V 2.00 Of Essay On International Project Finance

International Project Finance 1ICP7A1
Word 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

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
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
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/
4
http://www.biu.ac.il/soc/besa/waterarticle1.html
5
http://www.jr.co.il/articles/desalination.txt

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.
According 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
6
http://www.reuters.com/article/rbssEnergyNews/idUSL2031912320080520
7
8
http://www.ide-tech.com/News_item.asp?iid=5850&pid=1600&ppid=1489&z=4&p=1
9

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.
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
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
12

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
The proposed phases for the Ashdod Project are:-
13
http://ppp.mof.gov.il/Mof/PPP/MofPPPTopNavEnglish/MofPPPProjectsEnglish/PPPProjectsListEng/MitkaneiAtpalatMaim/A
shkelonWater/
14
15
16
17
http://www.water-technology.net/projects/israel/specs.html

Ashkelon Project Technical Data
Other technical Data includes18
Contribution to national demand 5–6% total
Initial filtration pools 20
Treatment 32 RO trains on four floors;
40,000 membrane elements
Plant footprint 75,000m² (300m x 250m)
Power plant Dedicated gas turbine –
80MW capacity, integrated cycle
Grid connection 161kV overhead line
Maximum nominal electrical consumption <4kWh per m³ product water
Water Data:
Feed water input temperature 15–30° C
Feed water salinity 40,750ppm TDS
Product water salinity <40ppm TDS
Salinity reduction 99.9%
Boron reduction >92%
18
http://www.water-technology.net/projects/israel/specs.html

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
19
http://www.desline.com/Geneva/Veolia.pdf
20
http://www.water-technology.net/projects/israel/

cubic meter - or just over one-quarter of an agora per litre of high quality, low sodium
water.21
Price Breakdown Graphic22
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
21
22
http://www.desline.com/articoli/5772.pdf
23
http://www.verticalpulse.com/my_weblog/the_water_industry/

SPC : EPC : O&M24
.
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
24
http://www.mekorot.co.il/Eng/ProfessionalServices/MekorotDevelopmentEnterprise/Documents/Ashdod%20Conference
%20Presentation2.pdf
25
http://www.iflr1000.com/LegislationGuide/88/Public-private-partnerships-an-effective-model-for-project-financing.html
26
http://www.projectfinancemagazine.com/default.asp?

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.
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.
27
2008, http://news.nationalgeographic.com/news/pf/56886964.html

• 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.
However, 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.
28

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).
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
29

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).
30
http://www.emwis-il.org/EN/legislation.xml
31

 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
actors 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
32
http://siteresources.worldbank.org/EXTWAT/Resources/4602122-1213366294492/5106220-
1213366309673/6.4PrivateSectorPerspective_Trends_inDesalination_Market-WillWillersdorf.pdf
33
http://cals.arizona.edu/azwater/programs/conf2008/presentations/Michael_Tramer-June-2008.pdf
34
35
Article 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.htm
38
http://www.infoexport.gc.ca/eng/document.jsp?did=38474

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).
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.
39
Israel comes of age was written by Paul Rubenstein, advocate at Herzog Fox & Neeman, Tel Aviv
-http://www.projectfinancemagazine.com/default.asp?
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
42

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: -
2. Pre-completion risk
An illustration of the spread of Development & Construction Risks as between
can be observed from those ascribed in the Ashdod Desalination Plant Project43
SPC : O&M Contractor : EPC Contractor : WDA
43

An 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 coming
1st
Total Expenditure on R&D as a % of GDP & Availability of qualified
engineers
2nd
Information Technology Skills
3rd
Flexibility & adaptability of the workforce
4th
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
44
http://www.mof.gov.il/Tools/tenders/Documents/ ‫בקרה‬%20‫על‬%20‫תקציב‬%20‫פיתוח‬%20‫של‬%20‫רכבת‬%20‫ישראל‬ /AGREEMENT
%20-%20%20MONITORING%20RAILWAYS%20PROJECTS.pdf
45
shkelonWater/

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 & engineers
3rd
Technological readiness
4th
Quality of research organisations
According 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 microprocessors
o IP Telephony invented by founders of Vocal Tec
o AOL Instant Messenger ICQ
o Zip compression technology
5 Input or Supply risk
The 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
6. 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 between
can be observed from those ascribed in the Ashdod Desalination Plant Project47
46
shkelonWater/ModeofPayment.htm
47

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
Inflation 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) Inflation
Given 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
48
49
Israel comes of age was written by Paul Rubenstein, advocate at Herzog Fox & Neeman, Tel Aviv -

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

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

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?

Annex 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 Agreement
21-Nov-00 Pre-Qualification Submissions
21-Dec-00 Announcement of Pre-Qualified Bidders
25-Feb-01 Issuance of Amended Agreement
01-May-01 First Bid Submission
15-Aug-01 Second Bid Submission
03-Sep-01 Best and Final Offer and Award of the Project to the Consortium
25-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/year
28-Apr-02 Signature of Agreement for additional 50 MCM/year
31-Oct-02 Effective Date (beginning of the 25 years Contractual Term)
22-Jan-03 Financial Close
22-Apr-03 Construction started & Issuance of Notice to Proceed
Aug-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)

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