After so many false dawns in the Gulf, prospects are starting to look markedly brighter for private power projects in the region. The hesitation and reservations about the risks and expense of promoting private power are evaporating. As the body of evidence increases, showing that privatisation can cut costs and improve efficiency, so the barriers to its adoption are coming down. The traditional state-led approach to producing and distributing electricity is being abandoned and the future of regional power generation increasingly belongs to the private developer.

‘I am impressed with the progress, particularly with what has happened in Abu Dhabi and Egypt,’ says Michael Kappaz, chairman of KMR Power in the US. ‘The Middle East is a major area for future growth.’ For potential developers, the absence of clear policy directives and transparent documentation has hampered progress, and only Oman has actually implemented a private power project. After holding out against the concept of private power, Egypt now has its first IPP under construction at Sidi Krier, with two more to follow at Suez and East Port Said. In the Gulf, Abu Dhabi is in the midst of its first IPP project, which is being built at Taweelah by CMS Energy of the US, and has two more under development.

The accumulation of experience from these pioneering schemes is making it easier for every project that follows. Says Kappaz: ‘What was lacking was good documents when you go to tender. There was a lack of a good road map. That has now happened at Manah, Taweelah and Sidi Krier.’ Kappaz, who is also the chairman and chief executive officer of K&M Engineering & Consulting which advised on the Manah scheme in Oman, believes the region has very little choice. As demand continues to expand at rates ranging from 4-9 per cent a year, governments are going to need to tap private capital to help foot the bill. ‘They are going to get smart and put capital resources into education, health and other services, not into heavy infrastructure. Private capital is available to do that,’ he says. ‘Necessity is going to be the mother of all initiatives.’

In recent months, the most striking developments have taken place in Oman. After an extended review of its options, the government in Muscat has approved a programme of privatisation that is the most comprehensive yet seen in the region. Two IPPs are to be tendered in rapid succession. At the same time, the project to complete the national grid is being stepped up and the privatisation of the existing generators, transmission and distribution is to be set in train.

‘If you think how much has been achieved in six months, it is a remarkable achievement,’ says Richard Ingham of ABN AMRO, which is part of the consortium advising the government on electricityprivatisation. ‘In the six months since the end of June the cabinet has approved the outline of the entire privatisation process.’

The programme it has adopted calls for the division of the existing generators into three separate companies. To ensure that this leads to competition, the companies will be privatised and restrictions will be placed on how much a single investor can acquire. Later in the process the transmission system will be privatised and distribution divided among three regional companies. Private developers will build new generating capacity and an independent regulator will supervise the system.

In a hurry

Oman scored a first with the Manah IPP in the early 1990s but it had been slow to follow it up, until now. The request for proposals for the 240-MW Sharqiya IPP were due to be published by the end of January, with the larger Barqa power and water IPP expected to follow within a month. In their haste to get on with things, the authorities have dispensed with a prequalification process, setting out minimum criteria for the participants instead. For the first time in the Gulf, full foreign ownership is being allowed.

‘The set-up will reflect acceptable international principles and is designed to be highly conducive to inward foreign investment,’ says Christopher McGee-Osborne of Denton Hall, which is part of the advisory group.

One of the drivers of this process is the need to clarify the true costs of production and distribution that are almost impossible to determine within a conventional state utility company. The rate of growth in demand in Oman is expected to slow from 7 per cent in the 1990s to about 5 per cent over the next 10 years, but generating capacity will still have to expand by nearly 50 per cent.

As the system will continue to rely on a significant level of government subsidy, there is a powerful imperative to drive down costs. ‘Privatisation is seen as a way of minimising the cost of subsidy, getting clarity about underlying costs and where the savings can be made,’ says Ingham.

What Oman is planning is a much fuller privatisation than has been seen anywhere else in the Gulf so far, where only Abu Dhabi has restructured in a way that is remotely comparable. Abu Dhabi is committed to IPPs but has no immediate plans to sell off transmission and distribution as well. Muscat is going further than Abu Dhabi and the privatisation will be wholesale rather than piecemeal. All new generating capacity is to be developed privately, a licensing framework will be put in place and an independent regulator will supervise proceedings. ‘Oman really has the will to do this,’ says one of the advisers to the ministry.

The effort to favour private sector solutions is less obvious elsewhere. Even when senior policymakers make the commitment, implementation often turns out to be a long, drawn-out affair. The Hidd project in Bahrain, for example, began life as an IPP scheme with BG International of the UK granted an exclusive mandate to negotiate with the authorities. When the mandate expired without an agreement, the power and desalination plant went ahead as a conventional state-run utility project. Plans are now being pursued to develop the second stage of the Hidd scheme as a private sector project with a retroactive take-over of the 280-MW first phase. Confusion still reigns, however. ‘They have invited bids to act as owner’s engineer which are only compatible with the traditional utility approach,’ says an engineering company representative familiar with the scheme.

There were similar, mixed signals from Qatar and Kuwait throughout the 1990s. Kuwait flirted with US private power developers in the early 1990s but nothing came of it in the end. The proposed 2,400-MW Al-Zour scheme, which has been on the agenda for more than a decade, is spoken of as both a private and a public sector scheme.

Mixed signals

The creation of the Qatar Electricity & Water Company (QEWC) as a closed joint stock company with a minority government holding was intended to signal the end of state-led development of new generating capacity. Initially, it was expected to take over responsibility for all power generation but Qatar was plagued through most of the last decade by project cancellations and a looming power shortage. In the event, QEWC has only assumed responsibility for a single plant, Ras Abu Fontas B. Corporatisation of the sector is promised for this year and the management role of QEWC at Ras Abu Fontas is to expand. Qatar’s first independent water and power plant (IWPP), however, is being promoted, at Ras Laffan, by state energy company Qatar General Petroleum Corporation.

Big things are promised in the largest market with the greatest potential. The charter for the Saudi Electricity Company(SEC) was approved at the end of last year and a new tariff structure to fund fully the sector is to be applied from early this year. There is no question of Industry & Electricity Minister Hisham Yamani’s enthusiasm for privatisation but even he concedes that the first IPP agreement is some time away. And the replacement of the regional power companies, the Scecos, is taking much longer than intended. Says one close observer of the process: ‘We are really waiting to see if it’s going to happen. The super Sceco was supposed to be in place by now.’

Attempts to bring private developers into power generation in Saudi Arabia have had a chequered history so far, with prospective investors put off by the lack of a clear legal framework. The build-operate-transfer (BOT) model was tested for the first phase of the Shuaiba project in the Western region but was ultimately rejected in favour of an Islamic finance deal arranged by the local Al-Rajhi Banking & Investment Corporation. The BOT formula has been wheeled out again, to sceptical reviews, for the next phase of the scheme. ‘They put out the specification but nobody was interested in buying it,’ says the engineering company representative.

Nevertheless, by the time Saudi Arabia does take decisive steps towards power privatisation, other Gulf states are expected to have made similar moves. ‘It’s a matter of necessity,’ says Kappaz. It also makes good sense as demand rises and governments realise that costs and risks can be better carried by the private sector. Says Kappaz: ‘It’s the transfer of risk, the transfer of the costs of capital, so governments can do what they do best as governments.’