Africa’s first water PPP
The Kigali Bulk Water Supply Project, a 40,000 m³ per day potable water project in Rwanda, achieved financial close to become the first bulk surface water PPP project in sub-Saharan Africa. By Aman Sachdeva, CEO and founder,Amit Singh, associate director, and Bibhu Prasad Das, senior associate, Synergy Consulting.
Teams working on projects with long development cycles are often asked about project challenges and achievements. The Kigali Bulk Water Supply Project would be remembered as a landmark project in the African water sector for being the first bulk surface water supply PPP project in Sub-Saharan Africa, setting benchmarks for similar transactions in the region, and implementing a complex financing structure, among other reasons.
Previously, some residents used to cycle uphill for more than 10km, several times every day to fetch drinking water from a near-by reservoir. Now, with the Kigali Water project coming online in the next few years, clean potable water will be delivered to their homes and around 40% of the population in Kigali city.
The Kigali Bulk Water Supply Project will be located in Kanzenze, in the south-eastern part of Kigali. The project when operational will deliver safe, clean water, serving domestic, commercial and industrial end-users. The water will be extracted from the south bank of the Nyabarongo River, treated and used to supplement the existing water supply in a strategic move to meet the growing water demands of Kigali – a city with a current population of more than one million.
The Government of Rwanda announced the Kigali Bulk Surface Water Supply PPP Project in 2013 to build, operate and transfer (BOT) the 40,000 m3/day water treatment plant through a competitively tendered bid. The Electricity, Water and Sanitation Authority (EWSA) of Rwanda managed the bidding process with the support of the Rwanda Development Board (RDB) and an International Financial Corporation (IFC) advisory team.
Metito, a global provider of intelligent water management solutions with 60 years of experience developing and managing water facilities across the world covering four continents, along with two other developers, was pre-qualified in December 2013, with the bid due in August 2014.
The successful bidder was required to submit a detailed technical and financial bid package. Considering the strategic importance of the project for the Rwandan government, Metito put together a highly competitive financial and technical package based on which Metito was awarded preferred bidder status in October 2014 after what is considered to be the first competitively tendered BOT water concession in Sub-Saharan Africa outside of South Africa.
As per the original timeline, the concession agreement was scheduled to be signed by the end of 2014 and the project was envisaged to become operational within two years after achieving financial close. However, with it being the first project of its kind in Rwanda and the region, some steps took longer than initially planned as it was critical for all parties to be diligent to ensure the project is sustainable, and to build a strong foundation that is able to set the scene for more PPPs to follow suit.
The project took around three years from the award of preferred bidder status to successfully achieving financial close. Following are the key highlights of the development process of the project before reaching financial close:
* Restructuring of EWSA– EWSA, responsible for managing the bid process and the offtaker of the project, undertook a restructuring soon after the bid submission in August 2014. EWSA was restructured into Water and Sanitation Corporation (WASAC), which is responsible for water and sanitation, and Energy Utility Corporation Ltd (EUCL) and Energy Development Corporation Ltd (EDCL), which were made responsible for electricity supply in Rwanda. As a result, realignment of the offtaker team was necessary and the processes was undertaken to finalise the concession agreement. Support from RDB and the IFC advisory team was instrumental in managing the transition and aligning the stakeholders involved.
* Developing bankable project structure– As the first bulk surface water supply project in Sub-Saharan Africa to be structured on a PPP basis, considerable time and effort were invested by the stakeholders to develop a bankable set of project agreements, which would serve as a benchmark template for future water projects on the continent. Several rounds of negotiations and all-party meetings were required, involving WASAC, RDB, Metito, the lenders and the advisory teams to collectively agree and execute the concession agreement in March 2015.
* Accommodating changes in timeline for financial close– Considering that the project was won through a competitive bid process, the winning bid was already reflective of a highly optimised financial and technical package. However, with the change in timeline resulting from the reality that some steps were taking longer than initially planned, strong commitment had to be demonstrated by both Metito and the lenders team to deliver a well-structured and sustainable project at the original bid price despite increased development and other project costs.
* Evolving financing structure– The project financing structure continuously evolved to accommodate changes in the project and cost structure. One of the key challenges faced was to manage the credit risk of the newly incorporated WASAC as the offtaker. WASAC’s credit risk was mitigated by structuring multiple layers of cash reserves to improve the credit profile of the project. Eventually, the final financing package was structured with debt secured from EAIF, the AfDB and a fund from PIDG, demonstrating their support for the project and development of the Rwandan infrastructure sector.
The key highlights of the project development and financing process are in Figure 1
The final financing package
The project requires total capital investment of approximately US$61m, which will be financed on a non-recourse basis at a leverage of 78.5%. The funding mix comprises senior debt and junior debt facilities with an 18-year door-to-door tenor and grant funding. The Emerging Africa Infrastructure Fund (EAIF), currently managed by Investec Asset Management, is the mandated lead arranger.
EAIF and African Development Bank (AfDB) each provided approximately US$19m of senior debt, with EAIF providing another tranche of US$2.6m in the form of junior debt. The project also benefits from a US$6.25m grant from PIDG’s technical assistance facility to ensure the feasibility of the project despite escalating development costs. The balance of funds required will be provided by Metito as equity. Figure 2 provides insight on the project and financing structure:
As the pioneering project in the water PPP sector in the region, the Kigali Bulk Water Project is expected to serve as the template for similar upcoming projects in Africa. The deal took four years of development effort to achieve financial close from the date bidders were invited to develop the project.
The financial close of this marquee project highlights an effective partnership between public and private sectors, paving the way for similar path-breaking and capital-intensive projects in Africa. The project is also exemplary as a catalyst that could enhance the international investor community’s appetite to invest in Rwanda and other African countries.
The Kigali Bulk Water Project aligns with the Government of Rwanda’s policy objectives outlined in the Economic Development and Poverty Reduction Strategy II (EDPRS II), targeting universal access to water and sanitation, improving the quality of water consumed, and increasing management of water supplied by the private sector. The government had set a target of 100% water access by 2017/18. According to the Rwanda Utility Regulatory Agency, water access currently stands at 86%.
The project is expected to have strong development outcomes for Rwanda and the surrounding region by:
* Providing clean potable water to the general population, contributing to improved public health, higher productivity and lower government expenses in the health sector which could then be redeployed in other infrastructure sectors
* Addressing the growing demand for clean, reliable water in the industrial sector, which would play a pivotal role in development of businesses with a high requirement for water, such as restaurants, hotels etc.
* Providing a framework for implementing water projects through a PPP framework in the Sub-Saharan Africa region, which could greatly improve the standard of living and public health, and provide economic impetus to the region
According to Metito, Africa has huge potential and it expects this to continue as critical infrastructure develops around the provision of key utilities. To undertake such capital-intensive infrastructure projects, the PPP scheme remains the best, and sometimes unavoidable formula.
Synergy Consulting provided financial and bid advisory support to Metito in winning the bid in 2014 and eventually achieving financial close for the project. Norton Rose was the sponsor’s legal adviser, and Allen & Overy the lender’s legal adviser.