Groundbreaking Developments in the Build-Operate-Transfer Model - International Law Office

International Law Office

Projects & Procurement - Israel

Groundbreaking Developments in the Build-Operate-Transfer Model

March 25 2003

Concept
Financing
Innovation
Construction
Operation and Maintenance
The Future


Concept

For some time, the Israeli government has utilized the build-operate-transfer (BOT) model to develop local infrastructure. The model has proved successful as a means of implementing large-scale infrastructure projects where state funds are unavailable and where the efficiencies of the private sector are beneficial. Recently, the lack of water in Israel and surrounding regions has led to some interesting BOT financing developments that have universal application.

In April 2002 the Israeli government decided to institute a plan calling for the construction of a series of desalination plants, primarily through the BOT financing scheme.

In the first tender, a consortium comprised of Israeli and international companies with expertise in water infrastructure construction was announced the winning concessionaire. It will design, finance, construct, operate, maintain and transfer two seawater desalination facilities in Ashkelon with an option to include a power plant in the project.

Financing

The consortium formed a special purpose company (SPC) which, with its finance providers, achieved financial closure in a groundbreaking loan in January 2003. The project is the first major BOT in Israel where institutional trust funds and pension funds were invited to participate in the syndication of the loan. As such funds traditionally favour long-term investments with relatively low risks and attractive returns, they were eager to join the BOT financing scheme, which is based on a long-term loan with suitable public-private sector risk allocation.

A major Israeli bank was the arranger and syndicated the loan. Financing was structured through a long-term, non-recourse loan facility equivalent to $200 million, and all lenders were protected by corporate and bank guarantees, in place of the traditional reserve funds as well as charges over the assets of the SPC.

All funding was furnished by Israeli financial institutions. This is the first BOT project in Israel of such substantial magnitude in which the funding was provided exclusively by Israeli sources of capital, as well as the first in which Israeli trust funds and pension funds played a major role in the financing. The syndication also redefines the local BOT mould as, for the first-time, all the parties to the transaction were represented by Israeli legal counsel.

Innovation

The real innovation in the financing of this project was the choice of an Israeli bank to syndicate the loan, together with 138 local institutional trust funds, including pension and investment funds that responded to a tender to provide financing for the project.

There are two categories of institutions involved. The majority are draw-down lenders that are to make available their contributions, at ongoing intervals, pro rata with the bank. Some, however, chose to make available all of their contributions at the start of the project. The 'upfront' institutional lenders' funds were held in trust by their agents from the closure of the tender process until the first draw-down.

Traditionally, these financial institutions are not noted for their experience in the management and supervision of such project finance arrangements. However, a credit rating, which was given to the project by a well-known Israeli rating agency, made their participation possible. The rating agency gave the project bonds an 'AA' investment grade rating and also made various suggestions to the finance agreements to bolster the financial security of the project.

Construction

As part of the project's structure, the SPC procured the construction and maintenance services through a partnership made up of affiliates of the SPC sponsors.

The construction agreement comprises a fixed-price, lump-sum, date-specific turnkey contract based on the assumption that risk allocation is split between the engineering procurement and construction (EPC) company and the SPC. The agreement shifts the construction and design risk to the EPC, which provided both corporate and bank guarantees to secure performance of its obligations under the contract.

Operation and Maintenance

The operation and maintenance agreement provides for the SPC to pay a special operation and maintenance company a fee, comprised of a fixed component and a variable component. The Israeli company is owned by affiliates of the sponsors. The operator has provided both corporate and bank guarantees to secure performance of its obligations under the contract.

The Future

The Ashkelon water desalination project is the first major BOT project in Israel in which institutional trust funds and pension funds were invited to participate in the syndication of the loan and the tender was fully subscribed. The project serves as a major development in the financing of infrastructure projects in Israel, where a steady stream of BOT projects exists, and thus provides important experience for the government, banks, lawyers and funds involved, as well as paving the way for institutional fund participation in future BOT projects in Israel.


For further information on this topic please contact Yehuda Raveh at Yehuda Raveh & Co by telephone (+972 3 562 0303) or by fax (+972 3 561 8558) or by email (ravehtlv@ravehtlv.co.il).



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