Saudi Arabia’s Water & Electricity Company (WEC) plodded along for nearly 15 years with moderate success.  Created in 2003 to encourage private sector participation in the procurement of water production, the company launched three independent water and power projects (IWPPs) and has been successfully managing these under 20-year build, own, operate (BOO) purchase agreements.

In early 2017, it awarded, on a negotiated basis, an extension to a project managed by lead developer Acwa Power for an additional 250,000 cubic metres a day (cm/d). Delivery of first water is expected by the end of the second quarter of this year.

In late 2017, its fortunes changed. WEC was given a new mandate, and a new board and management team were appointed. Within a year, the company had changed the face of the region’s water industry by announcing world-record-breaking tariffs.

The record prices were achieved for its 25-year BOO desalination projects, and also for the first sewage treatment plant in the country launched on a public-private partnership (PPP) basis, known as an independent sewage treatment plant (ISTP).

Following these successes, WEC was rebranded as Saudi Water Partnership Company (SWPC) in May 2018.

Record tariffs 

As shown in Table 1 below, WEC achieved new record prices for the levelised water cost (LWC) in 2018. The low bid for the Rabigh 3 IWP, announced in August 2018, came in at SR1.99, or about $cents53 per cubic metre, beating NEWater in Singapore – traditionally regarded as the lowest production cost of desalinated water worldwide. While the record low cost lasted only a few months, until Abu Dhabi’s Taweelah IWP broke it with a cost of just $cents49 per cubic metre, the industry was clearly moving the pricing bar lower.

Table 1: Bid prices for WEC’s latest IWPs
 

Rabigh 3 IWP – 600,000 cubic metres a day

 

Shuqaiq 3 IWP – 450,000 cubic metres a day

 

Lead developer

LWC per cubic metre  

Lead developer

LWC per cubic metre
SR US $cents* SR US $cents*
Acwa Power 1.99 53.1 Marubeni 1.95 52.1
Marubeni 2.02 53.9 Acwa Power 1.96 52.4
Veolia 2.12 56.5 Engie 1.97 52.5
Valoriza 2.29 61.0 Veolia Middle East 1.97 52.5
FCC Aqualia 2.62 69.7 FCC Aqualia 2.02 53.9
Note: * Based on SR3.75 =$1 Cobra 2.07 55.2

Four months later, WEC announced pricing for the Shuqaiq 3 IWP, setting the bar in the kingdom even lower at SR1.95 per cubic metre of water. What is astonishing is not so much that Acwa did not win, but that the top four bids were within 0.5 cent of each other, with Marubeni taking the top prize. FCC Aqualia, the highest-priced bidder for the Rabigh 3 IWP, could not compete, even after reducing its bid price for the Shuqaiq 3 IWP by more than 20 per cent compared with its Rabigh 3 IWP bid price.

WEC signed the water purchase agreement (WPA) with Acwa Power on 24 December 2018 in Riyadh and announced, at the same time, that Marubeni was the preferred bidder for the Shuqaiq 3 IWP. As expected, the WPA was signed with Marubeni on 29 January.

Water conditions

These record-low prices are remarkable for a number of reasons. Water conditions are less favourable for seawater desalination based on reverse osmosis technologies in Saudi Arabia than locations in either the Mediterranean or throughout Asia. Plants in Saudi Arabia must be designed to handle total dissolved solids (TDS) as high as 43,500 ppm. TDS levels in open seas tend to be 35,000 ppm or lower. This suggests that process designs and associated membranes for systems based on reverse osmosis must be more sophisticated to handle the higher level of TDS, implying somewhat higher costs.

Bidders for the Rabigh 3 IWP also had to submit for two water qualities: Base Water Quality with much more stringent requirements in regards to parameters such chloride levels, potable water temperatures, pH and sulfate levels; and, an Alternative Water Quality with less stringent requirements. In addition, the contracted capacity was set at 98 per cent, which is higher than the norm for the region, as the water was being delivered to Mecca.

Both IWPs had to meet two other mandatory conditions:

  • Saudisation and local content requirements: In line with the country’s 2030 Vision to develop the economy and workforce, and the need to meet legal requirements relating to the employment of Saudi nationals, the successful bidder for projects under the IWP programme has to meet specific local content targets. These were set at 40 per cent during the design and construction phase; 50 per cent during the first five years of O&M; and 70 per cent for years six and beyond for the first IWPs. These targets applied not only to the developer, but also to the EPC and O&M contractors. Significant liquidated damages are in place if these targets are not met, so bidders are encouraged to meet them.
  • Energy-efficient operations: The successful bidder must also commit to using no more than 3.5 kwh per cubic metre of water produced. This is a significant improvement over existing plant operations where energy usage can easily exceed 4 kwh per cubic metre. The rules are simple: if a developer bids 3.2 kwh, it is compensated for this amount only. If it uses more energy, it is not compensated for the added cost above 3.2 kwh. If it uses less, then 50 per cent of the savings are shared with WEC. These rules are clearly designed to minimise ‘gaming’ during the bid and evaluation process.
PPP in the sewage sector

A similar trend appears to be developing in WEC’s sewage treatment plant programme. Table 2 shows the submitted bid prices for the company’s first ISTP, which will be located at Dammam. The project is a 350,000 cm/d sewage treatment plant; it will be implemented in stages, with the first 200,000 cm/d stage expected to be operational in early 2022. All of WEC’s ISTPs are structured as 25-year build own, operate and transfer (BOOT) projects.

The Jeddah 2 ISTP will also be delivered in stages, with the first stage of 300,000 cm/d targeted for operation by the end of 2021. Like Dammam, the investors in the Jeddah 2 ISTP hold 100 per cent of the project, with no restrictions in terms of ownership.

Table 2: Bid prices for WEC’s first two ISTPs
 

Dammam ISTP – 350,000 cubic metres a day

 

Jeddah 2 ISTP – 500,000 cubic metres a day

 

Lead developer

LSTC per cubic metre  

Lead developer

LSTC per cubic metre
SR US $cents* SR US $cents*
Metito 1.27 33.9 Marafiq 0.90 23.9
Suez Group 1.48 39.4 Mitsui 0.91 24.4
Acciona 1.54 41.1 FCC Aqualia 1.02 27.2
Mitsui 1.70 45.4 Acciona Agua 1.10 29.3
Veolia Middle East 1.90 50.8 Suez Group 1.25 33.4
FCC Aqualia 2.14 57.1 Cobra 1.40 37.8
Saur SAS 2.62 69.8 Note: * Based on SR3.75=$1

The preferred bidder for Dammam, Metito, was announced on 24 December 2018 with a levelised sewage treatment cost (LSTC) of SR1.27 per cubic metre, or $cents33.8 per cubic metre. The second-placed bidder’s cost is nearly 17 per cent higher than Metito’s. Moreover, Metito’s LSTC is less than half of the highest cost bidder. Not surprisingly, the contract was officially awarded to Metito on 21 January 2019.

Bid costs for the Jeddah 2 ISTP were announced on 29 January 2019. Marafiq, the preferred bidder, significantly challenged Metito with an astonishing LSTC of SR89.75, or $cents23.9 per cubic metre. This represents a 29 per cent lower cost than Metito. Moreover, all of the bidders except Cobra beat Metito’s lowest-cost bid. The contract agreement with Marafiq was signed in late February 2019.

New benchmark

WEC’s privatisation programme is clearly breaking ground in the sewage treatment industry. To begin with, the tariff announced for Dammam was one of the lowest in the region. The benchmark tariff for Saudi Arabia is SR1.47-SR1.73 per cubic metre of sewage treated. Tariffs in the UAE are in the range of SR1.48-SR1.80 for Wathba 1 and 2. Sulaibiya in Kuwait comes in at about SR1.76. The Jeddah 2 ISTP has set the new benchmark for the region.

Both ISTP projects must achieve even more stringent local content requirements than the IWPs. The local content target is set at 50 per cent during design and construction, higher by 10 percentage points compared to IWPs. The targets for O&M are the same as those for IWPs: 50 per cent for the first five years and 70 per cent thereafter.  As with the IWPs, there are significant liquidated damages if these targets are not met.

There are also stringent environmental targets for the ISTPs, specifically:

  • ‘Zero’ sludge disposal – only “beneficial” sludge can leave the plant
  • Very low levels for odour and noise control
  • Low chemical usage over the O&M period

Both ISTPs must be developed, constructed and operated in accordance with the environmental protection regulations and stipulations of the kingdom, including those issued by the environmental regulatory agency known as GAMEP and within the latest relevant World Bank & IFC Equator Principles and Guidelines.

Structural changes

Much of what has been achieved is due to the company’s restructuring that took place in mid-2017. Khaled al-Qureshi was parachuted in as the new CEO, and tasked with the mandate to deliver a key component of the Ministry of Environment, Water & Agriculture’s (MEWA) water privatisation programme: to meet the growing demand for potable water in the kingdom by leveraging private sector resources, as part of Vision 2030.

Certainly, Khaled is well equipped to meet the challenge. His entire career has been in the utility business. After graduating from King Saud University with a degree in chemical engineering, he was hired in 1995 as a shift power supervisor at Saline Water Conversion Company (SWCC), a major government-owned water company with 10,000 employees. Khaled worked his way up the ladder at SWCC, taking on more and more responsibility until he was promoted to operations division manager, looking after a combined power and water plant. Along the way, Khaled earned an MSc in desalination technology from Glasgow University, graduating with distinction.

Career move

In 2006, Khaled joined Marafiq, a semi privately owned company responsible for provision of various utility services to industrial, commercial and residential customers in the industrial cities of Jubail and Yanbu. He started as chief process engineer, and again rose up the ranks to vice-president of operations and maintenance, responsible for the P/L of all multi utility services, covering not only desalinated and process water but also power, sanitary and industrial waste water treatment, seawater and cooling systems.

The board at WEC underwent major restructuring in 2017, when Abdulrahman al-Fadli, the current minister of MEWA with considerable private sector experience, took over as chair. He is also the chair of SWCC and the National Water Company (NWC), two key stakeholders in the kingdom’s water industry. This should make it easier for the government to achieve its mandate. Other members joining the board included representatives from the Ministry of Finance, National Centre for Privatisation (NCP), MEWA and the private sector.

Market conditions

The question facing developers is whether or not it will take even lower tariffs to win future water projects, particularly in the kingdom. The current drive to lower tariffs has been due in part to several developments affecting the industry, resulting in perfect conditions for lower tariffs. The water industry throughout the Middle East has been relatively quiet over the past few years, with only a few major projects in play. Existing developers and EPC contractors have been anxious to take on new projects and expand their portfolios. New market players from Europe and Asia have also been keen to gain a foothold in the water market.

The past few years have been challenging for local contractors and suppliers throughout the GCC, with a general slowdown in construction activities.  Large water projects offer opportunities for them to maintain their presence in the market in anticipation of future growth prospects.

Timing was also right from a financial perspective. Interest rates have been at a low for years now, making the cost of project financing attractive.  Equity returns have also been driven down for both power and water projects, especially in Saudi Arabia, which is now considered far less risky than it was 10 or 15 years ago.  And there has certainly been sufficient liquidity in both international and domestic debt markets to provide the much-needed capital to finance large water projects.

With little evidence to suggest that interest rates are set to rise, coupled with sufficient liquidity in the debt and capital markets for project financing, and developers and EPC contractors hungry for more projects, expectations are that lower tariffs are in store at least in the short term. How much lower remains to be seen.

Project pipeline

WEC is playing a major role in privatising the kingdom’s water programme, especially for new desalination and sewage treatment plants. This year should see at least another five to eight new IWPs and ISTPs announced.  On the desalination front, the Jubail IWP 3a and Jubail IWP 3b, at 600,000 cm/d each, are expected to be floated early in 2019, along with the Yanbu 3 IWP at 450,000 cm/d later in the year. Other IWPs expected sometime in 2019 or early 2020 are Ras Mohaisan (300,000 cm/d), Al-Hassa in Jubal (300,000 cm/d), Jazan 1 (300,000 cm/d) and Rabigh 4 IWP (600,000 cm/d).

On the sewage side, WEC is planning to issue RfPs for the Taif ISTP (270,000 cm/d) and the Buraida 2 ISTP (150,000 cm/d). Taif is expected to be issued to the market sometime in the second quarter, followed by Buraida later in the year.

This is a challenging procurement programme for WEC to deliver, but given the company’s recent track record, it is poised to meet the challenges head-on as it strives to meet the kingdom’s Vision 2030 goals in the water sector. Developers and EPC contractors would be well-advised to prepare for a busy few years in Saudi Arabia. To win one or more of these projects, they will need to pony up with experienced resources to meet the challenge, propose innovative technology solutions to improve throughput and overall energy efficiency, and sharpen their pencils when preparing bid prices.

About the author

Robert (Bob) Bryniak is CEO of Golden Sands Management (Marketing) Consulting, a UAE-based establishment that specialises in the provision of strategic management services to both private and public sector companies in the power and water sector throughout the GCC.  He has more than 30 years of experience in the power and water sector. As an independent adviser, he provides due diligence services and financial valuations, along with market analysis and business development.