The emirate may struggle to persuade investors to support its plans for privatised utilities
Dubai launched its first independent water and power project (IWPP) in late December, but has the plan appeared too late? While the idea of privatised power and water plants has been gaining popularity across the region in recent years, Dubai is in a different position to most other governments when it comes to raising project finance, following the crisis over the restructuring of Dubai World’s debt in November.
Against the backdrop of uncertainty over Dubai’s creditworthiness, bankers and developers are asking whether the emirate is strong enough to see its plans for privatised power and water utilities through.
The IWPP, to be located at Hassyan, will have a capacity of 1,500MW of power and 120 million gallons a day (g/d) of desalinated water. It replaces Dubai Electricity & Water Authority’s (Dewa) previous plans to develop the plant on an engineering, procurement and construction (EPC) basis.
Dewa aims to select a consultant by the start of the second quarter of 2010. Under what many observers say is an ambitious schedule, it then aims to sign a power and water purchase agreement with a developer in the first quarter of 2011. The plant itself is scheduled to open in 2014.
It is not the first time the authority has explored the option of privatised power and water. In 2007, it held talks with Abu Dhabi-based Oasis IP about building an IWPP in Fujairah. But Dewa told the developer it would have to find its own source of fuel for the plant and, as a result, the project never took off.
Now, it seems financial pressures have led Dewa to consider the IWPP scenario again. Using the IWPP model will free it from having to make a large, up-front capital investment in the project, as would have happened with an EPC scheme. Instead, its only obligation will be to pay the developer a tariff for the power and water produced at the plant.
“One of the major attractions of an IWPP model is that it frees up capital, which can be invested elsewhere,” explains Bert Kleinveld, director of special projects at Dewa.
The financial constraints on the project are nothing new. Through the course of 2008 and 2009, the authority repeatedly cancelled EPC tenders for the Hassyan project on the grounds that bidders’ prices were too high.
In the most recent bid round, for instance, in November 2009, contractors priced the power and water components at AED6.6bn ($1.7bn) and AED3.3bn respectively.
However, the parlous state of Dubai’s economy makes the issue of financing more problematic than before.
“We were informed in 2009 that Dewa was looking to the IWPP process very closely, since it can no longer finance such big projects by itself,” says one of the bidders.
For the first time in years, Dubai is also in a position where it can afford to delay its programme of building power and water plants. Growth in demand for power has dropped from a peak of 15 per cent in 2007 to just 5 per cent in 2009, as a consequence of the global economic slowdown.
In 2009, demand peaked at 5,622MW, far below Dewa’s installed capacity of 7,464MW. This margin will grow even further when the 2,000MW and 140 million g/d M Station power and water project comes on line later this year.
For the Hassyan IWPP project to succeed, the emirate’s government will need to be careful in how its structures the deal, say bankers and developers in Dubai. “It will come down to government backing,” says one international contractor in the emirate.
Dewa has launched its plans at a difficult time. The authority issued the IWPP consultancy tender little more than a month after Dubai World, one of the emirate’s largest property developers, announced on 25 November it was restructuring $26bn of debt. Days later, the Dubai government said it would not guarantee the conglomerate’s debts and left it to Abu Dhabi to step in with a $10bn bailout on 14 December. Those events led investors to reassess the risk of doing business with companies in Dubai, particularly those without explicit government guarantees.
Dewa is not Dubai World and benefits from far stronger government links. According to a Dubai government bond prospectus issued in October 2009, Dubai has guaranteed AED9bn of Dewa’s outstanding borrowings, which total AED20.45bn. Even so, Dewa has not escaped the fallout from the Dubai World crisis. Credit ratings agency Moody’s Investors Service has downgraded Dewa’s rating twice in the wake of Dubai World’s debt restructuring, from A3 to Baa2 and then to Ba2. Fitch Ratings also lowered its rating, from A- to BBB-.
“The reason for the recent downgrade is not related to Dewa’s profile,” says Erwin van Lumich, senior director at Fitch Ratings. “It rather reflects a weakening of Fitch’s assessment of the sovereign creditworthiness on which Dewa’s rating is predominantly based.”
The weak economic outlook for Dubai also hit ratings of $2bn in long-term debt it holds through a Cayman-registered company, Thor Asset Purchase. Fitch lowered its rating of that company on 30 November from A- to BBB-. On 3 December, Standard & Poor’s (S&P) followed suit, cutting its rating from A- to BB+, and on 10 December Moody’s also revised its rating, from A1 to A3.
Moreover, a $2bn bond issue which Dewa had been expected to launch in the first quarter of 2010 now appears to be on hold. Under the circumstances, it is no surprise that there are concerns over the level of support that Dubai can provide to its utilities sector.
“What we could find is that it becomes more difficult for the sovereign and corporates in Dubai to raise money,” says van Lumich.
Dewa has said it will provide land and fuel for the IWPP, which will run on natural gas sourced from the Dubai Supply Authority (Dusup). According to Dewa, most of the gas will come from Qatar via the Dolphin pipeline.
Dewa, meanwhile, is looking at the experiences of other governments around the Gulf to decide on the best way to develop its IWPP.
“We have explored how other utilities have gone about it and looked at where the bottlenecks are,” says Kleinveld.
The authority has yet to decide whether it will emulate the IWPP model used in Abu Dhabi or in Oman. While Abu Dhabi takes a significant stake in its IWPPs, Oman gives full ownership of its plants to private developers.
Dubai is also currently setting up a new regulatory body, which will provide a guarantee to the IWPP developer to buy the power and water produced by the plant.
“Guarantees will be provided under an independent regulatory bureau being created at the moment,” says Kleinveld. “Securities and guarantees need to be in place in order to attract investors and developers.”
Industry sources say additional backing for the scheme from Abu Dhabi would reassure investors even more and guarantee the project’s success, but they doubt that such backing is likely to be forthcoming.
“What interest does Abu Dhabi have in supporting Dubai when it has its own Taweelah site [where two IWPPs are already built and a third is planned] only 20-30 kilometres away from Hassyan?” asks one industry source.
“It can build its own project there, it has the confidence of investors and lenders and it can probably do it cheaper and faster than Dubai.”
In addition to the question of guarantees, there are also doubts about Dewa’s ability to manage this type of project. Contractors lament the authority’s obsession with detailed technical specifications on its EPC projects and say that successful implementation of an IWPP will require a change in the authority’s methods.
“Contract conditions are 10 years behind Adwea [Abu Dhabi Water & Electricity Authority],” says the industry source. “They [Dewa] are still squeezing everyone.”
However, developers can take some solace from the fact that Dewa runs a more commercially focused business than most of its peers in the region.
Thanks to sufficiently high consumer tariffs, it has been able to ensure solid revenues from its power and water activities. This in itself should provide a degree of security to developers considering sponsoring the IWPP.
Dewa’s decision to launch its first private power and water project at a time when Dubai’s creditworthiness is in such doubt may not have done it any favours. It can only hope that the situation will be entirely different by the time the financing of the project needs to be completed in two years’ time.
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