BAKAD: Great deal – even greater expectations

Expectations of Kazakhstan’s $740 million Almaty Ring Road project (BAKAD), which reached financial close last month, are high – perhaps too high.

The first major PPP concession in Central Asia, the deal has set a long list of precedents and is being held up as a proof of concept for a planned pipeline of major PPP schemes in Kazakhstan – which include the Almaty Light Rail PPP and a programme of 19 hospital newbuilds (the €85 million Almaty Hospital pathfinder PPP for the programme could be out to tender in the coming months, subject to Covid-19 delays) – and over the border into other Central Asian states.

Originally conceived of in 2002, preferred bidder status was awarded to a Turkish-South Korean consortium comprising Alsim Alarko Sanayi Tesisleri ve Ticaret, Makyol Insaat Sanayi Turizm ve Ticaret, Korea Expressway Corporation and SK Engineering & Construction in February 2016. The tender – with advisory from the EBRD and IFC – was both transparent and met international standards, but it took a further two years for the concession to be signed in February 2018 and another two-and-a-half years to reach financial close. That long evolution was in part due to fallout from devaluation of the Tenge but also because, as a pathfinder deal, BAKAD required amendments to Kazakh law and the regulatory environment (there was also a Covid-19 delay of around four months).

Although a toll road project, the Kazakh government is taking the traffic risk – the 20-year BAKAD design, build, finance, operate, maintain, transfer concession is largely availability-based. However, there is a mechanism by which the sponsors get a share toll revenue if certain construction milestones are fulfilled ahead of schedule. And that is a very real possibility – the sponsors have put a combined $158 million of equity into the scheme, which has enabled them to begin construction prior to financial close. The concession includes a 50-month construction deadline from financial close, but with works already underway a 2023 completion date looks feasible.

Construction works on the 66 km road comprise 51.5 km of six-lane and 14.5 km of four-lane highway, 20 bridges, eight interchanges and 22 overpasses. The key objectives of the project are to direct traffic away from Almaty thus reducing the city’s pollution levels; and reduce traffic congestion, excess mileage and road accidents. In addition, the project will be a significant part of the New Silk Road connecting Western China with Western Europe – turning Kazakhstan into a logistical hub and improving the country’s access to global markets.

The DFI-backed US dollar denominated financing underpinning the project is the largest non-oil and gas infrastructure financing in Kazakhstan to date. Coordinated by the EBRD, the $585 million of debt facilities comprise a $225 million EBRD A-loan and a $125 million EBRD B-loan – syndicated to Bank of China ($100 million) and Dutch pension fund PGGM ($25 million) – both on a 15.5 year tenor; a $135 million 15.5-year Eurasian Development Bank (EDB) loan and a $100 million 14.5-year murabaha (cost-plus financing) from the Islamic Development Bank (IsDB). White & Case was sponsor counsel, while Allen & Overy and local firm AEQUITAS provided lender counsel.

The deal includes standard international project finance features – payments in case of early contract termination; access to international arbitration in case of a dispute; lender step-in provisions; strict performance criteria for the availability payments based on provision of lanes; safeguards against any attempted future nationalisation – some of which required changes to existing Kazakh legislation. Furthermore, the availability payments are pegged to the US dollar and repayment of construction costs is skewed to the first 14 years of the 15-year-and-10-month operations period.

Given those provisions, BAKAD has done the groundwork for a PPP market that could generate significant international investor appetite – no question. The BAKAD PPP tender alone generated nine requests for qualification and a shortlist of five bidding groups including the winner (the other groups on the shortlist were IC Ictas Insaat Sanayi Ve Ticaret with IC Ictas Altyapi Yatirimlari Ve Isletme, Astaldi and Intertoll Infrastructure Development; Consortium Vinci-BI Group; Corsan Corviam with Gulsan Insaat Sanayi Turizm Nakliyat Ve Ticaret and Egis Partners; and CITIC Construction with KazStroyService).

And the KZT91.245 billion ($210 million) Almaty Light Rail PPP – like BAKAD, an availability-based concession – prequalified four bidding groups in early 2019: Itochu/Makyol/CAF Construcciones Y Auxiliar De Ferrocarriles; China Machinery Engineering Corporation (CMEC)/CHSR China High Speed Railway Technology; Enka; and Alstom Transport/Gulermak/Marubeni/Meridiam Eastern Europe Investments.

So international infrastructure investor appetite for Kazakh PPP is clearly in place – BAKAD even has Dutch pension fund PGGM as a debt provider, albeit under the EBRD umbrella. And Kazakhstan has an investment grade sovereign rating – affirmed at BBB-/A-3 by Standard & Poor’s on 9 September. But given the weakness of the local currency, any future market for major PPPs with Tenge-based revenue ultimately backing debt repayment will likely remain heavily DFI-backed – the Almaty Ring Road is a true internationally accepted PPP template, but not one that will spawn an international commercially-banked PPP market any time soon, which has to be the ultimate aim given stretched DFI and government budgets.

Furthermore, with the Kazakh economy so heavily reliant on volatile oil and gas revenues, even sovereign guaranteed PPP repayments (a la Turkey) might prove a hard sell to commercial lenders. Real PPP has arrived in Kazakhstan – and BAKAD is a significant achievement – but don’t expect a rapid post-Covid-19 market boom unless traditional DFI due diligence timescales suddenly accelerate.