Typically, independent water and power projects (IWPPs) involve the development by private sector investors of greenfield (previously unused) land. With the privatisation of Al-Rusail Power Company and the award of the Barka II IWPP to a consortium of Suez-Energy International, Mubadala and National Trading Company, the sultanate for the first time extended the privatisation model to an existing, brownfield facility.
It is also the first project to have reached commercial close since the unbundling of the electricity and related water sector, which involved the launch of a public interest watchdog – the Authority for Electricity Regulation – in May 2005, equipped with regulations to govern the sector.
Previously, IWPP projects fell under the auspices of the National Economy Ministry and central contracts were concluded with the Housing, Electricity & Water Ministry. Following the restructuring of the sector, 10 successor companies were created.
In the past, transactions did not require government guarantees – the Omani government took on credit risk. The restructuring of the sector means the Oman Power & Water Procurement Company is now responsible for the procurement of Oman’s power and related water requirements.
The financial obligations of this company are the subject of a government guarantee that falls away if the company secures and maintains a specified credit rating for a particular length of time. This is a first for the Gulf – in other instances, the guarantee is merely suspended, while the credit rating is maintained.
In addition, although the risk allocation of the project is in line with previous precedents in Oman, the transaction documents have been refined and additional risks have been transferred to the private sector. Further, contracts previously entered into between the IWPP and the government now need to be agreed between the IWPP and successor companies.
The evaluation methodology developed for the project was the first of its kind in the Middle East. In addition to giving consideration to the value of the unit cost of electricity and water, a methodology has been developed that attributes a value to the benefits of the plant configuration on the overall system demand requirements in Oman. This represents a significant departure from the manner in which IWPP projects were traditionally procured by governments and offtakers.
Traditional evaluation methodology required bidders to offer a fixed price based on a guaranteed output. In this instance, bidders had to be imaginative with the plant configuration so it continued to meet the demand on the system and remain economic across different outputs at different times of day.
The Barka II transaction is the first IWPP in Oman that requires the IWPP to construct a reverse osmosis plant for the desalination of water. Existing power and related water projects in the region predominantly use either multi-stage flash (MSF) or multiple-effect evaporator (ME) technology for the purposes of desalination.
In this particular case, the configuration of the plant was left to the bidders and a membrane technology, reverse osmosis, was chosen over the traditional methods. Advances in this technology have meant that reverse osmosis is now being welcomed into the region. It has considerably lower energy requirements than MSF or MED.
The use of this technology means the power and water purchase agreement has to recognise the fact that the generator may, in certain cases, purchase power from the grid for the purpose of running the desalination plant, instead of producing its own power for that purpose.
The divestiture of 100 per cent of the shares in Al-Rusail Power Company by way of a share sale is also the first of its kind in power sector in the Middle East.
The sale was effected by way of a share purchase agreement, with the private sector being invited to rely on warranties offered by the sellers. In addition, the government obliged the successful bidder to divest a number of shares in the ultimate holding company on the Omani Stock Market through an initial public offering. These shares are to be offered solely to Omani nationals, in a bid to stimulate local interest in utilities. This can be contrasted with the traditional divestiture model in the Middle East that is based on an asset sale. Further, it is not unusual to find that, unlike the full divestiture in Oman, regional governments retain a significant share in the IWPP special project vehicles.
Perhaps the most significant difference between the Barka II transaction and its predecessors is the fact it was undertaken in a regulated environment, requiring the authority to look into issues pertaining to market share, compliance with an ‘appropriate persons’ criteria, licensing processes for both generation and desalination, and monitoring and enforcing compliance in accordance with sector law.
Oman has demonstrated that the new industry structure with its public interest regulator can make Oman attractive for private sector participation in the sector. In successfully awarding the Barka II IWPP and achieving the privatisation of Al-Rusail Power Company, it has paved the way for future privatisation initiatives in the sector.
As demand for electricity and related water continues to rise, Oman remains a fertile market – indeed, the request for proposal work for the Salalah II IWPP in southern Oman is imminent, and is expected to be shortly followed by a project in the north of the country.
Oman has come a long way since the Manah IPP, where it led the way in introducing IPPs to the region. Like other jurisdictions, it is actively looking at alternative fuel sources and the procurement of power as part of the Sohail Barkatali and Chris DownSohail Barkatali is a partner in the projects group at law firm Berwin Leighton Paisner. Chris Down is a senior associate involved in the projects.
Sohail Barkatali and Chris Down
Sohail Barkatali is a partner in the projects group at law firm Berwin Leighton Paisner. Chris Down is a senior associate involved in the projects.