Despite the difficulties in the current global finance market, there are a steady stream of greenfield utility projects coming online in the Middle East. Master Developers are bundling and integrating their utilities, tapping into local debt and/or investor equity and structuring their deals through private concessions. In some cases, they are taking advantage of opportunities to ‘monetise’ their utility assets. Revenue streams are therefore starting to trickle where previous thinking had the money flow going completely upstream.
How did we get here?
The redistribution occurred because stakeholders had to come up with alternative ways to procure their essential projects during the ‘Arab Spring’ and gloomy global markets.
Petro dollars financed a massive construction boom in parts of the Middle East in the early 2000s. Most of the world’s cranes were located in the UAE and it seemed that there was no end in sight to the scale of development. Although construction in Dubai came to a screeching halt, Abu Dhabi, Saudi Arabia, and Qatar have pressed ahead, albeit at a slower scale than before the global financial crisis.
‘Fiscal responsibility’ has taken over the ‘starchitects playground’. As a result, non-essential projects are either being scaled back, suspended, or withdrawn. But other projects are proceeding, including utility infrastructure (i.e., electricity, drinking water, waste, air conditioning) and brand projects (i.e., projects that if they were to be withdrawn, might affect a country’s brand or reputation).
Where are we now?
Seeking private finance to fund infrastructure is not a new approach. Public-Private Partnerships (“PPP”s or “P3”s) and project finance are well known globally. PPPs are politically driven, so if a particular government is not actually fostering PPPs and private financing (i.e., providing cheaper access to funds) and are in favour of allowing the private sector to operate ‘core’ government services, then traditional models involving the expenditure of public funds usually win the day.
Private concessions need not involve governments contracting for assets and services. There is a trend in the Middle East, particularly in Saudi Arabia, Qatar, and the UAE where, subject to regulatory considerations, Master Developers are seeking to grant concessions to private parties to carry out and fund (in part or whole) their utility projects. Funding may come partly from private party and third-party debt, or from private party and end-user revenues generated from the project.
‘Monetisation’ occurs when a Master Developer participates in one or more opportunities to exploit their interests.
Monetisation Opportunities for Utilities
The ways in which a Master Developer can participate in the revenues generated by utilities infrastructure and services may include one or a combination of the following:
- Revenue Sharing: through a concession (or royalty) payment from the private sector to the Master Developer based on a fixed fee or a percentage of revenue earned by the private sector in selling the utility service to ultimate end users.
- Land payments: through lease payments under a Musataha or other property agreement from the private sector to the Master Developer to lease the land upon which the utility infrastructure sits;
- Profit Generation: where the Master Developer charges a premium to the ultimate end users of the utility over the cost the Master Developer pays to the private sector for the same utility; and
- Equity investment: where the Master Developer takes equity in the private sector Special Purpose Vehicle (“SPV”) set up to deliver the utility project, taking either dividend payments and other forms of return on equity (e.g., selling shares in the SPV at a premium to other (fund or IPO) investors). The Master Developer could have an option to buy shares in the SPV towards the end of construction of the utility infrastructure and then either sell the shares at a premium or retain its interest and receive dividends.
Another trend in the Middle East is to co-locate utilities infrastructure and services to generate greater energy efficiencies and achieve lower operating and maintenance costs. For example, a combined power and water plant may be able to generate electricity, potable water and thermal energy for chilling or heating (perhaps a sewage treatment plant (“STP”) for back-up water for a district energy plant). Regulatory hurdles can stand in the way of some of these utilities (e.g., power and water generation is a State right in some Middle Eastern countries), but where private sector participation is permitted, partnerships can be forged.
While the prospect of revenue generation may be attractive for any Master Developer, the commercial, financial, and contractual structure of each deal needs to be carefully considered at the early stages of project development. Often monetisation can increase the project economics, so financial advice is critical at the early stages. Also critical at the early stages is an analysis of project structuring, debt and equity options, risk allocation, and sector specific issues within the relevant political and regulatory environment.
There is a growing trend of using private concessions to execute and deliver utility assets. Government backed PPPs and project finance models are not new. But the use of ‘end user’ and ‘single offtake’ private concessions, particularly for unregulated utilities, is taking shape. With the benefit of experienced financial, technical, and legal advisers, these models can be a viable (and sometimes profitable) option to deliver essential utilities infrastructure.