Fixed pricing carries risks for Adwea

25 July 2008
If Adwea fails to strike an exclusive deal with Marubeni, it will have lost time in talks while project costs rise.

In the face of growing demand for electricity, every utility in the Gulf would like to bring new power-generation capacity on line as quickly as possible. Abu Dhabi Water & Electricity Authority (Adwea) is no exception.

In its eagerness to move its next independent water and power project (IWPP) forward rapidly, it has decided not to issue an open tender for the Shuweihat 3 scheme.

Instead, it has asked Japan’s Marubeni Corporation to submit a proposal for the new plant and match the prices of the winning bid for the previous Shuweihat 2 IWPP, which was submitted by France’s Suez in May.

The logic behind the move is simple. If it can avoid a prolonged competitive bidding process, Adwea will ensure the timely delivery of the Shuweihat 3 plant.

At the same time, securing a price now rather than six months down the line gives the utility a degree of immunity against inflationary pressures on materials and engineering costs.

However, a similar attempt to secure a low price on Shuweihat 2 failed when developers refused to match out-of-date prices.

Then the authority was forced to go back to the tried-and-tested open-tender process, and there is no guarantee that Adwea’s plans will work this time either.

Just as Adwea is concerned about cost inflation, developers will want to factor higher prices into their offers. It may already be unrealistic for the authority to expect Marubeni to be able to meet a price submitted in May.

It is a risky tactic for Adwea to adopt. If it fails again this time, it will have lost time in fruitless negotiations with Marubeni, while prices will have risen even higher in the interim.

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