ISSUES: Lindahl lays down the line

08 August 1997
SPECIAL REPORT POWER

HE HEADS one of the world's largest electrical engineering companies and knows more than a thing or two about the global power market. Goeran Lindahl is also very familiar with the Middle East and North Africa (MENA). Now president and chief executive of Zurich-based ABB Asea Brown Boveri, Lindahl previously looked after group interests in the MENA region. He also has a trenchant message for those in authority in MENA who are planning for the future.

'We cannot continue with the business as usual idea,' Lindahl says*. 'A dramatic rethink is required. The scale of the challenge is enough to review the whole process.' The region needs an estimated $150,000 million to upgrade its infrastructure over the next 15 years and governments simply have no alternative but to seek out a new approach to financing. Greater private sector investment holds the key.

Unless private capital is admitted to a leading role the power sector could be starved of investment. For MENA this means a rapid improvement on recent trends if it is to grab a greater share of the annual flow of foreign direct investment (FDI), now estimated to be running at $200,000 million.

'There is great competition from Latin America, Asia and central and eastern Europe for FDIs and the MENA region has been falling behind,' Lindahl says. He thinks the region should aim to secure about a third of its $21,000 million annual infrastructure bill from the private sector. Economic reform is a prerequisite.

'We need privatisation of state industries, liberalisation of the trading regime, deregulation, a faster decision making process and full transparency.' This means new rules and regulations for foreign investment and the standardisation of custom duties across the GCC. There is also no escaping sensitive issues - the generous subsidies on public services have to be reduced.

The modest progress of the independent power project (IPP) is testimony to the limitations of the present investment climate.

'Only two IPPs have so far materialised, at Al-Manah in Oman and Jorf Lasfar in Morocco. We cannot continue with having one IPP every two years. The pace of implementing IPPs in Latin America is much faster, with a couple of plants being done a year.'

Lindahl estimates that the region should be aiming to implement five or six IPPs a year by early in the next century, accounting for a third of all new generating capacity.

Governments must also be aware that developers will only invest if they are assured of a reasonable internal rate of return (IRR).

'The IRR has to be in the range of 15-20 per cent to be comparable to the rest of the world,' Lindahl says. Experience elsewhere has also highlighted the need for clients to be selective about the number of developers they invite to bid for an IPP.

'There is a worrying trend that the more people who turn up as developers, the more they drive down the IRR. Sooner or later, developers and investors will drop out.'

However, IPPs are only one element in an overall strategy for meeting the region's future power needs. Greater use should be made of combined cycle technology, which achieves efficiency rates of 60 per cent. The interconnection of national grids is another obvious option.

'Twenty per cent of the peak power needs can be saved through interconnection. I would like to see hundreds of interconnections on the low and high voltage networks in the future.'

Lindahl stresses that the region's economic fundamentals remain strong. Oil prices are up, industry is developing rapidly and more local value- added manufacturing is being created. Local skills have improved dramatically over the past decade. ABB itself has stepped up local involvement and has 56 companies in MENA involved in sales support, service and manufacturing

But if IPPs are the future, the time for talking is over. 'We now have to move from plans to execution,' says Lindahl. 'We have to study the approach so that each project can move faster than the last. Unless we move, the MENA region will lose out.'

*Speaking at Gulf '97, Energy, Finance & Infrastructure, 25-26 March 1997, Abu Dhabi

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