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[Belt and Road Financial Cooperation Practice Case] ICBC: Dubai Hassyan Clean Coal-fired Power Plant Project

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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: Dubai Hassyan Clean Coal-fired Power Plant Project

Abstract: The Dubai Hassyan Clean Coal-fired Power Plant Project (hereinafter referred to as “the Project”) is a typical case where the Belt and Road Initiative is implemented, Chinese enterprises succeed in “going global”, and international capacity cooperation is advanced. By partnering with third-party markets, ICBC has successfully led Harbin Electric International Company Limited (Harbin Electric International), Silk Road Fund, and other Chinese-funded companies to enter overseas markets, thus practicing the tenet that financial innovation is made to boost capacity cooperation under the BRI. As the first financing deal that ICBC has led with neither coverage from credit insurance nor recourse, the Project has been rated as the “Middle East & Africa Power Deal of the Year” by Thomson Reuters’ magazine Project Finance International (PFI) for 2016 and the “Best Project and Lead Bank in 2017” by the China Banking Association.

I. Background and Analysis of Financial Needs

Since the BRI came out, ICBC has always adhered to the principles of “joint building through consultation to meet the interests of all”, and actively supported enterprises from different countries/regions in participating in the BRI implementation. To date, its financing partners have been distributed on all the six continents: Asia, Africa, Latin America, Europe, Americas, and Oceania. The Bank, therefore, becomes a mainstream BRI-themed financial service provider in the international market.

As the world’s largest commercial bank by assets, ICBC stays true to its founding mission of serving the real economy, committed to giving full play to its advantages as a large state-owned bank. Relying on the top-ranking product and service capabilities, wide customer base, and extensive network of international presence, the Bank strives to provide the BRI with a full package of high-quality financial services, and offer Chinese wisdom and a Chinese approach to propelling international financial cooperation under the BRI.

When serving the “going global” enterprises and supporting the BRI implementation, ICBC actively seeks project cooperation with third-party markets and puts related achievements into application.

i. Project background

The economy of Dubai, the United Arab Emirates (the UAE) has continued to develop steadily in recent years, thus presenting an increasing demand for electricity. Residents and industries need a huge amount of electricity, which is a grueling test for the power supply stability. To date, the UAE sees its electricity supply completely dominated by natural gas thermal power generation. Due to the lack of natural gas, most of the needed fuel is imported from countries such as Qatar.

Based on the economic strategies of the state and the needs for sustainable development, the UAE has been actively transforming its economy to reduce its dependence on oil in recent years. In terms of power supply, the national government, while trying to boost energy security by diversifying its power sources, has decided to greatly lower its current over-reliance on natural gas for power generation. Specifically, it would develop clean coal-fired, solar, nuclear and other energy power generation in a well-planned, progressive way, so as to offer a stable power supply as needed by the proactively, sustainably growing economy.

Out of the above considerations, the Dubai Integrated Energy Strategy 2030 (DIES 2030) was developed and adopted by the Dubai Supreme Council of Energy in 2010. According to the strategy, 5% of Dubai’s total electricity will come from renewable energy sources, 12% from nuclear energy, 12% from clean coal, and the remaining 71% from natural gas by 2030. The power structure will be adjusted as a national strategy.

As the water and electricity management administration of the city in charge of implementing electricity strategies and initiatives, the Dubai Electricity and Water Authority (DEWA) proceeded from the current power conditions of the state and the forward-looking requirements for power development, and decided to construct the Hassyan coal- and gas-fired power plant. The station has a planned installed capacity of 4x660MW and a net output load of 4x600MW. It consists of four generator units. According to the plan, its construction started in May 2016, and units would be put into operation one by one. To be specific, the four generators are scheduled to come into commercial use in March 2020, March 2021, March 2022, and March 2023, respectively. The total project period is 25 years after the commercial operation of all units, that is, the project will end in 2048. As the national power management agency, DEWA will sign a 28-year power purchase agreement (PPA) with the HASSYAN Power Plant, which covers the entire operating period of the Plant.

ii. Financial needs

Currently, Dubai relies on natural gas as the primary fuel for power generation. However, according to the DIES 2030, the goal is to boost energy security of the state. Different types of fuel in stock will be used to achieve fuel diversification. The overall power plan is set out: by 2030, 12% of all electrical energy will be generated from clean coal, 12% from nuclear power, and 5% from renewable energy. Additionally, a more efficient national power grid will be established among the seven emirates. The Gulf Cooperation Council (GCC) plans to build a regional power grid that connects Kuwait, Oman, Qatar, Saudi Arabia, the UAE and other Gulf countries together. According to the development plan, DEWA has launched the Project through the public bidding process.

According to the bidding plans of the Project, DEWA selected from many internationally renowned bidders ACWA and Harbin Electric International to form a consortium in charge of constructing, operating and managing the power station. Located at an important position under the BRI, the Project has a great clout in the international community and conforms to the investment tenets and standards of the Silk Road Fund. So the fund will also participate in the Project. DEWA, ACWA, Harbin Electric International, and Silk Road Fund, by consensus, have decided to jointly initiate the Project as equity investors.

The Project requires a total investment of approximately USD3.2 billion with a financing term of 25 years. The loan borrower of the Project is a project company established by DEWA, ACWA, Harbin Electric International, and Silk Road Fund, taking a stake of 51%, 26.95%, 14.7%, and 7.35% in it, respectively. The portion of the creditor’s claim requires financing of USD2.52 billion.

iii. Location and basic information of the Project

The Hassyan coal-fired power plant is located in the Saih Shuaib area on the Arabian Gulf coast in Dubai, adjacent to the Dubai-Abu Dhabi Emirate border, the Emirate of Dubai. It is about 55 kilometers southwest of downtown Dubai, about 10 kilometers away from the famous Jebel Ali Palm Island, and some 3.5 kilometers away from the nearest sea resort under construction. The specific location is shown in the figure below.

The Project will adopt the Build-Own-Operate (BOO) model and the ultra-supercritical technology. It comprises four generator units, coal and dry bulk handling facilities, coal storage facilities, the backup fuel (natural gas) metering station and transportation pipelines, power output lines, the outfall system for seawater cooling, roads on the project site, and ash landfills.

The Project adopts dual-fuel generator units, which can use coal and natural gas as fuel sources for power generation. The plant will be mainly powered by coal throughout its operation period. Natural gas is a back-up fuel, used only in case of special events or force majeure events where coal is unavailable or too expensive as well as when the power station is run for the first time. The project owner has reached an agreement with a coal trading company affiliated to Électricité de France S.A. (EDF), so that the company will provide coal to the project company for a contract term of 30 years. The natural gas used by the project as a back-up fuel will be supplied by DEWA, and the relevant pipelines will be applied by the administration to the gas inlet of the power plant.

iv. Investment structure of the Project

The Project involves a total investment of USD3.14 billion, of which the EPC contract is valued at USD2.35 billion. Contributions from shareholders and operating income before the Project is put into operation account for 22.2% of the total investment. Other financing from external financial institutions amounts to USD2.44 billion, accounting for 77.78% of the total.

Of all shareholder contributors, ACWA, Harbin Electric International, and Silk Road Fund invested in and established the bidder’s joint venture called “ACWA Power Harbin Holdings Limited” at a shareholding ratio of 55:30:15 through their holding subsidiaries. The joint venture will invest in and incorporate the project company “Hassyan Energy Phase 1 PJSC” with DEWA at a shareholding ratio of 49:51. The actual shareholding ratios of ACWA, Harbin Electric International, and Silk Road Fund in the project company are 26.95%, 14.7%, and 7.35%, respectively.

According to the agreement, as to the 49% shares, ACWA’s stake in the bidding company for the Project shall not be lower than 51% within the first seven years since the power plant is put into commercial operation, and such proportion not fall below 35% in the period from the 7th to 12th year, and 30% after the 12th year. Harbin Electric International and Silk Road Fund shall keep their stake in the Project unchanged within the five years after it is put into commercial operation. There is no restriction on subsequent transfers for now. The equity of DEWA cannot be transferred before the power plant is put into commercial operation entirely. If any transfer is needed, the consent must be obtained from the loan banks and shareholders of the borrower.

v. Operation structure of the Project

The UAE power market is at the high end of the international spectrum, so the Project features high standards and demanding requirements. Given the requirements put forward by the owner and combined with risk control and operation conditions, all shareholders of the project owner have co-designed a business framework and signed agreements with all relevant parties to ensure the smooth operation throughout the Project.

The construction of the Project will be planned and coordinated by Harbin Electric International as a whole. All the electricity generated throughout the operation period of the Project will be purchased by DEWA at a steadily growing price linked to cost. The electricity in the first phase will be used to meet the demand of the Expo 2020 Dubai, and that produced in later phases will cater to the constantly growing electricity demand in Dubai in each of the subsequent years. The operation and management of the project company is in the charge of a power station operating company under ACWA. The coal required by the Project will be purchased at the prices of international coal market according to an agreement already reached with a trading company of EDF to cover the entire operating period of the Project.

II. Specific Measures and Highlights of Work

i. Specific measures

1. Adhering to the prudential principle to cement cross-border cooperation

The Project is jointly invested in and developed by the Dubai government, ACWA, Harbin Electric Corporation, and Silk Road Fund. It is the first coal- and natural gas-fired clean energy power plant built with high standards in the Middle East. It is of great international repute.

ICBC adheres to the prudential business principle, and mobilizes joint action between domestic and overseas institutions. Many of its functional departments in charge of risk management, credit approval, and legal affairs, among other aspects have worked together to conduct in-depth preliminary and mid-term due diligence, and the Special Financing Department has fully leveraged its professional financial product lineup in the global power industry. When arranging the syndicated loan worth USD1.9 billion as the lead bank, ICBC has accurately identified the country risk, customer risk, and risks arising from other aspects of the Project, optimized the shareholder structure of the Project, come up with innovative financing modes, and hired professional agencies to assure the quality of relevant agreements and safeguard the financing process of the Project.

2. Seeking joint action between the Head Office and branches as well as cross-departmental collaboration to keep a tight grip on project risks

Unlike the traditional export buyer’s credit business that can use export credit insurance agencies to mitigate credit risks, the Project adopts a pure project financing mode that presents enormous challenges on the efficient control of customer risks. This is because the strength and credibility of the project initiators have a direct bearing on whether the Project can be implemented smoothly. Moreover, compared with the Chinese financing market, an overseas one tends to be more complicated. Therefore, the first consideration for the Project is customer risk and country risk. As to risk control, ICBC fully exploits the advantages of the Head Office in professional operation and the geographical advantages of overseas outlets, so that the Head Office and branches can make joint efforts and divide work reasonably to identify the country risk and customer risk, especially the risks related to the Dubai power market, and take a firm grip on project risks. DEWA, a shareholder of the Project, is the only power administration in Dubai. Endorsed by the Ministry of Finance, it not only has a strong ability to pay, but also carries a huge political clout. Taken together, the Project presents reliable prospects.

From a macro perspective, the Special Financing Department and the Risk Management Department have assessed the political and economic situation in Dubai, UAE, and approved an ample country limit after verification. Two initiators of the Project sponsors are ACWA and DEWA, one of the Dubai government departments, both of which are important customers of ICBC Dubai Branch. Relying on previous business contacts with them, Dubai Branch has gained a full picture of these customers, communicated closely with government departments, and kept track of local political and economic dynamics. On the basis, it could comprehensively evaluate many factors such as possible changes in power policy and relations between power supply and demand.

3. Leading Chinese-funded enterprises as project shareholders and hiring professional agencies to reduce the risk of default

After making sure that the country risk and customer risk of the Project are under control, the Special Financing Department began to seek for the position of the lead bank. Under the leadership of ICBC, the Chinese-funded enterprises Harbin Electric Corporation and Silk Road Fund have participated in the Project as shareholders, and tried to obtain seats on the board of directors of the project company.

The pure project financing mode with neither coverage from credit insurance nor recourse dominates the electricity market of the UAE. As to the Project, the risk resolution mainly depends on the mutual constraints between the terms of various agreements. Therefore, the negotiation about these agreements turns out one of the key links where the syndicate of banks has invested in a lot of energy. ICBC utilizes its abundant experience gathered in the “going global” business and pool of external consultants and hires a world-class consultant team to support members of the syndicate. At the same time, the front-office departments seamlessly work with the Legal Affairs Department to get involved in the negotiation and review of each agreement. Of all agreements, the power purchase agreement (PPA) is one of the most important under the Project. The electricity purchase payments from the Dubai government constitute the most important source of cash flow for the Project. Therefore, ICBC has led internal and external professional agencies to carefully study all the PPA terms that are likely to affect electricity income or lead to electricity purchase interruption, and analyze the causes of the above possibilities at length one by one. Besides, the Bank has also taken part in the negotiation about other relevant agreements.

ii. Highlights of work

1. A typical case mentioned in a signed article by Chinese President Xi Jinping

In July 2018, Chinese President Xi Jinping published a signed article titled “Working Hand in Hand for A Better Future” on the local media during his state visit to the UAE. As he put it, “Our new and high technology cooperation is on the rise. The 700-MW Concentrated Solar Power (CSP), a China-UAE joint project, is under construction in Dubai. It will be the world’s largest and most advanced solar thermal power plant. The Hassyan Clean Coal Power Plant, the first Middle East project financed by the Silk Road Fund, will be the first clean coal plant in the region upon completion.”

The Project integrates many Chinese elements, which include Chinese investment, Chinese financing, Chinese general contracting, Chinese design, Chinese manufacturing, and Chinese construction. It is a typical case where central enterprises rally around as a national team to lead other Chinese firms to go global together and seek for international capacity cooperation.

As the lead bank for the financing deal for the Project, ICBC has participated in the entire process that consists of project marketing, financing structure design, negotiation about important guarantee terms, loan review & approval, formation of an international syndicate of banks, and negotiation about the signing of contracts and agreements, so as to turn the Project from a proposal into reality ultimately. While underpinning Chinese-funded enterprises to go global, it has also fully demonstrated to the international project financing market its global competitiveness as a world-class commercial bank that is professional, dedicated, down-to-earth, and pragmatic.

2. The first clean coal-fired power plant in the Middle East

As a major project requiring international cooperation under the BRI, the Dubai Hassyan Power Plant will become the first clean coal-fired power station in the Middle East upon its completion. The Project adopts the BOO model and the world’s leading ultra-supercritical coal-fired power generation technology to build and operate a 4x660MW clean coal-fired power house. The four generator units are scheduled to come into commercial operation in 2023. After that, they are expected to provide 20% of electricity energy needed by Dubai, which can greatly bring down power costs of local residents.

The Project is located in the UAE, a high-end power market of the international spectrum. The adoption of the world’s most cutting-edge combustion, desalination dust removal and desulfurization technologies enables the power plant to outperform the same type of generator units worldwide in terms of dust, sulfide and nitrogen emissions discharged during the operation, a design that is intended to minimize air pollution. Designed with high standards and a novel operation mode, it is the world’s first dual-fuel generator project to supply power at full load. It has the largest single coal storage facility among the power stations of same kind and the longest submarine pipelines for water transmission in the world. Upon completion, the Project is well poised to join the rank of the most influential projects in the global market.

3. A model case of multilateral cooperation

The Project involves a large amount of financing, many participants, and a complex structure. Due to its huge international influence, many large international banks such as UBS, Societe Generale and Deutsche Bank have thrown olive branches to the project owner, hoping to serve as the lead bank of the Project. After many rounds of negotiation, ICBC and Standard Chartered Bank have finally stood out to become the co-lead banks, responsible for arranging financing of up to USD2.4 billion and forming a syndicate of banks for the Hassyan 4x660MW coal-fired power plant project in Dubai, the UAE. Specifically, ICBC is in charge of forming a domestic syndicated loan of no more than USD1.8 billion (participating banks include Bank of China, China Construction Bank, Agricultural Bank of China, etc.). Standard Chartered Bank forms a USD600 million offshore syndicated loan (participating banks include First Gulf Bank, Union National Bank, and Saudi National Commercial Bank).

Participants in the Project come from China, the US, France, Germany, Italy, Spain, the UAE, Saudi Arabia, India, and other countries. It is a typical case of multilateral cooperation. The shareholders of the Project include DEWA, ACWA, Harbin Electric International, and Silk Road Fund. The EPC contractor is Harbin Electric International, the primary equipment supplier is General Electric Company (GE), the operator is NOMAC, a wholly-owned subsidiary of ACWA, the coal supplier is EDFT, a wholly-owned subsidiary of EDF, the natural gas supplier is DEWA (also the electricity purchaser), and the technical service provider is Rwe Group.

III. Results Achieved and Influences

i. Winning a host of international awards including PFI

As the first financing deal that ICBC has led with neither coverage from credit insurance nor recourse, the Project has been rated as the “Middle East & Africa Power Deal of the Year” by Thomson Reuters’ magazine Project Finance International (PFI) for 2016 and the “Best Project and Lead Bank in 2017” by the China Banking Association.

ii. Leading Chinese-funded enterprises to enter the Dubai market

By partnering with third-party markets in innovative ways, ICBC has successfully led the Chinese-funded companies Harbin Electric Corporation and Silk Road Fund to invest in the Project as shareholders, allowed Chinese capital to get involved in the engineering contract and equipment import, and helped Chinese-funded companies march into the host market, thus practicing the tenet that financial innovation is made to boost capacity cooperation under the BRI.

iii. Bringing sound social benefits and influence

The Dubai Hassyan project is the first coal-fired power plant project in the Middle East. Upon completion, it will provide 20% of the electricity needed across Dubai, thus greatly cutting electricity costs of local residents. The adoption of the world’s most cutting-edge combustion, desalination, dust removal and desulfurization technologies enables the power plant to outperform the same type of generator units worldwide in terms of dust, sulfide and nitrogen emissions discharged during the operation, a design that is intended to minimize air pollution.

IV. Lessons Learned and Policy Suggestions

i. Leading Chinese-funded enterprises to facilitate capacity cooperation under the BRI

The Project is a typical case where the BRI is implemented, Chinese enterprises succeed in “going global”, and international capacity cooperation is advanced. By partnering with third-party markets, ICBC has successfully led Harbin Electric International, Silk Road Fund, and other Chinese-funded companies to enter overseas markets, thus practicing the tenet that financial innovation is made to boost capacity cooperation under the BRI. Relying on cooperation with third-party markets, the Bank established a regular communication mechanism through which it could share customer resources and project reserves with peers to complement each other’s advantages, and exchange information. It, therefore, gained more influence and had a greater say in the international capacity cooperation under the BRI. In the implementation of specific projects, the Bank infiltrated financial support into all links, and raised project management standards throughout the entire life cycle.

ii. Practicing the concept of green finance and safeguarding the BRI implementation with environmental protection efforts

ICBC attaches great importance to cooperation with third-party markets and environmental protection. It always adheres to the concept of green credit, and integrates green finance into all aspects of financial services and every step of operation and management, to promote the formation of a new modernization pattern where man and nature co-exist in harmony. The Bank adopts international standards and abides by international norms. It gives priority to maintaining harmonious relations and carrying out win-win cooperation with the host countries. With these steps, ICBC does its part to the sustainable development of economies and the green implementation of the BRI, and shapes a socially responsible image in the international community.

iii. Basing the provision of comprehensive financial services on a professional product lineup

While providing financial support for the BRI projects, ICBC allows the professional product lineup to play a leading and driving role. Relying on innovative financial models, domestic and overseas branches of the Bank make joint action to provide customers with a series of comprehensive financial services such as deposit, settlement, remittance, global cash management, financial derivative instruments, and advisory services. In the process, they get promptly informed of what type of financial business and information the “going global” enterprises actually need, thus capable of spotting broader business opportunities under the BRI.