The major shareholders behind the $2bn Al-Dur power project in Bahrain have agreed to provide the government with several million dollars in new bonds in order to end a dispute with the Electricity & Water Authority (EWA) and allow the project to start commercial operations.

The dispute relates to the impact of anti-government protests on the construction schedule of the project. Civil unrest began in mid-February as part of the Arab uprisings that brought Manama to a standstill in mid-March.

The developers claim that completion of the project was delayed as a result of the disruption caused by the protests. Construction of the project finished in September 2011, about three months behind schedule. EWA has since prevented final testing from taking place. It claims that the project does not meet the specifications outlined in the power and water purchase agreement and that the political protests are not an excuse for the delay in completing the project. A source close to the project says, “There are always a few issues that come up in a project this size, but EWA seems to be deliberately trying to slow progress by finding minor things to complain about.”

Bahrain power sector
Installed generating capacity (MW) 2,339 (2011 figure)
Peak power demand (MW) 2,812 (2011 figure)
Growth in peak power demand (%) 3.8
Largest generator Hidd Power Company
Number of IPPs/IWPPs concluded 4
Additional capacity requirement by 2019 (MW) 1,843
Estimated cost of required capacity ($bn) 2
IPP=Independent power project; IWPP=Independent water and power project. Sources: Electricity & Water Authority; MEED

The UK/French International Power and Kuwait’s Gulf Investment Corporation (GIC), who together hold 70 per cent of the project, will provide the bonds as part of an agreement that has allowed the project to go into final testing before full commercial start. That is now expected by the end of January.

“The dispute has been sorted in that there is now an agreement to let commercial operations start, and resolve the other issues later,” says another source working on the project. The agreement between EWA and the company operating the Al-Dur project was reached on 17 December, bringing to an end several weeks of wrangling between the two. In return for allowing the project to go into commercial operations, EWA placed several additional obligations on the project, including the provision of the new bonds and requiring several other new conditions to be met.

Once the project is up and running, both sides have agreed to appoint an independent expert to determine who is at fault for the delays. The outcome of that process could see further claims launched, depending on where blame is laid for the delays.

“If the expert finds that EWA is at fault for the delays then a buyer failure claim will be launched against them,” says the source working on the project. This claim will be based on the lost income as a result of not starting operations of the independent power and water plant (IWPP) at Al-Dur when the plant was ready.

If the expert finds that the delays are the responsibility of the developer, then it will have to resolve all of the outstanding technical issues EWA has outlined with the project. EWA and the project owners have already agreed that if the project does not meet a set of conditions laid out by the government agency within six months of commercial operations starting, the owners will have to pay EWA $2m for each one they have failed to satisfy.

One banker involved in financing the project, which raised $1.34bn in debt from 20 banks in June 2009, says the dispute is “not a big issue to date.” Others are concerned that unless the issue is settled quickly, it will affect future willingness to fund long-term projects in Bahrain.

Bahrain’s credit rating was downgraded from A3 at the beginning of 2011 to Baa1 as a result of the political instability, although the country still managed to raise a $750m sukuk (Islamic bond) in November 2011.

The protests in Bahrain also led to a delay in the funding of the Muharraq wastewater plant as banks, which eventually reached financial close in September 2011.

Ewa did not respond to requests to comment on the Al Dur issues, and International Power declined to comment.