The turbines at the $1,600 million build-operate-transfer (BOT) power project at Hub in Pakistan are due to start turning this month, nearly 10 years after the project was conceived. The start-up of this pioneering project is symbolic of the changes that are taking place throughout the power industry. Private sector involvement is increasingly seen as the way to finance new power generating capacity. And Middle East governments are weighing up the benefits in the face of burgeoning demand.
High population growth and increasing industrial diversification mean that substantial new additions to capacity are required in most Middle East countries. MEED estimates that an additional 80,000 MW will be required throughout the region to ensure demand is met by 2005.The cost of installing this new capacity will be about $144,000 million.
With governments throughout the region trying to bring public spending under control, it is clear that alternative methods of footing this power bill will have to be found. In Pakistan, Oman and Morocco, this has already meant BOT. Egypt, Saudi Arabia, Tunisia and Yemen are all soon to follow down the BOT road.
With new power projects passing into private sector hands engineering firms are already recognising the need to adapt. ‘We estimate that by 2000, 50 per cent of our work will come from IPPs [independent power projects],’ says one senior sales executive at a leading turbine manufacturer. ‘Our customer base is changing from governments to the leading power developers and we are having to build up new relationships.’
Another industry source confirms this. ‘Tackling the IPP market means targeting the large investors.’ In the US, this means companies like AES Corporation, Enron Development Corporation and Mission Energy, all of which are already active in Pakistan. New players are also recognising the potential of the power generation market. British Gas has taken a keen interest, but failed to secure a project in Bahrain. The Royal/Dutch Shell Group has also announced recently that it is looking at the industry with a view to securing new markets for its gas and coal assets.
Not only are the targets of marketing campaigns changing, but the methods are different too. Securing contracts from such companies may be easier if it is possible to take up equity positions, analysts say. ‘The ability to take an equity portion in a power plant certainly helps to secure work,’ says one industry source. ‘Another approach is to negotiate exclusive positions with the large developers,’ he comments.
Nowhere have those developers been more active than in Pakistan. The success of the government’s private power policy has been largely due to guarantees from the government and the World Bank. The government has developed standard formulae for guaranteeing the sale of fuel to power plants and the purchase of the power generated. In some cases, these have been secured by the World Bank. This has meant that companies have been prepared to provide initial investment costs because there has been a guaranteed revenue flow after completion of the project.
As new projects are now moving into the construction phase in Pakistan, one question remains to be answered. That is whether government finances will be able to stand up to the burden of payments when the power starts coming on stream. Some critics describe BOT in Pakistan as simply another way of increasing the government’s foreign debt.
Whatever future problems may be in store, Pakistan has certainly surged ahead with BOT. The Gulf, however, tells a different story. Here there is so far only one successful BOT power project. Generation began in 1996 at the 90-MW Manah power station in Oman. The plant was built by United Power Company – a venture which included Powerfin and Tractebel, both of Belgium, the International Finance Corporation and local investors.
Elsewhere in the Middle East, BOT projects are at earlier stages. That of Saudi Arabia’s 1,750-MW Shuaiba power station is the most advanced, with companies expected to submit bids to implement the project in March. In Egypt, the announcement of shortlisted companies is said to be imminent for a 650-MW project. The Electricity & Energy Ministry, headed by the innovative Maher Abaza, also plans to apply the build-own-operate-transfer (BOOT) concept to a wind farm and a pumped storage scheme.
In Syria, the government has approved the first build-own-operate (BOO) power station, and has even pledged guarantees that the electricity it produces will be paid for in hard currency. In Yemen too, there are plans afoot for a 130-MW plant at Aden.
Bringing in the private sector has not been limited to the development of new projects. In Pakistan, the UK’s National Power now owns a 36 per cent stake in an existing 1,600-MW power station and the government is set to sell stakes in a further six plants in 1997. In Morocco, the sale of existing plants at Jorf Lasfar has been incorporated into a BOT project (see below).
The sale of transmission and distribution facilities is also being carefully looked at. ‘Real efficiency is only achieved when the private sector is involved in transmission, distribution, billing and collection,’ Mohamed al-Yousef, the Omani development minister and one of the Gulf’s erstwhile proponents of BOT, told MEED in 1996. Oman is not alone in this vision of integrated privatisation – the governments of Pakistan and Egypt are giving careful thought to the possibility of selling existing transmission and distribution companies.
The major attraction of inviting the private sector in is the ability of the government to pass on the burden of capital expenditure and investment. Despite this the private sector has yet to receive a warm welcome in many countries. Bahrain rejected a BOT proposal from British Gas for a 260- MW project at Hidd. Instead, a newly-appointed consortium, led by ABB Asea Brown Boveri, is expected to finance the construction of the plant, using export credits to secure international borrowing. The government will repay ABB over a period of 12 years. If successful, says Abdullah Juma, the electricity & water minister, the financing package could be replicated for a second phase of the Hidd plant.
The issue of how to finance new capacity is closely linked to the sensitive subject of tariffs. Charging consumers for electricity has the dual purpose of raising funds and limiting demand. The Saudi government has been one of the first to take tentative steps towards this by introducing tariffs on heavy consumers. However, with a buoyant oil price in 1996 the incentive to introduce domestic tariffs that actually reflect the cost of
provision has been further eroded.
As governments search for increasingly cheaper and efficient ways of installing new capacity, engineering companies are feeling the pressure. ‘Over the last 18 months, there has been a downward spiral of the price the customer is prepared to pay,’ says one company representative. This is in part due to the ever-increasing efficiency of the competing technologies available for turbine manufacture. It is also due to the advent of BOT. This new method of financing projects will no doubt be the source of much future business, but it will also mean tough competition and increasing efficiency for all involved.