November 19 2002
Having realized that state funds alone do not provide the levels of investment necessary for improved infrastructure (ie, roads, railways, schools and hospitals), the Israeli government is forging public-private partnerships. It is considering several build-operate-transfer (BOT) projects and the BOT model looks set to become the means through which large-scale infrastructure development is implemented in Israel.
The Cross-Israel Highway Project is in its second year of construction, having achieved financial close in October 1999. It is the first major project finance transaction to be implemented in Israel. Structured on a BOT model, the highway will stretch for 86 kilometres (km) from Hadera to Gedera with up to eight lanes, 13 interchanges, 80 bridges, 100km of agricultural roads and a 400 metre tunnel. Sophisticated electronic tolling technology will allow highway users to travel without having to stop at toll collection points. Such a system has already operated successfully for several years in Canada, on Highway 407.
The project has enjoyed broad political support since its inception, having continued uninterrupted through the governments of Yitchak Rabin, Benjamin Netanyahu, Ehud Barak and Ariel Sharon.
The Israeli Parliament (the Knesset) enacted the Toll Road (Israel National Highway) Law 1995, establishing the basic terms of the concession (including the route of the highway, the right to charge tolls, powers to be awarded to the concessionaire and principles to be included in the concession agreement) and the method for requisition of the site's land. Thereafter, regulations were promulgated in order to support activities by the concessionaire to enforce payment of the toll.
In order to implement the project the government established a special purpose state owned corporation, Cross Israel Highway Ltd (CIHL), responsible for planning and selecting a concessionaire through an open tender process and coordinating relevant government ministries.
The government has also agreed to:
As part of the transaction structure, the state was granted options of up to 49% of the equity of Derech Eretz Highways (1997) Ltd (DEC). The exercise price was determined in the concession contract, and the options become available between completion of the construction works and the end of the concession period. The state may exercise the options and enjoy the project's economic benefits without becoming a shareholder of DEC.
The tender process commenced in 1995 and took place over an 18-month period. Four international consortia were pre-qualified to participate. In the first quarter of 1998 DEC was selected as the project's preferred bidder.
DEC's sponsors comprise two Israeli entities and one foreign consortium. The Israeli entities are Africa Israel Investments Ltd (a large Israeli investment company) and Housing and Construction Holding Company which, through its subsidiary Solel Boneh, is one of Israel's largest construction companies. Canadian Highways Investment Corporation is a consortium consisting of Aecon Inc and Amec Inc, among others. It was responsible for the construction and initial operation of Highway 407 in Canada, and has advised on the Israeli project accordingly. The Israeli sponsors were instrumental in obtaining financing (arranged by Bank Hapoalim, one of Israel's largest banks), while Canadian Highways Investment Corporation helped to obtain the support of Newcourt Capital (now owned by the CIT Group).
In addition to the state's obligations and those of DEC to design, build and operate the highway for the entire concession period, the concession contract includes a requirement that DEC expand the highway when certain predetermined traffic triggers are reached. The triggers are expected to be reached every several years between construction completion and the end of the concession period.
The costs of highway expansion had to be projected as part of the project's financial structure since additional debt cannot be incurred during the project's lifetime. A dedicated reserve fund has been established in order to guarantee the availability of sufficient funds when necessary to implement the expansion.
Other features of the concession contract include DEC's obligation to construct four service stations along the highway, a portion of the income from which is payable to the state as a supplement to the partial revenue guarantee provided by it. In addition to providing highway users with service areas for refuelling, recreational and rest purposes, the service stations will provide DEC with important non-toll revenues with which to bolster the financial model upon which the project's viability is based.
The term of the concession is 30 years. Deadline extensions will be granted for completion of the construction works only (ie, not for the concession period itself).
The concession contract includes restrictions on the transferability of the concession and/or shares of DEC.
The project was structured with 90% debt and 10% equity. The bank debt was provided through a shekel facility equivalent to $850 million which was arranged and syndicated by Bank Hapoalim. In addition, $250 million was provided by CIT Group in the form of a private placement.
The shekel syndicated loan consisted of two tranches, one incorporating a sophisticated step margin which facilitates a lower toll for the early years of the project, and the other being at a fixed interest rate for the entire term. The facility includes a 6.5 year roll-up of interest and is based on a 28-year term. Standard and Poor's gave the note purchase facility a 'BBB-' rating.
Senior lenders are protected through the establishment of several reserve funds and charges over the assets of DEC and the equity contributions of shareholders.
As part of the project's structure, DEC procured the construction services through a joint venture comprising affiliates of the DEC sponsors. The construction agreement comprises a fixed-price, lump-sum, date-specific turnkey contract based on the assumption that all construction risks are borne by the joint venture (unless and to the extent that a particular risk is assumed by the state pursuant to the concession contract). The agreement is structured to pass construction and design risk to the construction joint venture.
The project is structured to open in phases in order to provide a 'run in' period prior to full-scale opening. Two sections of the highway have already been opened. The joint venture has provided DEC with a guarantee of revenues to be collected during this period. The joint venture's obligations were supported by joint and sponsor guarantees, a surety bond and several letters of credit.
DEC is obliged to operate the highway through an operating company, which is an Israeli company owned by affiliates of the sponsors.
The Cross-Israel Highway project is the first major privately financed project to be implemented in Israel, serving as an important experience for the government, lending institutions and the private sector, and setting the standard for future projects in Israel.
For further information on this topic please contact Jonathan Finklestone at Yehuda Raveh & Co by telephone (+972 3 562 0303) or by fax (+972 3 561 8558) or by email (email@example.com).
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