Marafiq takes on risk under Yanbu deal

28 March 2008
Offtaker will assume responsibility for guaranteeing payments for water and power for the first time.

The Power & Water Utility Company for Jubail & Yanbu (Marafiq) is taking on the risk of guaranteeing payments for power and water, removing the burden from Riyadh for the first time.

The arrangement is being developed for the independent water and power plant (IWPP) at Yanbu Industrial City.

Until now, the Finance Ministry has guaranteed all payments made by offtakers such as Marafiq to IWPP developers, as well as any payments to end a contract early.

The Yanbu project will be the first time such guarantees have not been given. The government made the move after Marafiq volunteered to take on more of the risk.

By demonstrating the strength of its project, Marafiq could find it easier to attract developers. “The decision reflects the credit strength of the company,” says a source close to the project. “There are two types of offtakers in the region: a single buyer such as Abu Dhabi Water & Electricity Company, or shell companies without resources that need guarantees, such as [Saudi Arabia’s] Water & Electricity Company.”

“Marafiq is half-way between the two. It has reasonable profits. It is a utility, but the boss, which is the government, can change the rules. The structure is a mix of the best of both worlds.”

Under the Yanbu deal, the Finance Ministry will not offer an invoice guarantee and will only give a termination guarantee in exceptional circumstances, such as a war or wider government policy changes that increase the number of offtakers or cut tariffs.

“The Finance Ministry comes in if there is a Yanbu credit event, which means if there is a government policy change and a default and it is not remedied,” says a project source.

While the Finance Ministry has softened its guarantees, Marafiq is putting in place a mechanism to guarantee monthly payments to the project company operating the plant, and for fuel supplies from Saudi Aramco.

Marafiq’s customers will pay their power and water charges into a collection account, which will demonstrate the offtaker’s ability to pay. “The purpose of the collection account is to give comfort as to the payment of monthly invoices,” says the source.

The planned IWPP will supply Yanbu Industrial City with 1,700MW of power and 33 million gallons a day of desalinated water. It will be designed to use heavy fuel oil as the primary fuel.

Marafiq will be the only buyer of the power and water output from the Yanbu plant under a 25-year power and water purchase agreement.

Bids to develop the build-own-operate-transfer project are due on 27 August, with the selection of a preferred bidder targeted for 28 October (MEED 12:03:08).

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