Long-term outlook steady for power and water projects

07 March 2011

The unrest in the Middle East is likely to delay some power and water schemes in the short term, but strong demand fundamentals makes the utilities sector an attractive investment prospect

One of many reasons that have prompted thousands of Arabs to take to the streets since the start of the year is the inadequate provision of basic amenities in the Middle East and North Africa (Mena) region.

Faced with rapidly rising demand, many states can no longer guarantee constant and stable supplies of electricity and water. It is no small irony that the actions of the demonstrators now threaten to hinder the execution of much-needed power and water projects around the region.

Power capacity building

To address the supply problems, governments have been stepping up their investment in capacity building projects in recent years. Across the region as a whole, there is currently $241bn-worth of power generation and transmission projects planned and under way. About $60bn-worth of water and drainage schemes, and a further $56bn of alternative projects are in the planning phase or under construction. This includes solar, wind and nuclear schemes. As the civil unrest spreads from country to country, the likelihood of some of these suffering minor delays increases, but the real risk to the sector is the impact on investor sentiment.

Hundreds of billions of dollars of new investment will be needed … regardless of who is governing

In recent years, power and desalination plants in the Mena region have increasingly been executed using the independent producer model, which requires developers to take an equity stake in the scheme and sign an offtake agreement with the client, usually for 20 years or more. Such a long-term commitment to a project carries significant risks for a developer, and the wave of uprisings is making investors view the region with much more caution.

Middle East and North Africa alternative energy projects due to be awarded in 2011
ProjectCountryBudget ($m)StatusClient
Noor 1 photovoltaic plantUAE100EPC PQAbu Dhabi Future Energy Company 
Al-Kamshah and Fujeij wind power plantsJordan100EPC BidEnergy & Mineral Resources Ministry
Ouarzazate solar IPPMorocco9,000EPC PQMoroccan Agency for Solar Energy 
Gabal Al-Zeit wind farmEgypt400EPC BidItalgen
Al-Warsan waste-to-energy plantUAE120EPC BidDubai Municipality
EPC=Engineering, procurement and construction; PQ=Prequalification. Source: MEED Projects

The decision in early February by the US’ AES Corporation to terminate its involvement in two projects under tender in the Gulf highlights this change in the risk perception among power developers. The firm withdrew its bids for the 1,500MW Sur independent power project (IPP) in Oman and the 1,800-2,100MW Qurrayah IPP in Saudi Arabia. This is despite the fact that at that time the kingdom had not experienced any protests and those in Oman had been fairly muted compared with events in North Africa. Industry sources tell MEED the withdrawal is a direct response to the unrest in the region and the decision was taken at board-level. Five other groups went on to submit bids on the Sur IPP in early March.

So far, AES is the only company known to have pulled out of projects in the region, in what some have described as “a knee-jerk reaction”. But the fear is that others may follow. This would shrink the pool of developers  available for clients to work with and could potentially make projects more costly to execute and even lead to some being delayed. With some $55bn-worth of power plants due to be awarded this year, along with $22bn of water and drainage schemes, the potential for disruption is huge. Any significant delays to power and water projects would compound the supply problems already blighting many countries.

Power and water project delays

At this stage, it is too early to say which projects might be impacted. But those in Egypt look most at threat (Libya has no major power projects in the pipeline).

Cairo’s PPP Central Unit was quick to assure investors that its planned projects would only be delayed and not cancelled, following the overthrow of the ruling regime. The $1.5bn Dairut IPP is among several infrastructure schemes whose tender timeline is now being revised, along with the 6 October City and Abu Rawash wastewater projects.

To make projects more attractive to potential investors in the current political environment, governments may have to make stronger guarantees to equity providers, and Egypt’s PPP Central Unit has already said it will offer “risk mitigation measures”. This could limit the capacity of non-oil producing countries to undertake major infrastructure projects, and particularly impinge on Jordan’s plans to develop a nuclear power programme.

With the risk perception towards the Mena region as a whole negatively impacted by the uprisings, analysts are forecasting project finance to become more expensive to secure in the months ahead. This will also affect the power and water sector. Several projects are expected to come to the market in 2011, including Saudi Arabia’s $1.8bn Qurayyah IPP and Bahrain’s Tubli sewage treatment plant.

Middle East and North Africa water and wastewater projects due to be awarded in 2011
ProjectCountryBudget ($m)StatusClient
6 October City wastewater treatment plantEgypt100EPC PQHousing, Utilities & Urban Development Ministry
Abu Rawash wastewater treatment plantEgypt100EPC PQHousing, Utilities & Urban Development Ministry
Ras al-Khaimah desalination plantUAE50EPC BidFederal Electricity & Water Authority
Tabriz sewage treatment plantIran100EPC BidEast Azarbaijan Water and Wastewater Company
Qom water treatment plant expansionIran400EPC PQQom Regional Water Authority
Agadir desalination plantMorocco118EPC BidOffice National de l’Eau Potable 
Misurata desalination plantLibya250EPC BidGeneral Desalination Company
Sirte desalination plantLibya50EPC BidGeneral Desalination Company
El-Attar wastewater treatmentTunisia50EPC BidOffice National de l’Assainissement
EPC=Engineering, procurement and construction; PQ=Prequalification. Source: MEED Projects

Abu Dhabi’s Shuweihat 3 power project and Bahrain’s Muharraq wastewater treatment plant are scheduled to reach financial close during the first quarter. There are concerns that the lenders on the latter scheme will ask to renegotiate terms. Subsequent projects may have to pay more to secure financing and negotiations with lenders will likely be more protracted. International banks in Europe are expected to be most wary of lending in the Mena region as they are still reluctant to take on large long-tenor commitments, following the global economic crisis. Provided unrest does not spread to the kingdom, the financing of the Qurayyah scheme should be unaffected as there is strong appetite among Saudi lenders for financing domestic infrastructure projects.

Attractive prospects

Despite the turmoil in the region, the first 10 weeks of 2011 have been an active time for the region’s power and water sector. In addition to bids being submitted for the Sur scheme; Iraq’s Electricity Ministry has received bids on four IPPs; Kuwait’s Electricity & Water Ministry has chosen a preferred bidder to build a desalination plant in Al-Zour South; Dubai has launched the tender for its 1,500MW Hassyan 1 IPP; Manama has awarded the construction contract for the Muharraq sewage treatment plant; and Yemen’s Public Electricity Corporation has made an award on the 380-480MW Marib 2 power plant, to name but a few of the recent developments.

This flurry of activity could reflect a continued confidence in Mena power and water projects. Regardless of any short-term complications, there are strong demand fundamentals underpinning the region’s utility sector that make it an attractive investment prospect when viewed over the longer term. Hundreds of billions of dollars of new investment will be needed in the decade ahead to meet demand, regardless of who is governing the countries.

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