Power & Water

In some countries in the region, pursuing the public-private partnership strategy has become an economic imperative

Source: MEED

The Middle East and North Africa is approaching 2012 in a very different position to that of a year ago. Social unrest across the region and continuing problems in the global financial markets have put many investments on hold, including power and water projects. Meanwhile, demand for power, water and wastewater services continues to rise.

In 2012, several countries will elect new leaders who will need to respond to demands from citizens if they are to stay in power, regardless of their political leaning. Part of their task will be to provide adequate access to utilities.

Meeting power demand

This will be a challenge in Libya, where there was insufficient capacity installed before the conflict and where significant damage has been caused to existing plants. Egypt also needs major investment in the power and water sector to bring capacity in line with a steep increase in demand.

Egypt will need major investment in its power and water sectors to bring capacity in line with increasing demand

However, to think that these emerging democracies can achieve all of these aims in 2012 would be incredibly optimistic. Iraq’s experience would encourage caution. The country continues to labour under cripplingly inadequate power supplies, while demand continues to soar.

The challenge for Iraq in 2012 will be to secure access to natural gas for its power plants and to re-build its credibility with the private sector. Many private contractors have been complaining about the length of wait between contract award and signing and again for payment. Frequent changes in the government have exacerbated these issues. If Iraq is to relaunch its previously shelved independent power project (IPP) programme, it will need to make significant improvements. 

In some states, pursuing the public-private partnership (PPP) strategy is an economic imperative and PPP projects are more likely to reach fruition as a result. For instance, Bahrain has been affected by the Arab protests in 2011, but nevertheless managed to close the financing of a wastewater treatment plant at Muharraq.

The drive towards the PPP model is less clear in oil-rich states, which have sufficient natural resources to develop infrastructure. Their commitment will be tested in 2012 with a series of IPPs and independent water and power projects (IWPPs). Should these tenders collapse, the model could be shelved at least in the short term. 

But for both engineering, procurement and construction (EPC) and private power and water projects, the Saudi market remains unrivalled. In 2012, the kingdom is expected to dominate the projects market with a steady stream of new facilities. By 2014, it is expected to have the world’s largest gas-fired combined-cycle power plant at Qurayyah. By 2020, Saudi power demand is forecast to rise to about 77,430MW from below 50,000MW today. IPP and EPC projects are expected to be developed to bridge this gap.

Massive spending on power sector

Between 2011 and 2020, it is estimated that about SR303bn ($80bn) needs to be invested in electricity generation, transmission and distribution projects in Saudi Arabia. This represents a massive anticipated spend in the power sector and much of the payments are to be made in the first five years.

In 2012, Riyadh expects to spend SR9bn on generation, SR21bn on transmission and SR7.4bn on distribution. About 30-40 per cent of the cost of the new generation plants is expected to be sourced from private firms.

In terms of new IPPs, little will happen in 2012. As both phases of the Qurayyah project have been awarded to a developer group, activity will centre around preparations for the next IPP at Dheba. This project is scheduled for commissioning in 2016, affording significant breathing space to Saudi Electricity Company.

Meanwhile, several EPC deals are expected to be awarded in 2012. The Jeddah South facility, with a projected capacity of 2,400MW, is expected to be awarded in the first quarter. The contract for a 2,500MW power project at Yanbu is expected to be awarded around the same time.

Saudi Arabia’s oil wealth has insulated it from the global economic downturn to a certain extent, which means that there is enough capital to fund new capacity building programmes.

Appeasing protesters

The kingdom was not untouched by the popular revolts that have swept the region this year. The need to provide basic utilities for its citizens, particularly wastewater treatment and networks, along with job creation, were central to the demands of the small crowds of demonstrators that gathered. So, meeting demand for services in the coming year will be more important than ever.

The experience has been different in Yemen and Syria, where social unrest has had a greater impact. Both have a desperate need for additional power capacity and had plans in place to develop new traditional and renewable energy projects. Both countries were struggling to develop their first IPPs ahead of the unrest, but the projects were cancelled by the revolts.

Before the revolution, Egypt’s power sector was in a good condition, although struggling to keep pace with a growing population and industrial base. The Electricity Ministry was keen to develop a 1,500MW IPP at Dairut that could be extended to 2,250MW, but the protests and consequent political vacuum halted this plan.

The same is true of EPC deals in Egypt. However, several contracts were signed by the previous administration before the protests began. Work was able to continue throughout the unrest and two 750MW plants at Damietta and Shabab are now fully operational. In the long term, Cairo will need to do a lot more to keep pace with demand. Without an elected government, the country is trapped in a state of inertia and no more contracts are expected to be signed before the second half of 2012.

Once the new government is in place, it remains to be seen whether it can convince financiers to fund its new power projects. Without sufficient public funds to finance all the necessary infrastructure improvements, its ability to raise funds will be crucial.

Embracing PPPs

Abu Dhabi remains committed to the private power model. It will launch a tender for a new IPP once it has decided whether to build at Taweelah or Mirfa. The decision, which is expected imminently, is dependent on gas availability. As the first in the region to embrace the private power model, Abu Dhabi’s formula for power projects is unlikely to be adjusted.

What will prove more challenging in 2012 is the progression of the UAE capital’s plans for the region’s first nuclear power plant. Its intention to finance the project using a combination of its own money, sponsor support, export credit agency finance and commercial debt is ambitious.

The government looks set to cover the commercial tranche, thus addressing some of the concerns that lenders may have with committing to the project. Nevertheless, the project will be the first of its kind and shouldering its risk could be a tough sell for Abu Dhabi. As a gas-rich emirate, the temptation to revert to its successful gas-fired traditional power plant programme may prove tempting. Despite the Fukushima nuclear disaster in Japan, Abu Dhabi has continued to press ahead with the project. Financial close will be a huge milestone for the project and success in 2012 will be critical.

In Dubai, the focus remains on the emirate’s first private power project at Hassyan. Bids will be evaluated in early 2012, with an award expected before the middle of the year. The deal will bring into focus not only the creditworthiness of Dubai Electricity & Water Authority, but will show whether the government is committed to using the private sector to deliver utilities.

Keeping pace with power demand

Next year will prove to be a challenging year for the region for different reasons. Oil-rich countries with high demand for power, water and wastewater services will struggle to keep pace with demand.

Meanwhile, countries that have experienced popular protests will need to convince financiers that upcoming projects are not risky. Bahrain has already tested the market to a certain extent with the financing of its Muharraq plant, but the test has yet to come for others that have seen protests and also rely on private-sector finance for infrastructure projects.

In many ways, power and water schemes will be used as a litmus test for countries making the move from pure balance sheet finance to PPP projects in 2012. This is true of Dubai and Kuwait, which have decided to tender IWPPs as their first PPP projects. As regulated asset projects, such schemes are considered less risky than others. The progression of the Hassyan IPP in Dubai and the Al-Zour North IWPP in Kuwait will make or break any future attempts to finance projects in partnership with the private sector.

Saudi Arabia will continue to be the biggest player in the power and water sector in 2012. If Iraq moves to address its power shortage, the country will provide a new frontier for companies and financiers with a different appetite for risk.