CASE STUDIES IN BLENDED FINANCE FOR WATER AND SANITATION Blended Financing for the Expansion of the As-Samra Wastewater Treatment Plant in Jordan August 2016 LEBANON SYRIAN Summary Overview A. R. IRAQ Location: Amman and Zarqa, Jordan, Middle East and WEST BANK North Africa AND GAZA Zarqa Approach to Blended Finance: A blended financial package was put in place to finance the expansion of the As-Samra Wastewater Treatment Plant. The project ISRAEL was undertaken by the Samra Wastewater Treatment Amman Plant Company Limited (SPC), a private operator that was recruited through a Build-Operate-Transfer (BOT) JORDAN contract to finance, upgrade, and operate the treatment plant. ARAB REP. SAUDI OF EGYPT ARABIA The private operator was required to mobilize private financing, which it did through an equity contribution and a syndicated limited recourse loan provided by domestic banks in local currency. The overall financial package also included public funds provided as viability gap fund- ing (VGF), including contributions from the Government extension IBRD work. 42436 | AUGUST scarcity is considered the most Water 2016 of Jordan and a grant from the Millennium Challenge important natural constraint to growth and development Corporation (MCC). Public funding was critical to help in the country. structure the deal and to convince private financiers to step in and provide what was, at the time, the longest The As-Samra Wastewater Treatment Plant was initially maturity ever achieved for a Jordanian dinar-denomi- designed in 2003 to treat wastewater for the 2.3 million nated limited recourse loan. inhabitants of Amman, while supplying quality irrigation water to the surrounding region. Construction of the plant was completed in 2008. However, the country’s Context rapid population growth and a large influx of refugees led to the approach of the plant’s capacity limits (both in Jordan is one of the most water-scarce countries in the terms of the volume of wastewater received and solids world. Available water resource levels have fallen with an processing) sooner than anticipated. For this reason, annual per capita quantity of water approximated at 155 the Government of Jordan, through the leadership of m3 as of 2013. While water demand outstrips supply, it the Ministry of Water and Irrigation (MWI), prioritized the is estimated that two-thirds of available water resources expansion of the treatment plant in order to meet the are used for agriculture. Scarce water resources com- needs of the population in two of Jordan’s most popu- bined with high population growth have caused extensive lous cities, Amman and Zarqa. stress on water infrastructure, requiring rehabilitation and Case Studies in Blended Finance for Water and Sanitation: Blended Financing for the Expansion of the As-Samra Wastewater Treatment Plant in Jordan Financial Structure and Approach to expansion of the As-Samra Wastewater Treatment Plant, Blended Finance while the Government of Jordan contributed an addi- tional US$20 million. Donor and public funding, which The Millennium Challenge Corporation (MCC) committed can be referred to as “viability gap funding”, was critical to assist the MWI with the expansion project by providing for leveraging an additional US$110 million in private transaction advisors and viability gap funding (VGF). This financing, including US$102 million from private debt and proved crucial to securing private financing for expan- US$8 million in equity mobilized by the SPC. sion of the wastewater treatment plant through a build- operate-transfer (BOT) contract, a form of public-private Commercial debt was secured through a standard partnership. The BOT contract was signed in 2012 project finance limited recourse loan, from a syndicate of between the MWI and Samra Wastewater Treatment Jordanian local banks and financial institutions arranged Plant Company Limited (SPC), a private company whose by the Arab Bank. The limited recourse loan tenor is investors include Morganti, Infilco Degrémont, and Suez for 13 years, with an option to extend up to 20. At the Environment. Responsibilities for financing, project time, this was the longest maturity that had ever been design, construction, operation, and maintenance were obtained for a Jordanian dinar-denominated limited awarded to the SPC for a 25-year period. Construction recourse loan. Additional security was ensured through on the expansion began soon after financial closure, a cash waterfall account structure, and the agreement and the project became operational in October 2015. included step-in rights for the banks. The denomination The plant expansion was a key part of a water re-use of the loan in local currency provided the clients with program that also improved the allocation of water protection against foreign exchange risk. The interest resources by enabling the use of high-quality treated rate during the three-year construction period for the wastewater from As-Samra in agriculture, thereby freeing treatment plant expansion was fixed (7.25 percent during up freshwater for higher value use in municipalities. year one; 7.75 percent during year two; and 8.25 per- cent during the final year). Following the commissioning The diverse blend of financing that was accessed to of the plant, the loan evolved to a floating rate linked to fund the US$223 million project is what makes this a the average prime lending rate of four local banks. unique case. MCC provided a US$93 million grant for the FIGURE 1  Viability Gap Financing for the As-Samra Wastewater Treatment Plant Expansion, Jordan: Financial Structure Government of Jordan: Project Sponsors Millennium Challenge Ministry of Water and Lender Syndicate Corporation (MCC) Suez Environment/IDI/ Irrigation (MWI) led by Arab Bank Morganti-CCC Viability Gap Funding Limited Investment Debt Service Recourse Equity Returns Grant Government Loan Legend Contribution Supply of Finance Repayment Flows Samra Wastewater Treatment Public/Donor Plant Company (SPC) Agencies Private Financiers Revenues/Project Cash Flows Financial Intermediary As-Samra Wastewater Service Provider Treatment Plant 2 Water Global Practice Case Studies in Blended Finance for Water and Sanitation: Blended Financing for the Expansion of the As-Samra Wastewater Treatment Plant in Jordan Payments from the MWI are guaranteed through a Lessons Learned reserve account, the replenishment of which is in turn backed by a guarantee from the Ministry of Finance. Viability gap funding can play a critical role. The Figure 1 illustrates the financial structure for the expan- MCC grant brought down the capital costs of the project sion project. and allowed it to be financially viable, while meeting the needs of all project participants. This proved critical for A critical component in the financial structure is the the mobilization of commercial finance. existence of an efficient securitization of cash flows from the original plant (constructed between 2003-2008) to Donor requirements led to nontraditional project support the equity element of the financing (from project finance agreements. Typical project finance is limited to sponsors) invested in the expansion project. This meant debt and equity, but in this case, the blending of grant the sponsors were able to invest internal cash flow from financing brought certain donor funding requirements to the original project as equity. The resulting debt-to-equity the project, and resulted in more complex negotiations ratio is 80:20, including investments from the original compared with a normal project finance transaction. plant. While the grant funding from MCC increased the Among other requirements, it was necessary to adhere investment appeal to private investors, the financial to MCC’s and Jordan’s strict standards for treatment, structure was designed to ensure that the grant would storage, management, and disposal of sludge to ensure not subsidize the private sector participants, and instead environmental sustainability. Ultimately, the project’s be directed to benefit consumers connected to the sys- innovative approach to blending financial sources made tem. The SPC project sponsors’ investment returns are it a success, and at financial close all stakeholders were thus based on their portion of the capital investment. extremely satisfied. Results References The As-Samra Wastewater Treatment expansion project Keenan, R. and M. Norman. 2012. “As-Samra Sets Expansion became operational in October 2015. In line with its origi- Template.” Project Finance International, Issue 491, nal design, the expansion increased the average daily October 17, 2012. capacity of As-Samra to treat wastewater from 267,000 MCC. 2012. “MCC Completes First Major Build-Operate- to 365,000 m3 per day (over a one-third increase). While Transfer Project Financing In Jordan.” Millennium Challenge additional outcomes are still being assessed, it is clear Corporation. https://assets.mcc.gov/press/action-2012- that the expansion improved water resource manage- 002-1136-01-first-major-build-operate-transfer-project.pdf ment in Jordan. The proportion of blended wastewater MCC. 2016. “Recharging the River and Growing Incomes in used for irrigation has grown from 61 percent to 83 per- Jordan,” Millennium Challenge Corporation. Accessed June cent four years later, freeing up additional freshwater for 13, 2016. https://www.mcc.gov/resources/story/story-kin- domestic use for an estimated 2,020,000 people. apr-2015-recharging-the-river-and-growing-incomes-in- jordan. The MCC grant, coupled with the Government of WEF OECD. 2015. Blended Finance Vol. 1: A Primer for Jordan’s contribution, helped reduce the capital costs Development Finance and Philanthropic Funders. Geneva: while enabling a project with important economic and World Economic Forum. environmental benefits to become financially viable. Without the blended finance approach, the private finan- ciers would likely not have provided the debt component of the package, and the market-based equity costs would have rendered the project unaffordable to the Government of Jordan. This blended financing experi- ence offers a model that holds potential for future infra- structure projects in Jordan and other emerging markets. www.worldbank.org/water 3 Case Studies in Blended Finance for Water and Sanitation: Blended Financing for the Expansion of the As-Samra Wastewater Treatment Plant in Jordan This case study is part of a series prepared by the World Bank’s Water Global Practice to highlight existing blended finance experiences in the water sector. Blended finance refers to “the strategic use of develop- ment finance and philanthropic funds to mobilize private capital flows to emerging and frontier markets,” as per the OECD definition (WEF OECD, 2015). Concessional funds can be used in a catalytic manner to open up new oppor- tunities for commercial financing, by providing technical assistance to borrowers and lenders to help them become more familiar with each other, help structure transactions, provide credit enhancement mechanisms, etc. Private capital flows can help with meeting immediate financing needs for investment in the water sector but ultimately need to be repaid. Repayable financing from private sources to the water sector can come in vari- ous forms, including as commercial bank loans, bonds or equity. To obtain such financing, water-sector actors need to be able to repay the borrowed amounts and the associated funding costs, which means that they need to be deemed “creditworthy” by providers of finance. Contact Us For further information please contact Joel Kolker (jkolker@worldbank.org) or Sophie Trémolet (stremolet@worldbank.org). 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