As part of the global trend towards finding energy alternatives and towards encouraging the establishment of renewable-energy projects, the State of Israel has issued several significant tenders in recent years with the aim of securing cleaner and more sustainable energy sources. Such tenders include two separate tenders for the construction and operation of two solar-thermal power plants (Plot A and Plot B) in the vicinity of Kibbutz Ashalim in southern Israel and the Gilboa hydroelectric pumped storage power station
Despite the desire of the State of Israel to create a competitive tender market for renewable energy projects, recent projects have shown that albeit the considerable interest and responses from leading international energy companies and corporations in the pre tender stage, at the proposal submission stage, only few bidders and in some events a single bidder submitted a proposal. for the construction of each of the two planned power plants.
This behavior by these world-renowned companies with decades of experience in the industry raises the question: What does the State of Israel need to do to in order to induce leading international companies to submit tender proposals in future renewable energy tenders?
The primary critical condition – obtaining financing for the project
A BOT project (build-operate-transfer) is a project whereby a private entity receives a concession from a public body in order to finance, design, construct and operate a public facility for a defined concession period. One of the critical conditions for such a project to succeed is the receipt of support and assistance from the banks. At first glance, this seems obvious, but this is a crucial issue and should not be treated lightly.
Just like MTS (Metropolitan Transportation Solutions), which had been selected to build and operate the Tel-Aviv Light Rail Project in 2006, but failed in its attempts to convince the banks in Israel to finance the project, over four years until the State revoked its win of the tender – so too, the bidders in past renewable energy projects had to seriously analyze the chances of their success in obtaining the necessary financing from the Israeli banks for the purpose of constructing and realizing the project. There is no doubt that this issue had been the deciding factor for some bidders who, in the final analysis, decided to withdraw their proposals and not contend.
Balancing the allocation of risks – Israel and elsewhere
When considering whether to finance a given project, there are many variables that the bank must consider before reaching its decision. I don’t want to stray off point by analyzing all of the bank’s specific considerations when deciding whether or not a particular BOT project should receive financing. However, I do want to point out the issue of ‘balancing the allocation of risks’ between the parties participating in the establishment of the project, since this is a critical issue, and a main consideration during the bank’s decision-making. The bank must evaluate and ascertain which parties bear what risks and how the bank itself will be able to mitigate the risks as a result.
To understand ‘balancing the allocation of risks,’ we can look at countries where BOT projects fall under the definition of PPP (public-private partnership). This means that the country is encouraging the outsourcing of infrastructure projects (such as the building of roads and railroads), of electricity generation, of water and sewage infrastructure, etc., to the private sector, thereby achieving additional sources of financing and increased operating efficiency for public infrastructure. In other words, the public and private sectors join forces for the purpose of building and operating projects, including in relation to balancing the allocation of risks during their construction. Correct to date, this idea has not yet fully materialized in projects in Israel. In Israel, there is a clear tendency to impose most of the risks, if not all of them, on the private-sector entity that is constructing the project.
In fact, most of the participants in tenders for BOT projects in Israel are prepared to assume the additional risks that are being imposed on them, but they are pricing their bids accordingly. Nevertheless, even when the participants in a tender are willing to assume the risks involved in these projects (while private entities carrying out similar projects in Europe, for example, are spared the extra risk), the banks in Israel are still declining to finance these projects. As a result, as we saw from the Tel-Aviv Light Rail Project, the company’s inability to obtain the financing it needed from the banks in order to proceed with the project, will, in all likelihood, cause MTS to incur heavy fines, in addition to the losses that it suffered as a result of not developing the project.
Resolving the difficulties in Israel
Persuading foreign companies to come and contend for renewable-energy projects in Israel has become extremely difficult, due to the issue of financing, as explained above, and leads to outcomes like in the case of the Ashalim Project, in which a significant number of companies opted to submit the documents required in order to be eligible to submit a proposal in the tender itself, and actually invested substantial financial and other resources in analyzing the opportunity to participate in the tender, but in the final analysis, only one bidder opted to submit a proposal for the construction of each of the two planned power plants which were the subject matter of the Ashalim Project.
Therefore, if the State of Israel wants to encourage the establishment of renewable-energy projects, it must find a way to devise a risk-balancing mechanism which, on the one hand, will act as a catalyst for attracting investors and foreign companies to Israel to compete for these major projects and, on the other hand, will enable banks to finance these projects.