LAHMEYER: Clear vision of things to come

17 October 1997

WITH a project record in Saudi Arabia that goes back to the mid-1960s, Lahmeyer International is a familiar name on Middle East bid lists. The Frankfurt-based engineering and consulting firm has focused on the region from the very start. Founded in 1966, the international arm of Lahmeyer landed a contract on the Jeddah power system in 1967. It has never looked back. In 1996, Lahmeyer had turnover from engineering and consulting services of DM 350 million and employed about 2,000 people around the world.

The Middle East continues to play a big part in Lahmeyer's activities, although what the company does is changing beyond recognition. 'We are not primary engineers any more. We have also to be economists,' says managing director Wilfried Schroeder. 'Engineers are fascinated by technology, they are not always aware of how it is paid for or applied.'

With a vast portfolio of completed power projects worldwide, Lahmeyer brings considerable expertise to the independent power projects (IPPs) which are belatedly making an impression on the authorities in the Middle East and North Africa.

'It has taken many years and a succession of IPP projects for us... to claim an unrivalled depth of experience,' says Schroeder. 'Currently we can claim 20,000 MWs of IPPs under our development with our inputs.' IPPs are far more complex undertakings than traditional power plants and Lahmeyer now acts as advisor, engineer, financial advisor to banks, governments and other engineers working for project developers. Says Schroeder: 'Detailed engineering is not a value-added business any more. As consultants we can get much better returns for our services and they are urgently needed.'

IPPs have yet to make a major impression in the Arab world but there are signs of growing acceptance, even in Saudi Arabia, which is considering every possible option for the 1,750-MW Shuaiba power station (MEED, Cover Story, 11:7:97).

Schroeder is bullish about prospects in Morocco and Egypt in particular. 'I see some real IPPs coming up in North Africa.'

There is still a lot of learning to do if the IPP is to become the norm rather than the exception, however. 'What we can see in Abu Dhabi and Dubai, Kuwait and Saudi Arabia is that people are talking about private power and governments have set up committees to discuss it. But their view is somewhat disturbed - they want investors to come in, but they want to control it.' And there is more to it than the question of control.

'Privatisation will have major constraints in this part of the world because of the tariff system,' says Schroeder. Few countries charge their electricity customers a market rate. Egypt is planning to expand the Sidi Krier plant as an IPP but will have to plan the pricing very carefully. 'I have my doubts that they can have a true market tariff. They have subsidised rates for agriculture but large industries pay closer to a market price. They will have to implement a market tariff, which could create political problems.'

The investors now venturing into the IPP business are also looking for a decent return, which may be harder to guarantee in the energy-rich Middle East. 'The fuel is there and it's cheap. What remains is the plant, and prices for plant have decreased by 50 per cent in the last five to six years - the competition is unbelievable. If you cut the fuel side from the IPP package, one key parameter is missing from the model.'

As clients in the Philippines and Pakistan have already discovered, IPP contracts can lock the purchaser into energy supplies that end up being too expensive.

Lahmeyer's experience of rapid change in Europe and other mature energy markets leads Schroeder to believe that the days are numbered for the original build-own-operate (BOO) approach to IPPs.

A new set of relations is developing among power purchasers, energy suppliers and the banks, which is creating an electricity market offering far greater flexibility. If the traditional IPP is going, the so-called merchant plant is coming, Schroeder suggests. 'The classical BO project will not last for long. If you look at the US, Europe or Asia the grid is open to all - parties negotiate directly with each other. What's coming now is the merchant plant.'

This view of a much more sophisticated power market in the future helps explain why Lahmeyer is not interested in becoming an investor/developer itself. 'People say we should invest but that's not my approach. In the future the need for services will be that much greater. Many third parties will be involved in a future free energy market and there will be a need for many more contracts.'

Developing services for software packages for half-hour energy forecasting will be more rewarding than detailed engineering or tying up capital in investments. In the Middle East Lahmeyer can claim to have been involved in about 70 per cent of the transmission lines laid in Abu Dhabi and west of Abu Dhabi, which puts it in a privileged position to unravel the complexities of a future independent GCC interconnector.

One of the biggest projects Lahmeyer is studying at present is a proposal to harness the Inga falls in Zaire to generate a potential 30,000 MW for transmission on a grid that could one day reach into southern Europe (MEED Feature, 14:4:95).

The estimated $5,000 million project is backed by the African Development Bank and enjoys the passionate support of Egyptian Electricity & Energy Minister Maher Abaza. 'The technology presents no risks; the only problem is the rights of way,' says Schroeder. As the transmission lines would cross other countries on their way to Egypt, those countries would feel entitled to compensation.

A contract won this year is part of an equally ambitious undertaking - the reclamation of the New Valley in Egypt for settlement and agricultural development. Lahmeyer has been commissioned by a consortium of Kvaerner, Hitachi and Arabian International Construction to do a project study for the turnkey supply of a 135-MW pumping station. Lahmeyer is also presently at work in the UAE, Kuwait, Lebanon, Jordan, Tunisia, Libya, Syria, Yemen and Bahrain, where it is the consultant to the Ministry of Water & Electricity for the first phase of the Hidd power station.

Like most German companies competing for Middle East business, Lahmeyer has suffered from the strength of the Deutschemark in recent years, although recent months have seen a remarkable depreciation in the value of the currency. 'We were always losing because of the price,' says Ara Sulukdjian, regional manager for the Middle East and Africa. 'In the Middle East the clients consider the companies as basically good, so they take the cheapest price.'

Nevertheless, Sulukdjian has high hopes for new prospects in most of the countries in the region. And, as Schroeder makes clear, it will be the breadth of professional services on offer, rather than price, that will secure the company' business in the future.

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