Company snapshot

  • Date established: 2002

  • Main business sectors: Power and water

  • Main business regions: Saudi Arabia

  • President & CEO: Paddy Padmanathan

In just a few years, Acwa Power Projects has been transformed from a small speculative investment firm to a leading developer in the Gulf’s power and water sector.

Mohammed Abu Nayyan, the company’s executive chairman, launched the Abdullah Abunayyan Group in the mid 1990s to look speculatively at private investment in the kingdom’s power and water projects.

In 2000, it won the kingdom’s first wastewater build-operate-transfer contract in Jeddah Industrial City. A year later, the Abdullah Abunayyan Group joined forces with AK al-Muhaidib & Sons to form Acwa Power Development.

As Saudi Arabia prepared to launch its first independent power and water project (IWPP) at Shuaiba in 2002, Acwa Power Development formed Acwa Power Projects with a partner, Mada Group for Industrial & Commercial Investment (Mada). Acwa Power Projects bid for the contract and won.

It went on to win Saudi Aramco’s Rabigh independent water, steam and power project (IWSP), the Shuqaiq IWPP and the Power & Water Utility for Jubail & Yanbu’s (Marafiq) IWPP at Jubail Industrial City. In a market traditionally dominated by foreign developers, local Acwa Power Projects is a highly sought-after partner.

Structure

Today, the company is owned in equal proportions by Abdullah Abunayyan Group, AK Al-Muhaidib & Sons and Mada, and is headquartered in Riyadh. In the second half of 2007, Acwa Power Projects began restructuring in line with an organisational development strategy prepared by UK consultant Booz Allen Hamilton. “Acwa Power Projects is a start-up so we have been focused on getting on with the work,” says Paddy Padmanathan, president and chief executive officer. “Now we need to consolidate and strengthen the organisation.”

The company has been split into departments by function Ѝ technical, project
finance, corporate services, business development and public relations – each run by a vice-president reporting to Padmanathan, who in turn reports to the executive chairman and the board of directors.

Hiring experienced staff is also part of the strategy. “Acwa Power Projects is quite visible,” says Padmanathan. “People in the business know us well enough. We are looking for people and, since 2007, people have also been coming to us.”

The company plans to list on the stock exchange, but is waiting until some of its projects are operational and its risk is better managed. “It will be 2010 rather than early 2009,” says Padmanathan.

In the first half of 2008, it will also bring in a new external shareholder, likely to be institutional, through a private placement of 10 per cent of its shares. A further 10 per cent will be divided among seven passive investors Рlarge Saudi conglomerates that have so far held minority stakes in Acwa Power’s project companies without voting rights. The move will give the passive investors an opportunity to consolidate their holding and benefit from the portfolio value.

Operations

The company owns 4,900MW of power and 480 million gallons a day of desalinated water, and has won projects worth a total of $9.8bn. About $8bn has been financed through debt and $2bn through equity. Acwa Power Projectsՠportion of this is about $570m.

In a consortium with other developers, the firm carries out privately financed power and water projects based on a concession or utility outsourcing contract model. Each project is 60 per cent owned by the developers, with the Saudi government owning the remaining 40 per cent. ҆rom the outset, the business plan was very simple: to pursue every credible IPP [independent power project], IWP [independent water project] and IWPP in Saudi Arabia,Ӡsays Padmanathan.

The coming year will be an important one for the company. The Rabigh IWSP will be its first power and water plant to fully come on line. Part of the plant’s water capacity came on line on 1 October 2007. “The plant is due to start commercial operation in the third quarter of 2008,” says Padmanathan. “It will be our first productive asset.”

Ambitions

“Having already built up a respectable portfolio in the kingdom, Acwa Power Projects now wants to further strengthen its position in the domestic market. It has been prequalified for Marafiq’s IWPP at Yanbu and is bidding for the Water & Electricity Company’s (WEC) Ras al-Zour IWPP. “We want to win Ras al-Zour,” says Padmanathan. “It will give us a nice portfolio of three WEC projects [in addition to the Shuaiba and Shuqaiq IWPPs]. We would also like to win Yanbu. It is a logical follow-on to Marafiq Jubail.”

The other goal is to expand into the regional market. “From the beginning, the plan was to start looking outside the kingdom in 2008, initially confining pursuits to the Gulf region,” says Padmanathan.

The Addur IWPP in Bahrain is the company’s first target outside the kingdom. It says it is also looking at two other projects outside Saudi Arabia.

TABLE: Power capacity

  %
Marafiq IWPP 56.5
Rabigh IWSP 7.4
Shuaiba IWPP* 18.5
Shuqaiq IWPP 17.5

TABLE: Water capacity

  %
Marafiq IWPP 36.6
Rabigh IWSP 6.2
Shuaiba IWPP* 47.2
Shuqaiq IWPP 10

* The capacity of the Shuaiba expansion is 33 million gallons a day and costs $200m

Source: Acwa Power Projects

MEED assessment

The interest generated by the rise of Acwa Power Projects is phenomenal. Rival developers want to understand how it has achieved so much in a short time, and many believe that partnering with the company is now the key to success in the Saudi market as the government is openly supporting local firms.

With its quick ascent to the top of the league table of developers working in the kingdom, it is only now that Acwa Power Projects is taking stock. Recruiting talent and reorganising is a step in the right direction as it prepares to expand.

The company will attempt to replicate its success in the Saudi market elsewhere. There is no doubt that its reputation precedes it. But one of its key strengths so far has been its knowledge of the local market, something it will be lacking elsewhere.

Q&A: Paddy Padmanathan, President and CEO

How has Acwa Power Projects grown so quickly?

The Acwa Power story is a good illustration of how a focused, dedicated developer can come through and win. A local developer has a better view of local risk and his own perceived capacity to manage and mitigate that risk. That must be a distinct advantage.

A local understanding inevitably means a closer understanding of the client’s real requirements. Ultimately, it is the tariff that wins, but it is driven by many things, including technical choices.

On a technical level, how do you compete with other developers?

We are able to provide more appropriate input. For example, on the oil-fired Rabigh IWSP [independent water, steam and power project], which uses limestone to remove sulphur dioxide produced during the burning of fossil fuels, all the bidders except us went to the market and secured long-term limestone supply agreements.

Because of the volume of limestone required, we thought it would be more competitive to set up our own quarrying business. The price is less than half of the long-term market price available elsewhere – a saving that was passed directly through to the winning tariff.

Why do you work with different partners on each project?

We tend to focus at the outset on selecting the right technical solution. When a client puts in a request, we start technical optimisation eval-uations and run tariff models. From the selection of the equipment solution, we go on to choose an engineering, procurement and construction contractor, and then think of who to choose as developer partners.

Many people ask to partner with us and in every case we explain that process to them. Every project is unique so it ends up giving a different solution.

Some people claim Acwa has close relations with the gov-ernment and that is why you win contracts. Is that true?

I am sure everyone knows in their heart of hearts that Saudi Arabia is a very transparent environment. If we had some special relationship and were so confident we would win,
why on earth would we leave a 20 per cent tariff difference on the table? We would leave 2.5 per cent.

This 20 per cent difference between our tariff and the second lowest bidder’s tariff, in the case of Shuqaiq, represents SR2.3bn ($6.4m) in NPV [net present value] terms over the life of the concession, and SR1.8bn in the case of Marafiq. This is the real value of a truly transparent, competitive procurement process.

What is your approach for deciding a tariff?

We do bottom-up pricing. We do not play the market pricing game. The engineering, procurement, construction, operation and maintenance contractors and the lenders evaluate each building block from the bottom up and add up the numbers.

We focus primarily on technology and that leads to interesting answers. On Shuqaiq, we were the only consortium to bid reverse osmosis. There were three bidders and they
all used different technologies. Reverse osmosis was the right choice for delivering the lowest tariff.

Will you will you do well in the wider region?

We are ready to cautiously step out. We are being very selective. We do not naturally bring as much value on each project as in Saudi Arabia and we will not dilute our focus. Saudi Arabia will be our anchor market.

Just because we are from the Gulf does not mean we know the Bahraini market. We will have to learn about it. We very much seek to find a Bahraini partner for the kind of support that we provide to our partners.