The innovative seven sisters
IFC, a member of the World Bank Group, pioneered an innovative programme to finance renewables in Jordan as seven solar photovoltaic (PV) projects simultaneously signed, at the end of September 2014, financing packages worth a total of US$207.5m to construct 102 MWdc/91MWac across the country. By Christopher M Cantelmi, principal, IFC, and Matthew Wood, partner, White & Case.
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The seven plants represent the first round of the Government of Jordan’s (the Government) renewable programme that plans a total of 12 solar power plants. The initiative is so far the largest collection of privately-owned solar PV projects ever to be realised in the Middle East and North Africa region.
Assisted by common external counsel, White & Case and Obeidat Freihat, IFC set out to provide the developers of these small-scale renewable projects with efficient and affordable access to project finance. The concept focused on the synergies of aggregating all the developers into a common, fast-track financing platform to achieve a critical mass under IFC’s leadership as sole mandated lead arranger (MLA) for the group.
All clients benefited from greatly reduced transaction costs. This was achieved by sharing common IFC resources, lenders’ counsel and specialist advisers, account banks and administrative and security agents, and by agreeing to a simplified syndication process and non-negotiable “firm-but-fair” documentation.
This article explores the background to the programme and the extent to which this approach could become a model for future renewable programmes in Jordan, Egypt and elsewhere in the region.
The Government was an early promoter of renewable energy in the region, given the challenges resulting from its ongoing dependence on expensive imported fossil fuels used for power generation, the sudden interruption of natural gas supplies from Egypt at the outset of the Arab Spring and persistent domestic growth in power demand.
Thus, it was recognised that the development of a renewable power alternative would have a transformational impact on the Jordanian economy and would also reduce the dependence on imported fuel, cut overall costs of generation and reduce the growth of greenhouse gas emissions associated with conventional power generation.
After three unsuccessful attempts during the previous decade to apply its otherwise well-proven conventional independent power project tender model to various proposed wind projects, the Ministry of Energy & Mineral Resources (MEMR) changed its course on renewable energy procurement in 2010 in favour of a regulated direct proposal scheme enacted through enabling legislation.
The main distinction is that, while still setting a level playing field and common rules of engagement with some competitive pressure due to limited grid capacity, the direct proposal process acknowledges the commercial ability of the individual developers to choose and optimise their own sites and technologies rather than these being imposed through specific tender processes.
Further benefits included allowing multiple projects to proceed in parallel in multiple locations according to available grid capacity as well as providing opportunities for local businesses to enter the market. Unique to the Round 1 projects, the tariff price was also fixed and published in advance, ensuring that a clear and uniform commercial signal was sent to all developers from the outset.
As a prelude to, and in preparation for, Round 1, MEMR successfully piloted the direct proposal scheme through the directly negotiated 117MW Tafilah wind farm project, which reached financial close in November 2013 after many years of planning, structuring and extensive negotiation.
As the project’s financial adviser and sole mandated lead arranger, IFC together with the Tafilah lead developers – EPGE and Samer Judeh, later joined by InfraMed and Masdar– fully engaged with the Government during the two years of negotiations – eventually agreeing on the transaction structure and its suite of project documents, which were to become MEMR’s standardised template for the entire direct proposal scheme.
The collaborative multi-year process that led to Tafilah’s successful execution and financing therefore also provided the Government with the live forum to advance the package of enabling legislation, essential economic incentives and bankable documentation that could be copied over and applied, with only slight adaptation (eg, for issues unique to each technology) to the entire direct proposal scheme.
In parallel with the development of Tafilah, MEMR formally launched Round 1 calling for expressions of interest in June 2011 and qualified 34 wind, solar PV and concentrated solar power developers on April 23 2012. Over the following months as Tafilah took shape, MEMR executed memoranda of understanding with the Round 1 developers essential to give them sufficient comfort to incur costs and commence the more detailed feasibility and design phase.
Round 1 was split into three parallel tracks according to technology, each timed according to its complexity and development needs. Given the relative simplicity of solar PV projects, MEMR chose to fast-track this group, setting March 2013 as their deadline for submitting generation proposals and allocating roughly 200MWac of readily available spare grid capacity concentrated largely in the high irradiation areas around the city of Ma’an but also allowing 10MWac in Aqaba and a further 20MWac in Mafraq governorates.
Twelve PV projects – comprising eight 10MWac, three 20MWac and one 50MWac projects – were ultimately put forward. After a further year of starts and stops, intermixed with tedious negotiations, all 12 projects successfully entered into their respective power purchase agreements (PPAs) with the National Energy Power Company (NEPCO) at the end of March 2014, starting a six-month countdown to achieve financial close.
During this process, the Round 1 developers were afforded little traction from the broader lender community, with most market participants either unconvinced by the Government’s commitment to renewable energy or simply too busy to deal with the assortment of smaller, local or otherwise lesser-known developers, each individually pursuing small projects that on their own lacked scale or relationship.
Further limiting the attraction to conventional lenders, many developers at this stage were either new to the industry, lacked international project finance experience and/or had not completed their equity raising, let alone had clear ideas on how to realise their developments once these were awarded.
To convince the sceptics and firmly establish the viability of the Jordanian renewable energy programme in a manner that could actually transform the electricity sector and not just provide an odd success here and there, MEMR and NEPCO needed to not only follow Tafilah with Round 1 PV in close succession but they also needed to show that Round 1 PV could be completed in its entirety in a successful manner.
Both also recognised the complexity of dealing with 12 live transactions at the same time and the need to standardise and co-ordinate their process on a “one-size-fits-all” basis, despite the efforts of several developers to negotiate exceptions. For this reason, long before being mandated by any one client, IFC stepped in with dedicated resources to actively support and informally advise the Round 1 developers throughout their long negotiation process, primarily encouraging them all to behave as a single unit and act collectively through their local industry association, EDAMA.
Through this process, the IFC team realised that, while most of these projects were essentially too small on an individual basis to be able to attract long-term financing on their own or to be able to sustain the high transaction costs and long processing periods that conventional project finance would normally demand, they all had remarkable similarities – such as identical 20-year PPAs, guarantees from the Ministry of Finance, interconnection and land lease agreements and, although not identical, similar PV technologies.
All but three of the 12 projects were located side-by-side in the Ma’an Development Area near the city of Ma’an and another in a similar zone in Aqaba, with only two actually located on private land.
Inspired by the Government’s uniform approach, IFC engaged early with the other development finance institutions – not just to co-operate at the obvious high level issues of taking common cause vis-à-vis the Government on specific bankability issues unique to PV – but more fundamentally on how to create a common financing platform able to serve all of the projects as a whole portfolio rather than have each lender “cherry pick” projects based on project size or relationship.
Given the issues stated above, “cherry picking“ could have caused the majority of the projects to struggle or fail under the combined pressure of high transaction costs and short implementation periods with little access to finance.
Although all 12 Round 1 projects were invited to join the programme, seven appointed IFC as their sole MLA, giving the programme its required critical mass. The final list of projects is as follows in Table 1.
Given that the Round 1 PV projects were composed almost entirely of small 10MW–20MW projects, there was an obvious sensitivity over their ability to apply conventional project finance techniques. The reasoning was that it would be difficult to justify the relatively high transaction costs and intensive adviser dependence in the context of projects of such a limited scale. In addition, it would have been challenging for individual developers to attract competitive financing proposals on a standalone basis – particularly in the absence of any strategic relationships or larger portfolios that would have been of interest to the usual project finance lenders.
Driven by a commitment to assist the Government in the delivery of its renewable projects and an ability to “think outside the box”, the IFC team set out to formulate an alternative approach that would provide each individual developer with a “one-stop-shop” to source its entire financing needs on a firm project finance footing whilst achieving economies of scale collectively for all participants.
The answer laid in extending the programme approach adopted by the Government at the PPA stage to the actual financing of each project. In this way, IFC committed to provide a template set of common terms to be applied uniformly to each project, both in respect of commercial terms such as pricing and tenor together with the actual form of documentation.
IFC also committed to its clients to negotiate on their behalf collective fee rates from the various common suppliers to the programme, including not only the obvious lenders’ legal counsel, technical and insurance advisers, but also the clients’ agents and account banks – thereby keeping transaction and running costs proportional to the size of each transaction.
The foundations of IFC’s approach were laid during the initial PPA negotiations, where IFC played an intermediary role between the group of developers and NEPCO. In this way, IFC was able to ensure a consistent approach to issues such as archaeological discoveries, force majeure and timing whilst ensuring that the PPA, the document around which each financing would subsequently be built, would be “bankable”, enabling future syndication of the projects.
The principle was to set uniform financing terms, as well as a uniform set of key project documents across all projects – the only exception being the engineering, procurement and construction (EPC) and the operations and maintenance (O&M) arrangements. Since six of the projects ultimately financed by IFC were located on plots of land in Ma’an and Aqaba allocated by the Government for this purpose, a collective approach to land and permitting issues could also be extended to these projects.
On the financing documentation side, the aim of the IFC programme was to produce a standard set of financing and security documents to be prepared on a balanced basis to minimise the need for extensive and time-consuming negotiations. Consistent with this, each developer was required to subscribe to the template principle from the outset and a high degree of trust was required between each party to guarantee the integrity of IFC’s common approach.
Further, each developer was encouraged to adhere to IFC’s principle that one size must fit all – meaning that individual deviations and bilaterally negotiated points would not be permitted. Given the size of the respective projects and the speed at which signing was to be achieved, IFC demanded a simplification of the suite of financing documents to accelerate review and negotiation of the drafts by each developer and its counsel.
IFC mandated a common set of advisers led by White & Case and Obeidat Freihat for the legal aspects, DNV-GL and Mott MacDonald for the technical and environmental aspects and INDECS for insurance. Further, agency roles in connection with the financing, such as security agents and account banks, were led and negotiated by IFC on a programme basis to ensure bulk discounts and generate efficiencies for each developer.
The aim of these appointments was to further reduce the burdensome transaction costs associated with a project financing by pooling such resources between all developers and implementing the efficiencies of a single set of template financing documents and approach to due diligence matters.
In terms of syndication to other lenders, IFC, as MLA, undertook to each developer that it would take sole responsibility for attracting the remaining debt requirements on a pooled basis, requesting other development finance institutions and local banks to also approach the projects on a collective basis.
In doing so, IFC, using its dedicated syndications team, set out to benefit from existing multilateral co-operation arrangements and also its standing amongst local banks for structuring and leading project financings – further benefiting individual developers that may have had limited exposure to the lending markets in the past. A common Information Memo and Data Room were prepared for the programme as a whole and distributed to interested financial institutions.
Immediately upon being mandated by the five developers, representing seven individual projects, IFC circulated a long-form term sheet reflecting the standard provisions to be applied to all projects and the consistent approach to pricing. Simultaneously, White & Case and Obeidat Freihat commenced drafting a set of template financing documents together with a template due diligence report.
The process was designed to enable the negotiation of such template documents by the parties, before being “split out” into tailored documents for each individual project at the last possible moment – thereby safeguarding the integrity of the programmatic approach whilst avoiding the inefficiency of working on seven individual sets of documents.
Developers were given one opportunity to submit comments on the template finance documentation, after which a series of bilateral meetings were held in the final week of August with each developer allocated a maximum of two days (but most only needing one) to discuss any issues and for IFC to provide further background on the approach and process being followed.
The meetings represented the only face-to-face dialogue required during the entire documentation process as the deadline of end of September was set for signing in compliance with the timetable contained in each PPA and IFC’s commitments to the Government to meet it.
The meetings were also timed to coincide with separate presentations by each developer to a group of potential lenders with the purpose of finalising the likely syndication process and allowing IFC to proceed with a near-final allocation of lenders for each project as needed.
In terms of syndication, the lenders were split between parallel loans (comprising FinnFund and OPEC Fund for International Development) required for the larger transactions and B lenders (ie, participants under the IFC loan agreement, comprising Arab Bank (Bahrain), Europe Arab Bank and FMO).
The programme was also fundamental in securing the most competitive possible margins for each developer from the syndicate of lenders – since lenders were able to price for larger volumes and spread internal costs across a larger portfolio of assets. IFC’s involvement and structuring also provided comfort to the other lenders during their due diligence and filled certain voids created by the lack of direct relationship between the syndicate lenders and many of the developers.
Upon receipt of final comments and queries following the meetings, as the last stage of the process, the template documents were locked and finally spun out into tailored sets customised for each project’s unique details.
In pioneering this approach in Jordan, IFC has successfully demonstrated the huge potential of a co-ordinated programme approach to future small and medium-sized renewable energy projects in Jordan and elsewhere in the world. Indeed, the simplification of documentation, the pooling of transaction costs between multiple projects and the ability of IFC to conclude a successful syndication with very competitive pricing, demonstrate the great value that such an approach can bring to developers – particularly those in emerging or challenging jurisdictions where prior exposure to international lenders has been limited.
The wholehearted commitment of the IFC team to a process that commenced with its role as an interface on behalf of each developer at the PPA negotiation phase and culminated in the signing of financing documents within an incredibly aggressive timeline for so many projects in parallel, demonstrates the continued importance of multilateral finance institutions and their proactive approach to the development of renewable projects in fledgling markets across the world.
For Jordan in particular, the benefit for future rounds of renewable projects and their developers is a solid PPA structure and a set of financing terms that are universally accepted by participants in the market – a sound foundation for the financing of many more renewable projects in the years to come and continued success of the Government’s fundamentally important focus on the broadening of its energy mix.