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[Belt and Road Financial Cooperation Practice Case] ICBC: Rolling out Innovative Project Financing Modes to Promote Multilateral Cooperation with Solid Efforts--A 485MW Combined Cycle Gas Turbine (CCGT) Power Plant Project in Jordan

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Editor's note: In order to systematically study the financial cooperation practice of the BRI, promote experience exchanges and business cooperation in the financial sector, and better introduce the excellent cases of financial cooperation, Asian Financial Cooperation Association (AFCA), on the basis of Belt and Road Financial Cooperation Committee (BRFCC), conducts Asian Financial Cooperation Association Belt and Road Financial Cooperation Practice Report. The appendix of the report selects 40 Belt and Road Financial Cooperation Practice Cases, including credit support, equity financing, bond issuance, insurance services, payment and settlement, risk management, inclusive finance, investment and financing platform, and epidemic prevention and control. The rich cases not only show the business achievements of AFCA members and relevant institutions under the BRI framework in recent years, but also reflect the new changes of the BRI financial cooperation practice.

ICBC: Rolling out Innovative Project Financing Modes to Promote Multilateral Cooperation with Solid Efforts--A 485MW Combined Cycle Gas Turbine (CCGT) Power Plant Project in Jordan

Abstract: The Project is the largest gas-fired combined cycle gas turbine (CCGT) power plant in Jordan, and also an important part of China’s effort to implement the Belt and Road Initiative (“the BRI”) in the Middle East. After put into operation, it has effectively eased Jordan’s power shortage and provided a continuously stable power supply as needed by the country’s industrial upgrading, economic take-off, and people’s wellbeing improvement. At the same time, the adoption of the world’s leading gas-fired electricity generation equipment enables the Project to increase power production efficiency significantly and exert generally controllable environmental impacts. In this sense, the Project can bring a wide range of economic and social benefits. The commercial operation of the Project has set a good example for the economic and trade cooperation between China and Jordan and for the international capacity collaboration, thus winning a great reputation for Chinese manufacturing.

I. Overview of the Project

i. Project background

Politically, Jordan has remained stable in recent years. The Jordanian government has vigorously pressed ahead with economic reforms and continued to improve the investment environment domestically. Even so, its economic growth has gradually slowed down. As of 2019, Jordan’s domestic GDP stood at USD43.74 billion, with the per capita GDP posting USD3, 284. The country saw its GDP growth rate gradually decreasing from a high level of over 6-8% before 2010 to merely about 2% after 2010. Currently, Jordan’s total system installed capacity is about 4.47GW (of which natural gas-fired power accounts for some 70%). Such a power output is barely enough to meet the domestic demand temporarily. As the national economy and society further develop, Jordan will face a severe dearth of power supply. So the Jordanian government is now committed to promoting the development of the power industry as a way to address the problem of energy shortage and ensure the safety of power supply.

However, the Jordanian government cannot afford to implement a huge infrastructure construction plan by itself, given its long-lasting fiscal deficit and record-setting public debt. To make up for the funding gap, it welcomes the participation of foreign companies in local infrastructure investment of various forms, and encourages international power giants to cooperate with itself and local companies in the fields of natural gas power generation, oil shale, new energy and beyond.

In 2014, the National Electric Power Company of Jordan (hereinafter referred to as “Company N”) planned to renovate the existing power stations in the country and invited power investment companies worldwide to attend the international competitive bidding process. A Saudi Arabia-based power company A (hereinafter referred to as “Company A”) won the bid to upgrade and rebuild the Hussein Power Station project in Zarqa.

ii. Information on participants of the project

1. Developer

The project developer, Company A, has invested in and operated 59 power plants and seawater desalination projects all over the world, with the total assets under management (AUM) reaching over USD48.8 billion and the total installed capacity hitting 34GW.

2. Project company

The project company was established on March 16, 2015. Registered in Jordan, it is a special purpose vehicle incorporated for the construction of the Project.

3. Shareholders

Company R is a holding subsidiary of Company A (Company A holds 85% shares and IFC holds 15% shares). It directly takes a 60% stake in the project company.

Company K is a leading power investment firm in the Jordanian electricity industry. Established in 2007 and registered in Jordan, it specializes in investing in Jordanian power station, power transmission and transformation, and power distribution projects, and is dedicated to promoting the privatization of the Jordanian power industry. In 2017, Company K acquired a 40% stake in the project company.

4. EPC contractor

The engineering, procurement and construction (EPC) contractor of the Project is a subject of the contract formed by the Chinese-funded enterprise S (Company S) and its related subsidiaries. Company S is a wholly-owned subsidiary of Power Construction Corporation of China (POWERCHINA), and owns the special-class qualification for general contracting of power engineering construction. To date, it has undertaken power projects worth over USD10 billion in more than ten countries including those in the Middle East and North Africa (MENA). Company S has implemented a number of successful projects in cooperation with Company A. It boasts an abundance of experience in project implementation.

5. Operator

The project operator is Company C, the largest power plant operating enterprise in Jordan. It has more than ten years of experience in operating combined cycle power plants. Company A is the largest shareholder of Company C, by taking a 51% stake in it. As to the remaining shares, the Jordanian government holds 40%, and other shareholders such as the Social Security Investment Fund hold 9%. Company C currently operates seven power stations that consist of gas power stations, oil power stations, and wind power stations. These power plants generate electricity accounting for about 50% of the country’s total electricity consumption. Company C has extensive experience in operating and maintaining similar projects.

6. Power purchaser

The power purchaser, Company N, is in charge of almost all the power transmission business across Jordan. With 2,811km of transmission lines in total, it is mainly tasked to supply power to regional distribution companies, so that the latter can sell electricity to end users. The Ministry of Energy and Mineral Resources (MEMR) of Jordan is the core authority responsible for policy formulation, supervision and management of the power industry.

iii. Major technical parameters of the project

The Project adopts a gas and steam combined cycle technical design, consisting of three gas turbine generators, three heat recovery steam generators, and one steam turbine generator, along with related ancillary facilities such as 500/220kV switch stations, power transmission lines, and water and gas supply facilities.

The Project is equipped with dual-fuel units: the natural gas-fired turbine has a net installed capacity of 485MW, and the light diesel-fired turbine has a net output load of 468MW.

iv. Financing needs and composition of the syndicate

The Project requires a total investment of about USD485 million. Of it, contribution by shareholders and operating income at early stage account for 25%. The remaining 75% part is to be raised through senior loans according to the plan.

Table 1 Source and Use of Funds under the Project

ICBC has formed a syndicate with many international multilateral financial institutions such as the International Finance Corporation (IFC), European Bank for Reconstruction and Development (EBRD), the OPEC Fund for International Development (OFID) as well as commercial banks to provide the project company with senior loans.

v. Major agreements of the Project

The project company has signed agreements with relevant participants of the Project, so as to push forward with the project construction and maintenance. The power purchase agreement outlines that electricity payment will be made on a “take-or-pay” basis, a design that provides a reliable cash flow for the Project. The project implementation agreement is signed to make sure the government provides necessary credit enhancement measures. The EPC contracting agreement is intended to transfer the project construction risk to the EPC contractor, a way to ensure that the power station could be completed and delivered on time with the guaranteed quality. The operation and maintenance agreement aims to transfer the project operation and management risk to a professional operation company. The multilateral investment guarantee agency (MIGA) agreement enables the Project to transfer the political risks to a multilateral agency substantially.

II. Highlights of Project Cooperation

i. Implementing typical cooperation projects under the BRI

Jordan is an important participant and builder under the BRI, and the Jordanian government takes an active part in the BRI implementation. The Project is a pivotal infrastructure construction project in Jordan, which has received extensive attention and policy support from the government and society of the host country.

Committed to the principle of “joint building through consultation to meet the interests of all”, ICBC joins hands with multilateral financial institutions and commercial banks to support Chinese-funded enterprises to “go global” and undertake projects as EPC or general contractors. The Project has, therefore, become another typical case where China and Saudi Arabia develop a third-party market together, promote multilateral cooperation and international production capacity collaboration, and facilitate the implementation of the BRI.

ii. Taking effective measures to prevent contract performance risks arising from participants

All main participants in the Project are all well-known companies in the industry. They have sufficient capacity to fulfill their contracts. For example, the developer of the Project is a well-established Saudi power company experienced in the full-cycle development and operation of power station projects in the Middle East. The EPC contractor of the Project has extensive experience of implementing projects implementation in the Middle East and has carried out successful projects in cooperation with the developer.

Project participants come in a relatively reasonable structure. Jordanian power companies get involved in investment, land, water supply, operation and maintenance, and other aspects of the Project. Familiar with the business environment of Jordan, they can do well in coordinating with the competent authorities and surrounding communities of the Project. As a result, country risks are reduced significantly. A Chinese-funded enterprise serves as the EPC/general contractor of the Project, and adopts the world’s leading gas-fired power generation equipment for the Project. In this sense, the Project marks a milestone event in international capacity cooperation between China and the West.

The Project receives policy support from the host country’s government and related institutions. The power purchaser is a Jordanian state-owned enterprise, which brings a long-term power purchase contract established under the “take-or-pay” mechanism, a design that guarantees a stable cash flow after the Project is put into commercial operation. The Jordanian government provides guarantees for the payment obligations of the power purchaser, and offers the Project many preferential policies such as tax breaks. In addition to putting cash flow risks under control, the endorsement from the national government also brings considerable investment benefits to the Project.

iii. Sharing project risks through a reasonable contract structure

The Project adopts a typical international independent power project (IPP) financing model, involving many participants and various types of potential risks. So a reasonable contract structure is needed to make sure project risks can be shared by and among different participants.

Country risks: Multilateral financial institutions exert a strong influence on the Jordanian government, have rich experience of operating projects in the country, and do well in predicting and assessing country risks of the Project. By undertaking loans for the Project with them, ICBC manages to cut down on country risks of the Project effectively. At the same time, the Multilateral Investment Guarantee Agency (MIGA) provides the Bank with the political insurance guarantee, a move that can transfer country risks efficiently. Besides, the project agreements and loan agreements are also governed by the laws of a third country, and disputes, if any, are settled with a third-country institution, thus reducing national legal risks of the Project remarkably.

Credit risks of the participants: The government default insurance guarantee provided by the MIGA effectively diversifies the default risk from the government and the power purchaser. The adoption of such measures as opening custody accounts, debt service reserve accounts, related asset mortgages/pledges as well as the intervention mechanism set out in the financing agreement make it possible to effectively reduce the default probability of the borrower and take timely measures after it does default.

Completion risks: The realization of commercial operation on time and with quality assured is a prerequisite for the Project to generate a stable cash flow. Therefore, a complete set of EPC contract guarantee measures are the key to the success of the Project. For example, to protect the Project from construction delays, the project company transfers such risks to the EPC contractor through the “back-to-back” principle. To guard against the risk of quality defects, the EPC contractor is required to provide performance guarantees and other measures. If the Project is rejected due to construction delays and quality defects, the EPC contract shall bear relevant losses. In addition, Company S provides guarantees from the parent company to ensure that the EPC contractor will perform in accordance with the EPC agreement.

Operational risks: Fuel and grid connection are both in the charge of the power purchaser, and water supply is a responsibility for a local state-owned enterprise. The supply of production materials and grid connection involve low risks. Upon completion, the Project can generate power efficiently and cause low environmental pollution. Since the Project functions as base-load power stations and mainstay power generation units of the Jordanian national grids, it is hardly likely for the power purchaser to reject buying electricity from it. The Project requires a relatively low total investment, and prices electricity within a reasonable range, both of which determine that the power purchaser is very willing to perform the contract. Even during the pandemic response period, the Project has protected its operation from being significantly affected. The Project ranks high in the order of priority payment among domestic power stations, so it is less likely to sink into electricity fee arrears. For senior loans, the project company uses derivative financial instruments to spread the risk of interest rate fluctuations reasonably.

With the above steps, the project risks are put under control overall. This means the Project can go into commercial operations on time and with quality assured and that the project company can obtain a stable, predictable cash flow.

iv. Raising funds for the project through multilateral cooperation

Innovative breakthroughs are made in project financing modes. Traditionally, limited recourse or non-recourse project financing is often applied to countries with high sovereign ratings and those with strong local power purchasers. The Project actively introduces international and regional multilateral financial institutions, gives full play to the advantages of all parties in the syndicate of banks, and rolls out innovative investment and financing modes. As a result, it has become an exception to the above tradition, by securing the project financing in a country with a lower sovereignty rating than usually required.

The feasibility of financing modes is enhanced through multilateral cooperation. Since multilateral loans do not require export credit agencies to provide insurance, it can greatly lower financing costs of the Project. At the same time, multilateral financial institutions permit longer loan periods than others, and provide the Project with credit enhancement measures, both tangible and intangible, to further boost the Project’s financing feasibility and competitiveness.

The BRI implementation is facilitated with financial services. Relying on impressive risk control capabilities, superior fund strength, and competitive brands of Chinese customers and leveraging the influence of multilateral financial institutions on the Jordanian government and their rigid control of country risks, ICBC pools together various types of resources available across the world, complements each other’s advantages, expands the global reach of customer service, and provides a diversity of international project financing solutions.

ICBC upholds the concept of green credit and practices the strategy of green finance. It supports the Project to comply with the internationally recognized standards and norms. In the development, construction and operation of the Project, it effectively manages environmental and social risks, and gives priority to maintaining harmonious relations and carrying out win-win cooperation with the host country. With these steps, ICBC does its part to the sustainable development of local economy and the green implementation of the BRI, and shapes a socially responsible image in the international community.

Multiple measures are adopted to improve risk control capabilities. ICBC works hard to draw on the project management experience of multilateral institutions. Through joint review and other methods, it has effectively built up the ability to analyze project risks at early stage. The introduction of the MIGA as a safeguard against political risks enables the syndicate of banks to enhance its risk handling capacity. The full-process participation in the post-loan management of the Project and the all-around information exchange with multilateral institutions help the Bank greatly improve its risk control capabilities after the project loans are extended.

III. Results Achieved and Influences

The construction of the Project started in January 2017, and the second phase of the Project went into commercial operation in September 2018. So far, the Project has operated well overall. Take the operation of the Project in 2019 as an example. In the first full operation year, the net capacity coefficient of the power station exceeded 95% (higher than the planned value), and the full electrical capacity charge was obtained. The loans of the Project have entered the repayment period, and the borrower repays principal and interest on schedule.

The Project is the largest gas-fired combined cycle gas turbine (CCGT) power plant in Jordan, and also an important part of China’s effort to implement the Belt and Road Initiative (“the BRI”) in the Middle East. After put into operation, it has effectively eased Jordan’s power shortage and provided a continuously stable power supply as needed by the country’s industrial upgrading, economic take-off, and people’s wellbeing improvement. At the same time, the adoption of the world’s leading gas-fired electricity generation equipment enables the Project to increase power production efficiency significantly and exert generally controllable environmental impacts. In this sense, the Project can bring a wide range of economic and social benefits. The commercial operation of the Project has set a good example for the economic and trade cooperation between China and Jordan and for the international capacity collaboration, thus winning a great reputation for Chinese manufacturing.

The Project was rated as the “Best Gas-fired Power Plant Project of the Year” by Asian Power of Charlton Media, which further established ICBC’s financial product lineup and brand in the global power market and fully reflected its market position in the global financing product system.

IV. Lessons Learned and Policy Suggestions

i. Upholding the principle of “joint building through consultation to meet the interests of all”, and enabling all parties to achieve win-win outcomes

Chinese President Xi Jinping pointed out that the principle of “joint building through consultation to meet the interests of all” is the only way to achieve high-quality implementation of the BRI. Committed to the principle, ICBC tries to select partners with strong contract performance capabilities and abundant project implementation experience, promotes government organs and enterprises of Jordan, China and third countries to cooperate with each other, and puts emphasis on exploiting advantages and potential of all participating parties to ensure the Project could finish successfully and operate smoothly.

ii. Delivering a high-quality project that is truly needed by and benefits the host country

As Chinese President Xi Jinping pointed out, connectivity is vital to advancing the BRI cooperation, and infrastructure is the bedrock of connectivity. ICBC endeavors to support the countries and regions along the Belt and Road in building a series of high-quality, sustainable, risk-resistant, reasonably priced, inclusive, accessible infrastructure facilities, which are aligned with the resource endowments and actual needs of the countries where these projects are located. Through these projects, the Bank is aimed to help these host counties get more development opportunities, allow their people to benefit more from development, and realize long-term, stable project cooperation while satisfying the interests of all parties.

iii. Arriving at more feasible solutions to the BRI through multilateral cooperation

President Xi also noted that we welcome the participation of multilateral and national financial institutions in BRI investment and financing and encourage third-party market cooperation. In the course of serving the BRI implementation with financial services, ICBC strives to give multilateral cooperation with many multilateral and international financial institutions including the World Bank. To make full use of the diversified financing system and capital structure involved in multilateral projects, the Bank works hard to play the guiding role of international multilateral institutions. Innovative cooperation modes such as project financing, syndicated loans, and guarantee insurance are employed to put 12 multilateral cooperation projects into operation. It, therefore, has become the mainstay of multilateral financial cooperation under the BRI, and offered more feasible solutions to the BRI cooperation.