v 2.00 of essay on international project finance

International Project Finance 1ICP7A1Word Count – 4,933, plus references & Annex.Submitted on 14-Apr-09

From Ashkelon

To Ashdod

A tour around

Project Finance in Israel

© Howard Brown Student reference number W11572970 1


Table of contents

I - Overview

II - Project Appraisal

III - Risk Analysis

IV - Conclusions



I. Overview

The objective of this Paper is to provide a potential Sponsor +/or Lender with facts and opinion based upon those facts that will assist the Reader to make an informed decision upon their possible future association with Desalination Plants financed by Project Finance, in Israel. The method will be to examine past & present Project Finance ventures in Israel and in particular, those that relate to Desalination Plants.

Gustavo Kronenberg, the director-general of VID Desalination Company Ltd., (“VID”). the SPC that controls the Ashkelon project, said in 2007, shortly after the new Ashkelon portable Desalination plant had begun pumping water, that this represented a “… true revolution in [Israel's] water network. We will soon enter a situation in which there will be no more shortage of drinking water…"

On 01-Feb-09, Mekorot Development & Enterprises (“MD&E”), a subsidiary of the Israeli national water company, issued a tender for the design, building, commissioning and supervision on a turnkey basis of the Ashdod seawater desalination plant.1 It will have production capabilities of at least 16,000 m³/h (384,000 m³/d) and at least 100 million m³/year.

The successful bidder would, at the option of Mekorot, be able to join MD&E as a shareholder of up to 40% in the special project company and/or the operation and maintenance company, which will be established by MD&E for the project.

Time Schedule for Proposed Ashdod Project

1 http://www.desalination.biz/news/news_story.asp?id=4727


http://www.desalination.biz/news/news_story.asp?id=4727


The final date for tender submissions is 01-Jul-09 2009. A Bid Security of NIS 20,000,000 (twenty million NIS) fulfilling the conditions indicated in the Bidding Documents must accompany all bids. The winning bidder will be announced on 01-Sep-09 & the plant is expected to begin producing desalinated water in 2012.

II Project Appraisal

Desalination Projects in Israel

Israel has completed or in construction 5 large state-of-the-art desalination plants, plus 31 smaller facilities. Some experts believe that ½ of Israel's potable water supply will eventually come from desalination.2 Israel recycles 75% of its water. The second largest water recycler is Spain, with 12% recycling.3

2 Desalination No "Silver Bullet" in Mideast, by Mati Milstein in Amman, Jordan for National Geographic News on May 22,

2008, http://news.nationalgeographic.com/news/pf/56886964.html 3 http://www.verticalpulse.com/my_weblog/the_water_industry/


http://www.verticalpulse.com/my_weblog/the_water_industry/

http://news.nationalgeographic.com/news/pf/56886964.html


Fig. 3: Distribution of Mekorot's Desalination Sites - Active and Reserve Installations (1999) 4

The Ashkelon desalination plant is the largest and most advanced negative osmosis facility in the world.5

The negative osmosis process is attractive and has export capability. Israel Desalination Enterprises Technologies (“IDE”), one of the three sponsors VID, has recently won tenders to build 3 desalination plants in Asia worth a total of $80m. 6 Thus association with the anticipated Ashdod Desalination Plant will place a participant in an excellent position not merely to bid for further projects in Israel, but also elsewhere in the world.

The Ashkelon Desalination Project

The estimated global market for fresh water amounts to some $ 400b. The World Bank estimates that in the Middle East, there are approximately 5% of the world's people but less than 1% of its renewable fresh water. The UN Population Fund projects that at present consumption rates, in 2025, 5 billion of the 7.9 billion people on Earth will live in areas where safe water is scarce. Thus involvement in the Israel Water Recycling Industry has ample scope for application in other areas of the world.

4 http://www.biu.ac.il/soc/besa/waterarticle1.html 5 http://www.jr.co.il/articles/desalination.txt 6 http://www.reuters.com/article/rbssEnergyNews/idUSL2031912320080520


http://www.reuters.com/article/rbssEnergyNews/idUSL2031912320080520

http://www.jr.co.il/articles/desalination.txt

http://www.biu.ac.il/soc/besa/waterarticle1.html

International Project Finance 1ICP7A1Word Count – 4,933, plus references & Annex.Submitted on 14-Apr-09According to VID's agreement with the State,7 the Ashkelon project will run as a build-operate-transfer (“BOT”) deal, by which VID will operate the facility for 25 years (including the 3 year construction period) before it becomes government property. VID is a single purpose company created especially for this Project.8

Ashkelon Project Sponsors

V.I.D. Desalination comprises 3 shareholders9:i) IDE Technologies Ltd. (50%), leading the Joint-Venture;ii) Veolia Water S.A. (25%);iii) Elran (D.D.) Infrastructures Ltd. (25%).

IDE Technologies Ltd. is a 50/50 subsidiary of the Delek Group, & Israel Chemicals Ltd. IDE has built 350 desalination facilities in 40 countries, including 65 in Spain & 20 in the Indian sub-continent.

Veolia Water S.A. is wholly owned by the Veolia (formerly Vivendi) Group, the 2nd largest communication company in the world. Veolia Water, created by the merger between Générale des Eaux and US Filter in September 1999, is the international brand name of Veolia’s water business.

Elran D.D. (formerly Dankner Ellern) Infrastructures Ltd. is a subsidiary of Dor Gas, the First International Bank of Israel, and the Dankner Group

In Israel generally project sponsors are required to guarantee their equity contributions either by up front payments or via undertakings (underwritten through credit support instruments from strongly rated banks) to inject equity upon the achievement of a defined construction milestone. Sponsors are also typically required to provide other means of support, such as completion guarantees, which tends to transform Israeli project financings into limited recourse rather than purely non-recourse financings (but this is, generally a matter for intense negotiation).10

Ashkelon Project Financing Plan

The financing plan for the Ashkelon Project11 was signed on 22-Jan-03. The whole project debt was raised locally and is NIS-denominated. The project sponsors provided the project equity which comprised approximately 24% of the capital cost. The remaining 76% of the project funds has been raised as a limited recourse debt through a special financing arrangement.

7 http://www.jr.co.il/articles/desalination.txt 8 http://www.ide-tech.com/News_item.asp?iid=5850&pid=1600&ppid=1489&z=4&p=19 http://www.ide-tech.com/News_item.asp?iid=5850&pid=1600&ppid=1489&z=4&p=1 10

In March 2000, in Project Finance Magazine an article entitled -Israel comes of age was written by Paul Rubenstein, advocate at Herzog Fox & Neeman, Tel Aviv - http://www.projectfinancemagazine.com/default.asp?Page=20&PubID=157&ISS=10987&SID=434296&SM=ALL&SearchStr=israel&itemCount=4 11 http://www.ide-tech.com/News_item.asp?iid=5850&pid=1600&ppid=1489&z=4&p=1


http://www.ide-tech.com/News_item.asp?iid=5850&pid=1600&ppid=1489&z=4&p=1

http://www.projectfinancemagazine.com/default.asp?Page=20&PubID=157&ISS=10987&SID=434296&SM=ALL&SearchStr=israel&itemCount=4






The three tranches have similar terms, i.e., CPI-indexed fixed interest rate over 23 years - compared to the BOT agreement term of 25 years - with an average life of approx. 14.5 years.

In addition, Standby Facilities were provided by Shareholders and Lenders to cover unforeseen cost overruns during the Availability Period of the Facilities (2 ½ years), with all undrawn amounts being cancelled at the end of the Availability Period. The Standby Facilities represent 10% of the total Financing Requirements.

The BOT Project comprises the financing, design, construction, operation and transfer of a seawater desalination facility with guaranteed production capability of 100,000,000 m3/year for a term of 25 years. The production of the plant is sold to the Water and Desalination Authority (“WDA”), whose obligations under the BOT agreement are deemed to be the obligations of the State of Israel. Following termination of the Agreement, the Facility will be transferred to the State.12

Infrastructure background to the Ashkelon Project

The main input for the operation of the Ashkelon seawater desalination / purification plant is energy. Accordingly the project initiators contracted Delek an Israeli Fuel Company (one of the owners of IDE Technologies Ltd.) to construct a natural gas fuelled power supply station at its own expense, at an estimated cost of US $70 million. The intended output of this power supply station is some 80 megawatts of electricity, of which the water desalination / purification plant is expected to, consume about 50 megawatts.13 The power plant was built on the basis that it will be fuelled by natural gas from Egypt.14.

The feed water to the plant is pumped from the Mediterranean Sea, from a pumping station is located on the sea shore, 400 meters from the site. The water quality is typical Mediterranean sea water.15

Project Timescale

In respect of the Ashkelon Project, it took a record 14 months from issuance of the Tender Documents until the announcement by the Tender Committee of the Successful Bidder. Please see Annex I, for a schedule of the Project Milestone Dates for the Ashkelon Project.16 17

12 http://www.ide-tech.com/News_item.asp?iid=5850&pid=1600&ppid=1489&z=4&p=1

13http://ppp.mof.gov.il/Mof/PPP/MofPPPTopNavEnglish/MofPPPProjectsEnglish/PPPProjectsListEng/MitkaneiAtpalatMaim/

AshkelonWater/ 14 http://www.jr.co.il/articles/desalination.txt 15 http://www.ide-tech.com/News_item.asp?iid=5850&pid=1600&ppid=1489&z=4&p=1 16 http://www.ide-tech.com/News_item.asp?iid=5850&pid=1600&ppid=1489&z=4&p=1 17 http://www.water-technology.net/projects/israel/specs.html


http://www.water-technology.net/projects/israel/specs.html




http://ppp.mof.gov.il/Mof/PPP/MofPPPTopNavEnglish/MofPPPProjectsEnglish/PPPProjectsListEng/MitkaneiAtpalatMaim/AshkelonWater/




The proposed phases for the Ashdod Project are:-

Ashkelon Project Technical Data

Other technical Data includes18

Contribution to national demand 5–6% totalInitial filtration pools 20Treatment 32 RO trains on four floors;

40,000 membrane elementsPlant footprint 75,000m² (300m x 250m)Power plant Dedicated gas turbine –

80MW capacity, integrated cycleGrid connection 161kV overhead lineMaximum nominal electrical consumption <4kWh per m³ product water

Water Data:

Feed water input temperature 15–30° C18 http://www.water-technology.net/projects/israel/specs.html


http://www.water-technology.net/projects/israel/specs.html

International Project Finance 1ICP7A1Word Count – 4,933, plus references & Annex.Submitted on 14-Apr-09Feed water salinity 40,750ppm TDSProduct water salinity <40ppm TDSSalinity reduction 99.9%Boron reduction >92%

Set out above is a graphic which seeks to explain the Desalination Process that does occur in the Ashkelon Project.

Set out below is the proposed process flow for the Ashdod Project



Ashkelon Project products services and markets

According to the BOT contracts the State of Israel is committed to purchase, (take or pay) at least 100,000,000 m3/year19

The overall revenue over the period of the contract will be in the region of $825m.20

The initial price of the water provided to Mekorot, the government water company, stands at roughly NIS 2.60 (52.7 US cents according to the tender submitted) per cubic meter - or just over one-quarter of an agora per litre of high quality, low sodium water.21

Price Breakdown Graphic22

19 http://www.desline.com/Geneva/Veolia.pdf

20 http://www.water-technology.net/projects/israel/

21 http://www.jr.co.il/articles/desalination.txt 22

http://www.desline.com/articoli/5772.pdf


http://www.desline.com/articoli/5772.pdf


http://www.water-technology.net/projects/israel/

http://www.desline.com/Geneva/Veolia.pdf


More recent tenders for similar projects both in Israel and abroad have put the price of water at around $0.80 to $1, due to the latest rises in the price of both raw materials and energy inputs and rising interest rates.

Gustavo Kronenberg, CEO of VID, has indicated that 10 years ago, desalination cost $1.10 per cubic meter. It now costs $0.60, and growing demand and advances in technology will continue to drive costs lower.” 23

“China alone will propel tremendous demand for desalination: China’s goal is to produce 5.5 billion cubic meters of desalinated water a year, 55 times the capacity of the Ashkelon facility. China is expected to invest $18.6 billion a year in water desalination by 2020,” according to Mr. Wanetick. Thus involvement in the Ashdod Project will strategically position a member for future input into other projects elsewhere e.g. China

Israeli Regulatory & Environmental Information

Set out below is a graphic taken from the pre-tender conference for the proposed Ashdod Desalination Project which illustrates the spread of permits and regulatory approvals as between the

SPC : EPC : O&M24.

23 http://www.verticalpulse.com/my_weblog/the_water_industry/24http://www.mekorot.co.il/Eng/ProfessionalServices/MekorotDevelopmentEnterprise/Documents/Ashdod%20Conference %20Presentation2.pdf


http://www.mekorot.co.il/Eng/ProfessionalServices/MekorotDevelopmentEnterprise/Documents/Ashdod%20Conference%20Presentation2.pdf


http://www.verticalpulse.com/my_weblog/the_water_industry/


The Israeli government recognises the benefits that this form of financing can have upon its infrastructure projects. The public-private partnership (“PPP”), enabled government to involve the private sector in the development of infrastructure in the country. 25. For all sides there were benefits. The - Public sector had a level of certainty for schedule and cost. - Private sector had continuity for the delivery of its service, (usually 20 to 30 years).

The Israeli government has, in the past, provided tangible support to projects of national importance. In the Cross Israel Highway project, in order to make the project bankable, the government agreed to offer tangible support in the form of a sophisticated traffic revenue support mechanism pursuant to which the government guaranteed traffic levels below certain minimum levels (subject to various exceptions, of course), and shared in the upside, where traffic levels exceed basic forecast levels.26

Other forms of support which have been offered by the Israeli government include the passage of special enabling legislation to streamline the implementation of projects, the offering of a fast-track through planning and regulatory bodies, agreement to accept certain change of law risks and the provision of specific tax pre-rulings to clarify the application of certain taxation laws to the terms of a particular project.

25 http://www.iflr1000.com/LegislationGuide/88/Public-private-partnerships-an-effective-model-for-project-financing.html 26

http://www.projectfinancemagazine.com/default.asp?

Page=20&PubID=157&ISS=10987&SID=434296&SM=ALL&SearchStr=israel&itemCount=4




http://www.iflr1000.com/LegislationGuide/88/Public-private-partnerships-an-effective-model-for-project-financing.html


Consideration of Environmental Issues generally in Israel

Concern for the environment is an issue actively discussed in many circles in Israel. http://www.eib.org/attachments/pipeline/1755_nts_en.pdf is an illustration of the environmental impact studies that are required for Such plants before they can be proceeded with in Israel

The Water Wisdom conference in 2008 was an illustration of the active debate that pervades the scientific community and which crosses the communal divide.Convened in April 2008 by Professors Alon Tal of Israel's Ben-Gurion University and Alfred Abed-Rabbo of the West Bank's Bethlehem University, these scholars raised serious questions about the potential environmental, geopolitical, and social impacts of desalination.27

They noted that a typical reverse osmosis system, which can also remove some chemicals, requires three to seven kilowatt hours of energy to produce one cubic meter of fresh water, according to a 2008 National Academies Press report on desalination.

At that rate, it would take 7,500 kilowatt hours to fill an Olympic-size swimming pool—the same amount of energy the average person in Israel uses over the course of two months, for everything from cooking to driving.

They noted a litany of other environmental considerations and problems—many of them not fully researched potentially associated with desalination.

High boron concentrations in desalinated water could cause reproductive and developmental toxicity in animals and affect agricultural crops, according to some experts.

While there is concern about desalination of sewage-contaminated seawater, there is a converse problem—overly pure water. The reverse osmosis process used in new facilities can reduce calcium and carbonate concentrations, making the water acidic enough to damage pipes.

Desalination may also remove a range of beneficial ions normally found in drinking water that could have a supplementary dietary role, especially in certain high-risk populations.

Reverse osmosis desalination can discharge chemicals and brine two to three times saltier than seawater back into maritime environments. It is still unclear what the ecological effects of these discharges might be.

27 Desalination No "Silver Bullet" in Mideast, by Mati Milstein in Amman, Jordan for National Geographic News on May 22, 2008, http://news.nationalgeographic.com/news/pf/56886964.html


http://news.nationalgeographic.com/news/pf/56886964.html

http://www.eib.org/attachments/pipeline/1755_nts_en.pdf

International Project Finance 1ICP7A1Word Count – 4,933, plus references & Annex.Submitted on 14-Apr-09However, these scholars accepted that "Maybe [desalination] is the only way we can get through the coming years without drawing down aquifers to the point where they're really destroyed," 28

Tender Documentation

Re the Ashkelon Project

The Ashkelon Contractual Structure is set out in the graphic below

Operations are governed by an Operation & Maintenance Agreement (“O&M Agreement”) entered into between the Consortium and the Operating and Maintenance Company (named ADOM) made up jointly of Veolia Group, IDE Technologies Ltd., and Elran.

The tender documents29 outlined, among other things, the fundamental principles of the Agreement. The main contracts were the BOT Agreement, the Engineering Procurement and Construction Contract (“EPC Contract”), the Operation and Maintenance Contract (“O&M Contract”), the Power Purchase Agreement (“PPA”) and the Financial Agreement(s).

28 Desalination No "Silver Bullet" in Mideast, by Mati Milstein in Amman, Jordan for National Geographic News on May 22,29





Construction of the first 50Mm3/y took 27 months and the second 50Mm3/y, 3 additional months (total of 30 months) from Issuance of Notice to Proceed. The Construction was undertaken under an Engineering and Procurement Contract (“EPC Contract”) entered into between the Consortium and the Construction Company made up jointly of OTV (Veolia Group) and IDE Technologies Ltd. The name of the EPC Consortium is OTID.

Re the Proposed Ashdod Project

The proposed contractual structure as set out in the pre-Tender Conference is

Legal analysis

The Legal Services market in Israel is highly developed & sophisticated. English is almost universally spoken by almost all lawyers (and for that matter most professional & business people).

The Laws of Israel in relation to Law & Regulations for water in Israel. Principles of Water Legislation



Water Rights Water Uses and Permits Legal Tools for the Management of Scarce Water Resources The Governmental Authority for Water and Sewerage Water Resources Management - Institutions Payment for Water Use Public Participation The Environmental Protection of Water Resources

are all publically available, in English in a transparent and clear manner30

Typically, Israeli project financing involves a bid process that is subject to Israeli tender laws. Recent experience has shown that the tender process on large-scale projects tends to be well managed and conducted in an open and competitive environment. During the tender period, detailed negotiation of the concession contract as well as basic terms of other project related documents (such as construction and operation and maintenance contracts) are the norm. Bidding groups are also expected to demonstrate fairly firm commitments from lenders, which often take the form of fairly lengthy financing term sheets, with closed lists of conditions precedent to funding.31

Israel is a transparent country that is governed by the rule of law, which is presided over by an independent judiciary, and enforced by a police force & prosecution service that will not tolerate direction from the Executive. Any participant in a project in Israel can be confident that should anything improper there are present the institutions & processes to provide an effective remedy.

Financing plan

For the Ashkelon Project

Total Project Costs: about NIS 1,000 million Equity will fund 23% of the Total Project Costs Credit facility provided by Lenders (Bank Leumi & 106 Institutional Lenders)

will fund about 77% of the Total Project Costs (approx. NIS 800 million). Bank Standby facilities will be provided by Shareholders (25%) and by Bank

Leumi (75%) in the limit of 10% of the Total3233

Israel has displayed a range of innovative financing combinations.34 Banks and institutional investors are the essential participants of almost all PPP projects. Traditionally, the perception has been that banks negotiated the financing and served as lead arrangers, whereas institutional investors acted as co-investors. However, in recent years a new perception has been developed, according to which both of these

30 http://www.emwis-il.org/EN/legislation.xml 31 http://www.projectfinancemagazine.com/default.asp?Page=20&PubID=157&ISS=10987&SID=434296&SM=ALL&SearchStr=israel&itemCount=432 http://siteresources.worldbank.org/EXTWAT/Resources/4602122-1213366294492/5106220-1213366309673/6.4PrivateSectorPerspective_Trends_inDesalination_Market-WillWillersdorf.pdf33 http://cals.arizona.edu/azwater/programs/conf2008/presentations/Michael_Tramer-June-2008.pdf 34




http://cals.arizona.edu/azwater/programs/conf2008/presentations/Michael_Tramer-June-2008.pdf

http://siteresources.worldbank.org/EXTWAT/Resources/4602122-1213366294492/5106220-1213366309673/6.4PrivateSectorPerspective_Trends_inDesalination_Market-WillWillersdorf.pdf

http://siteresources.worldbank.org/EXTWAT/Resources/4602122-1213366294492/5106220-1213366309673/6.4PrivateSectorPerspective_Trends_inDesalination_Market-WillWillersdorf.pdf



http://www.emwis-il.org/EN/legislation.xml

International Project Finance 1ICP7A1Word Count – 4,933, plus references & Annex.Submitted on 14-Apr-09actors join together in the financing (including the process of negotiations). In such cases, banks negotiate and finance the short-term construction facilities while the institutional investors participate in the long-term credit facilities.

An explicit example of this innovative financing is that of Highway 431, a PFI contract for the construction and maintenance of a 22km, three-lane suburban highway designed for the purpose of reducing the traffic from the main entry routes to Tel Aviv. In this project, banks financed the short-term construction loans and the institutional lenders committed to finance the long-term loans. Highway 431 was awarded the project finance deal of the year for 2006 by Project Finance magazine

Current sources of finance to projects in Israel include:-

In these credit crunch times Lenders have sought to extend the ability in facility agreements to pass increased costs of through to the borrower not only to the extent that they are attributable to a change in law or regulation, but also to the application of an existing law or regulation, e.g. to pass through increased costs associated with a deterioration in the borrower’s credit standing.

Tenders for new Project Finance Deals have reduced from the previously typical 25 to 27 years to 7 to 12 years, which means that because these projects still broadly speaking, amortise at the same rate as a long term facility, leave a repayment at final maturity which the borrower must refinance35.

Grants from the government of Israel are available for major civil works.

The Tel Aviv Light Railway project, a Build-Operate-Transfer (BOT) project will be built on a government grant of up to 80% of project cost. Successful bidders will have to undertake to engage with domestic industry for 30% of the value of the grant.36 Additional government support can be provided by way of tax breaks37

Non-Israeli government sources of Project Finance for projects in Israel include38 the World Bank Group: Multilateral Investment Guarantee Agency & European Investment Bank

Israel is a pro-creditor jurisdiction39 and allows lenders to protect themselves properly against insolvency by the taking of adequate security and through set-off mechanisms (although the Israeli Supreme Court has not looked favourably upon unregistered security mechanisms, such as set-off, which purportedly grant a creditor security over other secured creditors).

35Article published on 25-Mar-2009, Charles Wood and Christopher McGee-Osborne of Denton Wilde Sapte LLP

36 http://www.tamas.gov.il/NR/exeres/85C96324-328D-40FC-9E8A-78B6CC5F6E7E.htm 37 http://www.moital.gov.il/NR/exeres/9DF4F491-E41C-406F-8903-894F11A502E0.htm38 http://www.infoexport.gc.ca/eng/document.jsp?did=38474 39

Israel comes of age was written by Paul Rubenstein, advocate at Herzog Fox & Neeman, Tel Aviv -http://www.projectfinancemagazine.com/default.asp?Page=20&PubID=157&ISS=10987&SID=434296&SM=ALL&SearchStr=israel&itemCount=4




http://www.infoexport.gc.ca/eng/document.jsp?did=38474

http://www.moital.gov.il/NR/exeres/9DF4F491-E41C-406F-8903-894F11A502E0.htm

http://www.tamas.gov.il/NR/exeres/85C96324-328D-40FC-9E8A-78B6CC5F6E7E.htm


The Israeli legal system permits lenders to take both fixed and floating security over all of a borrower's assets. Perfection and registration of security is fairly routine, with security being protected by a public filing.

There is a reasonably high degree of certainty relating to issues such as priority, preferences and the scope of remedies available upon an enforcement of security. However, the SPV can only grant security over assets that it owns and typically, the government will retain ownership of the site upon which a project is developed, providing the SPV with rights of use only.

The main assets that can be pledged, therefore, are usually restricted to the SPV's rights under the main concession contract as well as the SPV's rights and interest in the revenue stream of the project and its bank accounts.

Financial Statements

Please refer to the references below which set out the financial statements of the Ashkelon Holding Company40

III Risk Analysis

PPP projects are generally structured on a project basis requiring all parties to share the risks of the project.41 These risks are spread between the various parties; each risk is usually assumed by the party that can most efficiently control or handle it. Project risk-sharing is necessary since the sponsor, a joint venture of one sort or another, will possess a limited worth substantially less than the aggregate net worth of the equity parties.The Ashkelon Project's contractual structure 42 has been designed with a view to allocating the different risks to those parties that are the most qualified to manage and control them. The Laws of Israel are the Governing Law which applies to all contracts.Save as not addressed above one can evaluate the subsequent risks upon the following basis

1. Sponsor risk

For the Proposed Ashdod Project these are: -

40 http://www.fibi.co.il/STORAGE/FIBI/files/0/4530.pdf?FileCode=Financial_Statements_20033

http://www.fibi.co.il/STORAGE/FIBI/files/4/1584.pdf?FileCode=Financial_Statements_2001 41 http://www.iflr1000.com/LegislationGuide/88/Public-private-partnerships-an-effective-model-for-project-financing.html 42





http://www.fibi.co.il/STORAGE/FIBI/files/4/1584.pdf?FileCode=Financial_Statements_2001

http://www.fibi.co.il/STORAGE/FIBI/files/0/4530.pdf?FileCode=Financial_Statements_20033


2. Pre-completion risk

An illustration of the spread of Development & Construction Risks as betweencan be observed from those ascribed in the Ashdod Desalination Plant Project43

SPC : O&M Contractor : EPC Contractor : WDA

43 http://www.mekorot.co.il/Eng/ProfessionalServices/MekorotDevelopmentEnterprise/Documents/Ashdod%20Conference%20Presentation2.pdf




International Project Finance 1ICP7A1Word Count – 4,933, plus references & Annex.Submitted on 14-Apr-09An illustration of the content agreements entered into by the Government of Israel, (“GOI”), can be found in the Professional Services Agreement 44 that relates to the monitoring of Railway Projects

3 Completion risk

The construction period for the Ashkelon Project was estimated at 3 years,45 however it was completed in 30 months.

4 Technology risk

This is perhaps one of the less riskier elements for any party to a project in Israel.According to the IMD World Competitive Yearbook for 2007, Israel was ranked out of the 125 countries surveyed coming1st Total Expenditure on R&D as a % of GDP & Availability of qualified

engineers2nd Information Technology Skills3rd Flexibility & adaptability of the workforce4th Higher education achievements

In December 2006, Augusto Lopez-Claros, Chief Economist, World Economic Forum, December 2006, said that “Israel does spectacularly well on those indicators that capture technology innovation, education, human capital and this accounts for the very rapid movement of the Israeli Economy .” The WEF ranked Israel as 1st Availability of scientists & engineers3rd Technological readiness4th Quality of research organisationsAccording NASDAQ in 2007 Israel had 70 companies listed as opposed to 60+ from Canada and under 20 from the UK

Israel is credited with breakthroughs that led to o Intel’s Centrino and Pentium 4 microprocessorso IP Telephony invented by founders of Vocal Teco AOL Instant Messenger ICQo Zip compression technology

5 Input or Supply riskThe principal input elements are: -- sea water, which hold no impediment to its availability and- energy in the form of natural gas, which comes from Egypt, with who Israel

has been at peace with for over 30 years

44 http://www.mof.gov.il/Tools/tenders/Documents/ ישראל %20 רכבת %20 של %20 פיתוח %20 תקציב %20 על %20 בקרה / AGREEMENT%20-%20%20MONITORING%20RAILWAYS%20PROJECTS.pdf 45

http://ppp.mof.gov.il/Mof/PPP/MofPPPTopNavEnglish/MofPPPProjectsEnglish/PPPProjectsListEng/MitkaneiAtpalatMaim/ AshkelonWater/




http://www.mof.gov.il/Tools/tenders/Documents/%D7%91%D7%A7%D7%A8%D7%94%20%D7%A2%D7%9C%20%D7%AA%D7%A7%D7%A6%D7%99%D7%91%20%D7%A4%D7%99%D7%AA%D7%95%D7%97%20%D7%A9%D7%9C%20%D7%A8%D7%9B%D7%91%D7%AA%20%D7%99%D7%A9%D7%A8%D7%90%D7%9C/AGREEMENT%20-%20%20MONITORING%20RAILWAYS%20PROJECTS.pdf

http://www.mof.gov.il/Tools/tenders/Documents/%D7%91%D7%A7%D7%A8%D7%94%20%D7%A2%D7%9C%20%D7%AA%D7%A7%D7%A6%D7%99%D7%91%20%D7%A4%D7%99%D7%AA%D7%95%D7%97%20%D7%A9%D7%9C%20%D7%A8%D7%9B%D7%91%D7%AA%20%D7%99%D7%A9%D7%A8%D7%90%D7%9C/AGREEMENT%20-%20%20MONITORING%20RAILWAYS%20PROJECTS.pdf

International Project Finance 1ICP7A1Word Count – 4,933, plus references & Annex.Submitted on 14-Apr-096. Operating Risk

The contract period, including construction period: 24 years and 11 months Mode of payment schedule to the awardees46

i) Regular, fixed payments starting from the date of completion of construction. ii) Variable payments, according to the actual quantity of water purchased by the State.

An illustration of the spread of Development & Construction Risks as betweencan be observed from those ascribed in the Ashdod Desalination Plant Project47

7. Off take and Sales risk

The (Ashkelon) Project consists of the financing, design, construction, operation and transfer of a seawater desalination facility with guaranteed production capability of 100 Mm3/year for a term of 25 years. The facility which started operating in August 2005, achieved an initial water price of US¢ 52.7/m3, one of the lowest prices ever offered in a BOT project for seawater desalination. 48

46http://ppp.mof.gov.il/Mof/PPP/MofPPPTopNavEnglish/MofPPPProjectsEnglish/PPPProjectsListEng/MitkaneiAtpalatMaim/

AshkelonWater/ModeofPayment.htm 47

http://www.mekorot.co.il/Eng/ProfessionalServices/MekorotDevelopmentEnterprise/Documents/Ashdod%20Conference %20Presentation2.pdf

48 http://www.ide-tech.com/News_item.asp?iid=5850&pid=1600&ppid=1489&z=4&p=1





http://ppp.mof.gov.il/Mof/PPP/MofPPPTopNavEnglish/MofPPPProjectsEnglish/PPPProjectsListEng/MitkaneiAtpalatMaim/AshkelonWater/ModeofPayment.htm

http://ppp.mof.gov.il/Mof/PPP/MofPPPTopNavEnglish/MofPPPProjectsEnglish/PPPProjectsListEng/MitkaneiAtpalatMaim/AshkelonWater/ModeofPayment.htm

International Project Finance 1ICP7A1Word Count – 4,933, plus references & Annex.Submitted on 14-Apr-09Inflation and Foreign Exchange Risk

Most Israeli projects involve the use of Shekel denominated loans49 to match the financing with revenue streams. Legal issues worthy of particular note in a Shekel denominated loan are as follows:

a) InflationGiven the hyperinflationary environment of the 1980's, Shekel loans are always linked on a monthly basis to the Israeli CPI. This trait adds a layer of complexity to the basic credit agreement, which is not usually present in foreign currency denominated loans. The inflation factor can also play a significant role in determining the level of outstanding debt under an inter-creditor agreement, where some creditors lend in Shekels and others in foreign currency.

b) Interest rateIsraeli banks have been able to offer fixed rate funding based on base rates derived from an average of long term Israeli government bonds. However, interest rates are usually fixed upon the date of each successive drawdown under the credit agreement, leaving a number of tranches with different interest rates which need to be averaged out at the end of the drawdown period. This has given Israeli lawyers reason to develop specialised loan documentation.

c) Market disruption and increased costs provisionsStandard provisions dealing with these matters in a syndicated loan will almost certainly need to be adapted in the context of a Shekel loan, given the different loan maturities and bases upon which interest rates are set.

10. Political risk

Israel had a GDP: $161.8b (2007) from a population of 7.0 million, in an area of 22,000 sq km, (a size smaller, than the Kruger National Park)

It is a stable Parliamentary Democracy, governed by the rule of law both of whom are answerable to the intense scrutiny of its free press and vocal & critical public. Israel is an attractive place in which to do business. In 2008 the World Economic Forum, (“WEF”), Israel was placed just behind Taiwan in 18th place in the world in the Networked Readiness Index50, (NRI) for variables capturing government readiness and use, such as government procurement of ICT, government R&D subsidies,

49 Israel comes of age was written by Paul Rubenstein, advocate at Herzog Fox & Neeman, Tel Aviv -


50 http://www.investinisrael.gov.il/NR/rdonlyres/61BD95A0-898B-4F48-A795-5886B1C4F08C/0/israelcompleteweb.pdf


http://www.investinisrael.gov.il/NR/rdonlyres/61BD95A0-898B-4F48-A795-5886B1C4F08C/0/israelcompleteweb.pdf



International Project Finance 1ICP7A1Word Count – 4,933, plus references & Annex.Submitted on 14-Apr-09government ICT vision, success in ICT promotion, ICT productivity and the pervasiveness of ICT use.[[ The United Kingdom held position 12]]

Israel has by far the highest number of engineers per capita in the world—140 per 10,000 employees, more than twice the level of the United States and Japan, the second and third ranking countries in the list.

In interpersonal relations Israel is a relaxed environment. Indeed, senior managers in top Israeli companies in the high-tech sector will often refer to their strong preference for original thinkers, who will not hesitate to tell their bosses how wrong they are, and why a particular alternative approach will be better. Conformity with and awe of one’s supervisors is neither encouraged, nor in keeping with the culture of independent thinking and active intellectual dissent.

IV Conclusions

Israeli government policy is to expand the country’s physical infrastructure, and thereby facilitate economic growth. The government budget infrastructure investment in 2003 was NIS 1b. The 5-year plan was to increase that budget by NIS 1b annually. It was recognized that51:-- State funding alone would not provide that budgeted expenditure- Private sector involvement would provide for

o continuity of stakeholder involvement through all project stages,o provision of higher quality service to end users, o a mechanism for importing expertise, o reducing the level of direct governmental involvement in the economy.

Lessons were learnt from a number of Project Finance schemes in IsraelProject Finance was used in Israel in

The Cross Israel Highway Project

This was a (30) year BOT concession contract, wherein the highway was Operated & Managed by a special purpose state-owned company known as Cross Israel Highway Ltd. ("CIHL") it was an important milestone in the development of project fiancé in Israel due to the ability to reach financial closure on $850m with an international consortia of sponsors and lenders.

It was considered that appropriate risk allocation between the government, the concessionaire and the lenders significant main feature of the concession agreement. Two of the main governmental commitments are the provision of a partial revenue

51 http://www.s-t.org.il/files/documents/Issue_03_Neta_BOT_and_PFI_projects.pdf


http://www.s-t.org.il/files/documents/Issue_03_Neta_BOT_and_PFI_projects.pdf

International Project Finance 1ICP7A1Word Count – 4,933, plus references & Annex.Submitted on 14-Apr-09guarantee and incorporation of a mechanism for adjusting the toll rate in accordance with the actual financing costs.

The CIH, as the first major PPP project in Israel, was a learning process for all parties and serves as a benchmark for future projects in Israel. The CIH project was named by “Project Finance International” magazine as its 1999 Infrastructure Deal of the Year for Europe, Middle East and Africa.

The Red Line BOT Project

In many ways, the $1.5 billion Tel-Aviv light rail project (the Red Line), is the largest and most ambitious transportation project Israel has seen to date. It will cross 50 intersections & provide capacity of up to 10,000. The Red Line project will be implemented as a 32 year BOT concession to finance, design, construct, operate and maintain the Red Line, and to transfer it to the State upon termination of the concession contract. To facilitate implementation a special purpose government company, was established in 1997, called NTA.

Several mechanisms have been established in order to attract the private sector and to facilitate and promote financial closing including: - a revenue risk sharing mechanism, - investment grant milestone payments, - payment of the investment grant in foreign currencies, - an adjustment mechanism in accordance with the actual financing costs, - a mechanism to mitigate the impact of terrorist and/or political matters on

the concessionaire and for dealing with unexpected geotechnical conditions.

In 2004 the range of other projects, financed under the project finance module included- Desalination plants x 5- Roads & Tunnels x5- Prison x 1

The government of Israel recognizes and seeks the benefits of mutually beneficial partnerships between the public and the private sectors. This progressive governmental attitude and the experience gained from the above-mentioned projects make Israel an attractive opportunity for the global Project Finance Industry.

Israel is a suitable and friendly environment, which has proven itself conducive to the development of both large- and medium-scale infrastructure projects. This has already resulted in the implementation of several large-scale projects52

An aerial view of the Ashkelon Project which came into full capacity production in 2007

52 In March 2000, in Project Finance Magazine an article entitled -Israel comes of age was written by Paul Rubenstein, advocate

at Herzog Fox & Neeman, Tel Aviv -http://www.projectfinancemagazine.com/default.asp?Page=20&PubID=157&ISS=10987&SID=434296&SM=ALL&SearchStr=israel&itemCount=4




International Project Finance 1ICP7A1Word Count – 4,933, plus references & Annex.Submitted on 14-Apr-09Annex I - Project Milestone Dates for the Ashkelon Project.

Jul-2000 Issuance of the Tender Documents, except for Tender Document D (the Agreement)

27-Sep-00 Issuance of the Agreement21-Nov-00 Pre-Qualification Submissions21-Dec-00 Announcement of Pre-Qualified Bidders25-Feb-01 Issuance of Amended Agreement01-May-01 First Bid Submission 15-Aug-01 Second Bid Submission03-Sep-01 Best and Final Offer and Award of the Project to the Consortium25-Nov-01 Signature Date (execution of the Agreement for 50MCM/y); Dec-2001 Selection of Arranger Feb-Apr-02 Negotiations between VID and WDA for additional 50MCM/year28-Apr-02 Signature of Agreement for additional 50 MCM/year31-Oct-02 Effective Date (beginning of the 25 years Contractual Term)22-Jan-03 Financial Close22-Apr-03 Construction started & Issuance of Notice to ProceedAug-Sep-05 Completion Date of Sub-Phase 1 (50 Mm3/year)Nov– Dec-05 Completion Date of Sub-Phase 2 (100 Mm3/year)Dec-05 Full capacity production Mar-06 Desalination plant of the year award Oct-06 First 100 million m3 produced Oct-2027 Term of Agreement (24 years and 11 months from Effective Date)
