A Year of Two Halves

Simmons & SimmonsThe midpoint of the year is a good time to sit down and evaluate the current state of the energy and utilities sector. And in the week when the European Champions League qualifying campaign kicks off, it may be appropriate to borrow the trusty football cliché that this year could be a game of two halves.
 
If you looked hard, the first half of the year did see the energy, and particularly the PPP/PFI market, show signs of waking, but there is a more palpable sense now of the re-emergence of a project finance market. It may prove, as many commentators are warning in relation to the global economy as a whole, to be something of a false dawn, but there are definite signs of new life. In our position as a leading international law firm operating in the energy and utilities sector, Simmons & Simmons has seen a distinct pick up in the number of clients who are starting to kick off new projects and our involvement in the closing of the $2.1 billion Ambatovy mining restructuring in Madagascar in June showed us that the banks, together with the multi-national lenders, are starting to re-engage with the project finance market.

As you would expect, the projects that are making their way to market at the moment all have a significant government involvement. In the UK, the Manchester Waste PFI project did achieve financial close in April this year, but only after the UK Government stepped in as a lender (through the Treasury Infrastructure Finance Unit), alongside EIB, in a move which clearly eased the commercial banks’ concerns. The Ambatovy restructuring in Madagascar also showed a consortium of ECAs and development banks working closely with strong sponsors to get across the finish line.

It is no surprise that many of the new projects are originating from the Gulf. Oman has been to the fore on the power side and has launched a couple of projects that have been met with an enthusiastic response, in particular the RFP for a large scale solar power project. Over 50 interested parties purchased the RFP and the Omani’s received proposals from over a dozen consortia. The project itself, to assess the feasibility of and, if feasible, run a competitive tender process to source a concentrated solar power plant (CSP) of more than 50 MW is a first in the Gulf, and has the potential to lead a new wave of renewable projects in the region. Solar power is an obvious choice for countries with so much of that particular natural resource and the technological developments in the CSPs themselves, including the potential of saline power storage, means that their time may well have finally come. We would expect the price of the technology to start to fall as other developers enter the frame and the longer operating life of these plants means that they will be increasingly economic in the future. The whole middle-eastern power market, as well as many parts of Africa and Asia, will watch the development of that project with interest.

In another move that will be a first for the region, Oman is also running a tender for a coal fired plant at Duqm, which would allow them to avoid the need to import expensive natural gas for power generation. It is a move likely to be followed by Abu Dhabi who are also contemplating a nuclear project for the same reasons.

Abu Dhabi itself has been taking a lead on the PPP projects, with the Zayed University PPP following the Paris-Sorbonne University - Abu Dhabi PPP of last year and the Dolphin refinancing to financial close. Together with the two Independent Sewerage Treatment Plant (ISTP-2) projects that have also almost reached financial close, there is a definite sense of an unlocking of the bank market in the region, albeit one that the projects in those markets are supported by guarantees from reputable governments, backed by strong track records in the countries in question.

It remains the case that without the two crucial elements of support mentioned above, namely a country with a track record of successful projects and a reputable government support arrangement, it still a very difficult market. ECAs and development banks clearly have a significant role to play in getting new projects off the ground in jurisdictions that cannot boast the same track record or level of support as Oman and Abu Dhabi, but the evidence of the Ambatovy mining project in Madagascar, amongst others, is that the multilaterals do seem to understand their responsibilities and are getting involved.
Nevertheless, the market is undoubtedly fragile and it will be fascinating to see what happens over the next 12 months.

Simmons & Simmons,
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London,
EC2Y 9SS.
Tel: 020 7628 2020
Web: www.simmons-simmons.com