Al-Zour power and water project puts Kuwait to the test

18 September 2009

Investors will be closely monitoring progress on the country’s first independent power and water project

It has been a busy summer for Kuwait’s power and water industry. In August, the country launched its first ever independent water and power project (IWPP), relinquishing its position as the last bastion of public procurement in the GCC.

A great deal hinges on Kuwait’s ability to complete the IWPP at Al-Zour as planned. Until now, a convoluted and opaque decision-making process has meant that power and water projects have often been subject to delays, retenders and cancellations. Success this time would give new confidence to foreign investors who have been less than impressed by the country’s track record.

Unlike past schemes, the IWPP will not be overseen by the Electricity & Water Ministry. Instead, the Partnerships Technical Bureau, a new body set up to lead the country’s public private partnership (PPP) programme, will be responsible.

While some are hopeful that this will improve the project’s chances of going ahead as planned, others are sceptical about how much power is held by the new body, which is housed within the Finance Ministry.

If the IWPP does go ahead, the winning bidder will design, build, finance, operate and maintain the plant, which will provide 1,500MW of power and 100 million gallons a day (g/d) of desalinated water.

The private investor will also hold a 40 per cent stake in the project company, while the government will take a 20 per cent share. The remaining 40 per cent will be sold in an initial public offering.

The direct role the government is taking in the scheme is seen as encouraging. “The government itself is involved in this investment, so this should boost confidence,” says one foreign contractor based in Kuwait.

So far the project appears to be proceeding on schedule. The bureau moved quickly to issue a request for proposals to consultants in early September after tens of companies expressed interest in the scheme in late August. Their offers are due by 27 October.

“Kuwait is one of the last Gulf main jurisdictions that has not gone down the IWPP route,” says a source at one of the firms bidding for the contract. “This is an opportunity to help develop the Kuwaiti model for IWPPs.”

Kuwait has picked a good moment to launch its first private scheme. The current lull in activity in the power and water sector elsewhere in the Gulf is one of the main reasons the IWPP has generated such strong interest.

Losing confidence

“We will bid for it because there are not many projects around at the moment, but it will be a very challenging task,” says Matthias Schnurrer, Gulf area director at German engineering consultant Fichtner.

The authorities will be relieved that they have managed to attract such interest, parti-cularly given the way Kuwait’s past performance in the power and water sectors has failed to inspire confidence among foreign firms. Perhaps the most telling example is the Subiya power project, which the Electricity & Water Ministry has retendered four times.

In 2006, it selected a team of the US’ GE and South Korea’s Hyundai Heavy Industries to build the plant. However, the group pulled out of negotiations in 2007 and the contract was never awarded.

The government tried again later that year, including a 2,500MW plant at Subiya in an emergency power programme, which was designed to prevent electricity shortages over the summer. It awarded the contract to the local Kharafi National, but later cancelled the scheme because of its cost.

It issued a new tender in April 2008. When bidders finally submitted their offers in November that year, Germany’s Siemens emerged as the low bidder.

But the ministry again scrapped the tender, this time to protect itself against currency fluctuations. In the latest bid round, contractors submitted new offers in June.

It is a similar story with a planned project at Al-Zour North. The ministry tendered a contract to build a 3,000MW power plant at the site in 2006. However, it later cancelled the tender after receiving only a single bid, from a team of the US’ Washington Group International, South Korea’s Doosan Heavy Industries & Construction Company and Athens-based Consolidated Contractors Company. It has not retendered the scheme.

“The government is not focused on the end of the process,” says David Pfeiffer, managing partner of the Kuwait office of UK law firm Denton Wilde Sapte.

“The whole point of a tender in the first place is to get power on line, but they lose sight of the fact that projects that were important four years ago are still not on line.”

The authorities in Kuwait now appear to be changing their attitude and taking a far more co-ordinated approach. In mid-September, the ministry finally awarded the contract for the Subiya power project to a team of the US’ General Electric and South Korea’s Hyundai Heavy Industries, the same consortium that won the first tender in 2006.

The news came a week after the cabinet approved the construction of a power and water plant at Al-Zour North. The project will be developed in four phases and will have a total capacity of 4,800MW of power and 280 million g/d of desalinated water.

The projects at Subiya and Al-Zour North are part of a $17bn capacity expansion programme, which also includes power and water plants at Al-Zour South, Doha East, Jeleiaa, Shuaiba North, Shuaiba South and Shuwaikh.

The ministry plans to more than double its existing installed capacity through these projects by 2017, from 12,779MW and 423 million g/d to 27,039MW and 929 million g/d.

Such developments are needed. With a growth rate of 8 per cent a year, peak power demand is expected to reach 20,000MW in 2015 and 26,000MW in 2026.

The ministry forecasts water demand will rise to 621 million g/d, then 819 million g/d over the same period.

For now, the ministry says the plan is for the government to foot the bill for all these projects. However, depending on the outcome of the first IWPP, private finance could play a far more significant role in Kuwait’s power and water sector in the future.

“This IWPP may be the project that becomes the example,” says Pfeiffer.

Contractors are already predicting that the second phase of the Al-Zour North plant could be also offered to private developers, and the ministry has confirmed that there are more private projects in the pipeline using a build-operate-transfer model.

“No decision has been made, but the [build-operate-transfer] model is going to be applied on a couple of power stations and the privatisation of at least one existing power station,” says Suhaila Marafi, director of the department of studies and research at the ministry.

No one is under any illusion that success is a foregone conclusion. Several consultants in the country tell MEED that even if the advisory contract for the first IWPP is awarded, there is nothing to guarantee the project will progress beyond that.

Bureaucratic hurdles

The country’s complex bureaucratic proces-ses have derailed many projects before and could do so again in future.

For a contract to be awarded under the public-procurement process, the client must first technically evaluate the bids. The Central Tenders Committee will then open the financial offers and recommend a winner to the client. It is up to the client whether to act on this or not, but even after that happens, the State Audit Bureau must still formally approve the award.

“Kuwait needs strong decision-making like the rest of the Gulf has,” says Schnurrer. “It has  a parliamentary structure but there are too many lobbies, so decisions often do not get made.”

The government appears to have recognised that it needs to make a concerted effort to get the power and water industry back on track. The Al-Zour IWPP is an opportunity for Kuwait to show that it is capable of delivering a project of this size on time.

In parallel to this, the award of the Subiya power plant contract and approval of the Al-Zour North project suggest the Electricity & Water Ministry’s own capacity-building programme could be regaining momentum.

Foreign investors will be watching closely to see whether the progress Kuwait has made this summer is sustained. Past experience has taught them to remain wary.

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