Consolidated Water lines up Mexican mega-project

The Playas de Rosarito seawater RO desalination mega-plant project has been six years in the making. It began as a twinkle in Consolidated Water's eye even before Mexico had introduced its new public-private partnerships law, but the act's introduction in 2012 gave the project a clear structure for moving ahead.

The new desalination plant at Playas de Rosarito will be on the coast adjacent to the existing power station

The new desalination plant at Playas de Rosarito will be on the coast adjacent to the existing power station

At that point, Consolidated had already done much initial project scoping, however the terms of the new law mandated that it tender in a competitive process with only a very slight advantage. The firm's speculative activity in laying the groundwork for the project paid off, and it won the commercial contract in August 2016.

The Playas de Rosarito project, whose estimated total cost is MXN9 billion ($490 million), is a huge initiative for the State of Baja California, one of the largest infrastructure projects ever to have been undertaken in the region. Hopes are high that it will support economic growth, particularly in terms of tourism trade.

The next big milestone for the mega-project will be financial close in early to mid-2017. Construction will then commence in two phases: the first delivering water into the city of Tijuana's potable water system; and the second to a delivery point in central Tijuana.

Finally, there is the potential for the Rosarito plant to supply water across the border into California. Read comment from Otay Water District, California, board president Mitch Thompson.


Shape of the project: Mega-project has several unique characteristics

The drivers
· Initially to supply the city of Tijuana
· Next phase may involve a cross-border water deal with US, giving the project a bi-national flavour
· Structured according to Mexico's Asociaciones Publico-Privadas (APP), law on public-private partnerships

Proactive project
· Project grew out of ideas and studies initiated by Consolidated Water
· The company secured land and other rights of way from the Rosarito Power Plant
· APP introduced a clearer framework for projects that helps to attract private investors

The Rosarito Seawater Desalination Plant project is a multi-faceted piece of work that relies on input from, and partnerships with multiple agencies, individuals, administrators, and regulators.

Once built, the plant will be twice as big as any other desalination plant in the Americas, or the entire Western hemisphere.

"The magnitude of it in terms of a global desal project, and the size and importance of it to Baja Norte -- it's the region's biggest infrastructure project ever, and one of the biggest public-private partnerships anywhere in Mexico -- is very exciting. It's a really big deal for the region's water supply, and not just in Tijuana, but also in San Diego, California," says John Tonner, vice president and chief operating officer of Consolidated Water.

As a Mexican project, it will be financed in pesos, and there is potential to work out a cross-border deal on water supply with the State of California, US, giving the project a bi-national flavour.

When Mexico's new public-private partnerships law, Asociaciones Publico-Privadas (APP), came into play, it provided a clear legal framework for the project. Under the terms of the law, private developers can propose to the state ideas for studies on issues like the feasibility, environmental effects, and social impact of a project.


Public-private partnership: The APP agreement sets the foundation for the future

The contract
· APP contract covers design, construction, financing, and operation
· Covers seawater desalination plant and accompanying aqueducts
· Water rates are indexed to the Mexican national consumer index

Two phases
· Phase one: capacity of 50 million gallons a day and an aqueduct to the Tijuana potable water system
· Phase two: capacity of 50 million gallons a day and an aqueduct to a second delivery point in Tijuana
· Consolidated Water signed a public-private partnership APP deal with the State of Baja California on 22 August, 2016.

The tender had been a competitive international tender and, as Tonner says, Consolidated Water "had to fight tooth and nail with other experienced, international desalination companies"--a process that ultimately "kept the costs down".

The contract was signed through Aguas de Rosarito (AdR), a special purpose vehicle owned by NuWater and NSC Agua, a subsidiary of Consolidated Water, for the design construction, financing, and operation of a seawater desalination plant in Playas de Rosarito.

The project is split into two halves, the first covering a 50 million gallons a day desalination plant and a 14km aqueduct to deliver water into Tijuana's potable water system, and the second for another 50 million gallons a day plant, and an aqueduct to convey water to a central delivery point a further 15km into Tijuana.

Phase one must be operational within 36 months of commencing construction, and the second by the end of 2024, although the state could bring that date forward.

The operations and maintenance part of the contract runs for 37 years from the date of commissioning of phase one. At the end of the period, ownership of the plant and aqueducts will transfer to Baja California State Water Commission (CEA).


Bi-national flavour: Water supplies in Baja Norte and San Diego County are closely linked

The possibilities
· Desal project could eventually supply water to the US
· Innovative water trading ideas are developing, including new definitions of "wet water" and "paper water"
· "Paper water" equates to trading between water agencies on water supplies
· Potential for leverage through smart approach to water deals

The challenges
· Many permitting hurdles must be cleared, including at a Federal level, for cross-border initiatives

Back in the 1930s, a treaty on water from the Colorado River and Rio Grande was signed between the Mexican and US authorities. The organisation involved was the International Boundary and Water Commission, a unique agency that continues to exist today, as a function of both the Mexican and US authorities.

As part of the broader work that's going on around the Rosarito Beach project, Otay Water District, California, has been working to get approval to take water from the plant, steering a process through authorities on the US side of the border.

"There has been a lot of water sampling and testing going on for almost a couple of years now in compliance with California and Federal regulations, and Otay Water District has applied for permission to have a pipeline cross the border. Anything that goes across the border, whether a gas pipeline, a power line, or whatever, requires presidential approval on the US side -- a presidential permit; and Otay is quite advanced in planning for that," says Tonner. "The application for the presidential permit is in, and the source water quality monitoring necessary to support an application for consideration of a new water source is proceeding with the State of California." One question is whether CEA, the State Water Commission of Baja California, will be the vendor of water to Otay, or if the supplies will be bought direct from Consolidated Water. "That's the million dollar question. On one hand, we'll just keep making the plant as big as CEA wants it to be, and they can sell it to whoever they want, assuming that they can get approval from whichever entities they need to on both sides of the border. Or they may want us to go directly to Otay," explains Tonner. "Whether it ends up that they negotiate with the State of Baja California Norte, or if something's worked out with some other government agencies at the Federal level on both sides, I don't know. Whether they end up dealing with us, we don't yet know."

Water from the plant could be delivered across the border in one of two ways: in Mexico the two possibilities are known as "wet water" or "paper water". Wet water means physically delivering water, by means of a pipeline for example. Paper water means that a US agency somewhere further up the Colorado River would take a certain amount of water from the river, and that Tijuana would no longer draw that volume from the river on its side of the border, but instead take it from the desalination plant.

"For every cubic metre a second that we deliver to Tijuana, they don't need to take it from the Colorado. To get a cubic metre a second to Tijuana they take more than that from the Colorado, because of the canal, evaporation, and leakage. So paper water represents a potential for leverage. We give them one, they may be able to haggle for two on the Colorado. That's never been done before, and can be a part of our project," says Tonner.

San Diego and Tijuana are seen by some agencies, including development funding bodies, as a single economic area. "The potential to deliver water into both Southern California and Baja is really exciting, it builds on the community there, helps to foster and grow that, and there are a lot of people on both sides who believe in that," says Tonner.


Technology and design: There will be a focus on low energy consumption

Energy efficiency
· Plant will use the latest proven micro-filtration, ultra-filtration, and reverse osmosis technologies
· Double the capacity of any other desalination facility in the Americas
· Consolidated Water will exploit significant experience with energy recovery devices that it has gained through projects in the energy-expensive Caribbean market

Proven technology
· The intention is to use proven and robust technologies in reliable ways
· Experimental or unproven technologies are considered inappropriate in this context

It's still early days for the exact technical details of the system to have been nailed down. Broadly speaking, the approach will be "to deploy the latest proven micro-filtration, ultra-filtration and reverse osmosis technologies in the marketplace," says Tonner. "It's going to be double the capacity of anything in the Americas. It will be world class in terms of its environmental footprint, including energy consumption."

He points out that the big innovations of the project are expressed more in terms of its mega-size, and the structure of the deals that it is built upon, rather than in using the latest, most experimental technology out there. Additionally, use of unproven or early stage technology is usually more appropriate in situations where the developer is investing only its own money.

"The type of deals we are doing as part of the Rosarito project, they get done with limited recourse project finance which mandates that you are using proven, robust technologies in reliable ways," says Tonner.

Consolidated Water's core market is in the Caribbean -- including the Cayman Islands, the Bahamas, and the British Virgin Islands - a market whose energy prices are five to eight times higher than in the US or Europe.

"We know that reverse osmosis is considered by some people to be an energy-intensive process, and in the Caribbean we operate in an energy-expensive market. At our Caribbean plants we have been among the first to deploy advanced energy recovery devices, we have a lot of experience with that. We do that with assets that are on our own balance sheet," explains Tonner.

Consolidated Water's portfolio of plants includes RO plants in the Cayman Islands, the Bahamas, Belize, the British Virgin Islands, and Bali. It began as an exclusive water utility franchise in Grand Cayman in the 1970s, developing technical expertise and regional knowledge that it could then leverage to expand. The company's first SWRO plant was installed in 1989.


Construction and ops: EPC contract goes to experienced mega- operator

The partners
· Degremont (Suez subsidiary) was selected as the design and construction partner
· Track record and reliability of partners is considered important as part of the project package that will be presented to potential lenders

The operations
· Suez, NuWater, and Consolidated Water will operate and maintain the plant and aqueduct over a period of 37 years
· Ownership of the infrastructure transfers to Baja California State Water Commission (CEA) in the mid to late 2050s

Degremont, a subsidiary of the French water treatment solutions and services provider Suez Environment, has been awarded an engineering, procurement and construction (EPC) contract to build the plant at Rosarito.

"Suez has a track record of building projects like this, and lenders like to see that the EPC contractor is doing the engineering and taking responsibility for that," says Tonner.

Back in 2009, Degremont, in consortium with Thiess, signed up to finance, design, build, operate and maintain the Victorian Desalination Plant mega-project in Melbourne, Australia, up until 2039 -- one of the world's other major public-private partnership desalination mega-projects.

The ongoing operations and maintenance of the Rosarito Desalination Project will extend for 37 years from the date of commissioning of the first phase of the project.

"We will be operating the plant through an operating subsidiary, in partnership with Suez and NuWater," says Tonner.


Next steps: Consolidated is now working towards financial close

The facts
· APP contract forms the basis for discussions with potential lenders and investors
· Equity partners and banks are currently combing through the fine details of contract
· Financial close is expected to be in early to mid-2017

The figures
· Consolidated Water expects annual revenues from the project to be around MXN1.02 billion ($55.5 million)
· Water rates will be indexed to the Mexican national consumer price index

The next big milestone is for Consolidated Water to secure funding, which it expects to do in the first half of 2017. An interesting aspect of the project is that it will be financed in Mexican pesos rather than US dollars.

The details of the contract released by Consolidated include that water rates will be indexed to the Mexican national consumer price index, and that electrical energy costs incurred by AdR to desalinate and deliver water will be passed through to CEA (subject to efficiency guarantees). The company also said it expects annual revenues from the project to be around MXN1.02 billion ($55.5 million).

Tonner, whose background includes 10 years working as a technical adviser to lenders on project finance structures for big projects, explains that details such as these, among other information, will be pored over by banks and investors before they commit funds.

"Before the banks put their money in the kitty, they will be reviewing the preliminary details that we've got, satisfying themselves that the project can be built on budget and on time, and operate for those costs. The bankability of a project like this is encapsulated in the agreements between the various partners involved in the APP," he says. The APP was issued in substantially complete form by the Mexican authorities in November 2015, and the final agreement executed in August 2016. "Under Mexican law, they pretty much have to prove that it is the exact same as they started with last November, but incorporating clarifications. Once that deal is done, we can start banking upon it, and the state can start putting the guarantee trusts in place," adds Tonner.

Consolidated has been in discussions with potential equity partners and banks throughout the project development process, and these parties are now scrutinising the paperwork; as well as a guarantee mechanism - a trust agreement - that is put in place by the State of Baja California. Once financial close is achieved, the design work begins. "The next really big announcement is financial close, and then we can begin breaking ground," says Tonner.



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