Desalination draws private sector.

Byline: Michel Cousins

Saudi Arabia has always been a believer in the free market. It has never wanted a command economy. However, until not too long ago, the reality was that the Saudi private sector was not up to the scale of demand that rapid infrastructural and economic development required. In the water and sewerage sector (linked to the electricity sector because of the use of steam for both desalinization and power generation), as in other infrastructure sectors, the role of the private sector has tended to be limited to the preparation of studies and the construction of plants.

That began to change when in May 2002 the first contract on a BOT basis (Build, Operate and Transfer) was awarded to a private local consortium to rehabilitate and upgrade an existing wastewater treatment plant in Jeddah Industrial City. The SR120-million project was for a 20-year period.

Driving the change was not merely a genuine desire for privatization but also a need. Back at the end of the 1990s and the beginning of the millennium, when government budgets were tight because of ever increasing demands and stagnant oil prices, privatization was seen as a means of drawing the private sector's vast financial resources into the Kingdom's development. In the case of water, it was estimated that billions of riyals would be needed to meet ever-growing demand. Those estimates are themselves constantly on the rise. The most recent estimate is that by 2020, SR375 billion ($100 billion) will have to be spent on water projects.

Following fast on the Jeddah contract, other BOT wastewater plant contracts were awarded to the private sector. However, the government had already decided that the fastest way to provide water was desalination and that the best way to involve the private sector was not using BOT contracts but long term BOO (Build, Own and Operate) concessions. The role of the government was to be that of the overseer ensuring standards and supplies, while the private sector would be permanently responsible for providing the water and funding projects that produce it.

Thus in July 2002, the Supreme Economic Council passed a resolution opening desalinization to the private sector. The objective was to set up four Independent Water and Power Production projects (IWPPs), each of which would be 60 percent owned by the private sector, with 32 percent owned by the Public Investment Fund and eight percent by the Saudi Electric Company (SEC). The resolution also resulted in the formation of a new public entity, the Water and Electricity Company (WEC) as the sole purchaser of the desalinated water and electricity produced and there was government credit support in the form of purchase guarantees.

The four IWPPs chosen were:

N Shuaiba III, 118 km south of Jeddah: Supplying Jeddah, Makkah, Taif and Baha; project cost: SR9.2 billion ($2.45 billion); capacity: 880,000 cubic meters a day, 900 MW;

N Shuqaiq, Phase II, 140 km north of Jazan, 105 km southwest of Abha: supplying Asir region and Jazan; project cost: SR7.5 billion ($2 billion); capacity: 212,000 cubic meters/day, 850-1100 MW;

N Ras Azzour, north of Dammam: project cost: SR9 billion ($2.4 billion); capacity: 1 million cubic meters/day, 2,500 MW; and

N Jubail, which was later canceled and merged with Marafiq's Jubail III project.

In addition, a further six IWPPs are envisaged at costs, estimated two years ago, of SR22.5 billion ($6 billion). Today those costs are thought to be a significant underestimate.

The initial four IWPPs have not been the only desalinated water and power projects in the Kingdom to involve the private sector. Marafiq is the country's first nonwholly state-owned utilities company, providing water and power to the industrial cities of Jubail and Yanbu. It is part state-owned (its four major shareholders - Royal Commission for Jubail and Yanbu, Saudi Aramco, Saudi Basic Industries Corporation and the Public Investment Fund, who each own 24.81 percent). Seven other private companies hold 0.76 percent and it is listed on the stock market. It has its own IWPP projects for both places. In 2006, a contract for its Jubail III IWPP (replacing the canceled WEC Jubail IWPP) was awarded to a consortium that includes France's Suez Energy and Saudi-based ACWA Power Projects, itself a consortium of three Saudi companies: Dammam-based A.K. Al Muhaidib & Sons, Al-Rajhi Group's MADA Group for Industrial and Commercial Investment and Abdullah Abunayyan Group. The SR13.13-billion ($3.5-billion) project, producing 800,000 cubic meters of water a day and 2,743 MW of electricity was due to begin operations on March 31, 2010 but was completed ahead of schedule two months ago. In November 2007, 12 consortia were pre-qualified for the project Yanbu IWPP. The contract was supposed to be awarded in February but has not yet been decided.

The appropriately named ACWA ("aqua", Latin for "water") has become one of the leading private Saudi companies in the sector. It is also involved in the Shuaiba III and Shuqaiq projects as well as in the Rabigh IWSPP (Independent Water, Steam and Power Producer). This project, awarded in June 2005 on a 25-year BOT basis, to a joint venture comprising ACWA (25 percent), Itochu (20 percent), Marubeni (30 percent) and JGC (25 percent), is located at the Petro-Rabigh refinery, itself a joint venture between Saudi Aramco and Sumitomo Chemicals.

The scale of the Kingdom's IWPP projects has drawn massive financial and investor interest from around the globe. Shuaiba III, the biggest IWPP in the world, for example, has involved some 37 banks in project finance, among them almost all the Saudi banks and major international players, such as HSBC, Societe Generale, Sumitomo Mitsui, Bayerische Landesbank, National Bank of Bahrain, Gulf International Bank and the Export Import Bank of Korea, to name just a few. The projects are seen almost as a golden egg, with financial consultants pouring out attractive reports. However, it is not all plain sailing.

That is seen in the unfolding events surrounding the Ras Azzour IWPP. It has hit problems. The project, to supply power and water for Maaden's aluminum smelter and phosphate-processing facilities at Ras Azzour, which is thus destined to become one of the Kingdom's industrial locations. In October last year, WEC announced that the consortium of Sumitomo Corp of Japan, Malakoff International of Malaysia and local partner Aljomaih Automotive was its First Ranked Bidder for the IWPP. The other consortia were ACWA/Kepco of Japan and Suez Tractebel/Marubeni Corp. However, Malakoff, a partner in the Shuaiba IWPP, pulled out of the consortium in the spring and last month Sumitomo, which was having difficulties finding a replacement, announced that its bid was on hold. The problems are said to be with funding-not exactly a surprise in the present financial climate.

It is not clear whether Ras Azzour remains an IWPP or whether the project will be taken over by the government and tendered as an EPC (Engineer-Procure-Construct) contract either on behalf of the Saline Water Conversion Corp (SWCC) or of Maaden. There is support for merging it with Maaden's other projects. Much depends on the negotiations with two other consortia. For its part, the government, putting practicality above ideology, is determined that it go ahead on as scheduled. The plan had been to go to contract in August. Given that converting it to an EPC at this point is bound to involve considerable delays, it may well be that one of the two other bidders may get the contract, even though their prices were higher.

In any event, it is unlikely to dampen investor enthusiasm for the Saudi water projects - nor Saudi government enthusiasm for the private sector to run them.

Copyright: Arab News 2009 All rights reserved.

Provided by Syndigate.info an Albawaba.com company