form a letter of commitment or any otherform of security.

The impossibility to implement anintercreditor agreement between MCC and thelenders proved to be significant. Without anintercreditor agreement there is no mechanismfor MCC and the lenders to consult, shareinformation and collectively make decisions. Theconsequence of this is that the project companyis required to pursue two separate approval pathsin connection with disbursements of MCCfunding and debt and in respect of any mattersrequiring MCC and lender consent, such aswaivers or amendments to transactiondocuments.

USAID provided a letter of commitment inconnection with the financing of Phase 1, which,as far as the Phase 1 lenders were concerned,significantly enhanced the bankability of theUSAID grant/funding structure.

The absence of a letter of commitment or someother form of security from MCC required somerestructuring of the project agreement to ensurethe project company has sufficient remedies inthe event of non-payment by the Government ofJordan of amounts contemplated to be receivedby it from MCC.

A template for viability gap financingThe participation of MCC together with theinnovative nature of certain aspects of thefinancing contributed to making the expansion affordable for the Government of Jordan - a key requirement for all stakeholders.

By bringing down the capital costs, the grantfunding enabled the project to be financiallyviable, thus benefiting the government and localrate-payers, without subsidising the privatesector.

Closing the financing of the expansion provedthe feasibility and demonstrated the significantbenefits of combining private sector financingwith viability-gap grant funding.

MCC expects to adapt the contractual structure developed for the As-Samra expansion for use in upcoming infrastructureprojects elsewhere in the world, thereby allowingprojects that are economically andenvironmentally beneficial to be implementedand operated by the private sector where suchprojects would otherwise be unaffordable to thepublic sector.

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