When the King Hamad Causeway deal was originally floated to the market in 2017, the project appeared to have the early momentum, with a bidders' day in Bahrain’s capital Manama attracting considerable attention at the time.
Since then, it seems as though the Bahrain Metro project has largely overtaken the causeway as the country’s priority project.
However, interest in the King Hamad Causeway deal will resurge when it is eventually brought to market, provided that certain risk structuring issues are appropriately addressed in the RFP documentation.
We do think the project will follow Bahrain Metro's lead in being structured as a PPP. Given Bahrain’s financial constraints, accessing private capital is likely to be an important point for the authority in procuring the project.
Bahrain’s ability to raise the funds will be contingent on the market attitude taken to key bankability issues. In particular, investors will be keen to understand the demand risk.
The capex for this project runs into the multiple billions of dollars (around $3.5bn) and, in this context, without significant support from government, it is difficult to see how traffic revenues could be usefully matched against the necessary capital outlay.
To what extent will the concessionaire be able to control those traffic levels, or the tolls charged to use the causeway? To take material revenue risk in this context would put the concessionaire completely at the mercy of the pricing policies of the governments.
The fact that the project involves a mix of road and rail transport modes further adds to the complexity of trying to pass material revenue risk. Does the project extend to rail operations and, if so, is it intended that the concessionaire will be asked to take demand risk on the railway?
Transfer of demand risk in tolled roads/crossings can be successfully achieved – but even this is a history littered with high profile failures, so care is required.
In reality, if the project is to be a success as a PPP, it is likely that it will be necessary to structure it so that the primary payment stream is an availability based payment that is subject to performance-based deductions under a detailed payment mechanism to be set out in the PPP contract. This payment stream would need to be supported by suitable government guarantees.
Given the relative credit ratings of the two countries, investors will be very keen to understand the extent to which the Saudi exchequer in particular is standing behind the project in the form of a sovereign guarantee.
The treatment of the existing causeway (King Fahd) will also be an important structuring point. Will this project – and the revenue it generates – be wrapped into the new causeway deal? The revenues generated (with solid historical data) would obviously assist the bankability analysis but, by the same token, seeking to impose risk in the existing structure will be highly problematic.
Alternatively, if the old causeway is kept separate, to what extent will this project compete with the new asset? This issue could further affect the project’s bankability.
We would expect to see a significant construction grant from one or both governments to support the capex of the project and reduce the overall funding requirement. This is notwithstanding the very large debt and equity ticket.
It is likely that the King Hamad Causeway will need to tap a wide array of sources of funds in order to deliver the projects, including multilaterals, international and local commercial/Islamic banks and export credit agencies. The structure and risk allocation of the project will also need to meet the requirements of these kind of institutions.
There are also many issues to be developed and resolved around how the two governments will work together to deliver the project: governing law, jurisdiction of incorporation, applicability of rail regulations, land rights, border controls and foreign exchange, and much more.
Bahrain’s second causeway is an exciting and interesting project that could attract significant international attention – both in terms of sources of debt capital and also equity capital from regional and international players.
Similarly, regional and global sponsors and contractors in both the civils, road and rail fields might well all be enticed to participate – however, all of that is conditional on suitable answers being found to the risk allocation and structuring points on the deal.