TRANSACTIONAL: Project Development / Finance: First Energy Concession under innovative model to reach financial close in the Kingdom of Saudi Arabia

by King & Spalding
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Jabal Omar Development Company (JODC) recently embarked on its first PPP initiative in the Holy City of Makkah, a district energy project (Project) to service the company’s USD5.5bn mixed-use development at Makkah Al-Mukarramah, Kingdom of Saudi Arabia (Development).

JODC is the largest developer in Saudi Arabia by market capitalization and is developing and constructing the Development as well as owning, developing, managing, investing, selling, and renting real estate and plots of land in the area. The entire Development will comprise up to 37 towers and many of the world’s leading hotel brands to provide accommodation for 45,000 pilgrims. It is one of the largest hotel projects of its kind in the world.

When complete, the Project will serve the entire Development and will be one of the largest project financed deals of its type in the Kingdom of Saudi Arabia.

The Project involves JODC granting a concession to a third party special purpose vehicle (SPV) to design, build, finance, operate, and maintain a district cooling system with a plant capacity of up to 55,000TR for a 25-year period (Term). The “concession” element of the transaction means that the SPV has the exclusive right to provide district cooling services to all “end users” within the Development, in return for payment of a tariff from each “end user.”

The Project is comprised of three key components:

  1. a district cooling (DC) plant which contains water and uses chilling technology to cool the water to 5 degrees Celsius, plus pumps to move water out of the DC plant;
  2. a DC network that consists of two long pipelines: one to supply the chilled water throughout the Development area; and one to bring the return water back to the DC Plant; and
  3. energy transfer stations, which are rooms at the base of each building within the Development, that contain the pipes and equipment necessary to receive chilled water and convert it into chilled air and return the water back into the DC network.

The SPV is granted a concession to design, build, finance, operate, and maintain all of these components. The SPV is also responsible for entering into various services agreements with “end users,” in this instance, the companies that will function in the Development (e.g., hotels and commercial and retail developments), for the supply of chilled water for long-term air conditioning needs. The SPV will charge certain “tariffs” to “end users” under the services agreements. This is the SPV’s revenue stream for the Project that will enable it to repay debt to the financiers, a concession fee to JODC, a return on equity for the shareholders to the SPV, and all costs and expenses to the EPC contractor and operator. The services agreements will operate for the duration of the Term and will require JODC and future third-party “end users” to pay a tariff to the SPV in exchange for the SPV performing certain “DC services” (mainly providing chilled water).

In order to secure project financing for the Development and ensure its ”bankability,” the lenders required the SPV and JODC to enter into a range of financial and security documents, including a direct agreement in order to provide them with the right to step in and cure defaults of the SPV.

The Project is significant because it is the first project financed district energy transaction in the Middle East under a new “end user BOT concession” model. Future deals in the GCC have and will continue to follow this model. This model differs from traditional IWPP and IPP models, where a Government or quasi-Government concession grantor acquires the complete power or water offtake, provided the facility is made available.

The end user BOT concession model is being adopted by sophisticated developers on many other project financed district energy schemes across the Middle East.

Hoda Naghdy
Abu Dhabi
+971 2 596 7009
hnaghdy@kslaw.com

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Khaled Dahlawi
Abu Dhabi
+971 2 596 7005
Riyadh
+966 1 466 9411 kdahlawi@kslaw.com
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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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