Power: The importance of partnering

27 June 2008
With Riyadh investing billions in power and water projects, developers are flooding into the market. But joining up with companies that are experienced in the sector will be essential.

Saudi Arabia’s current portfolio of power projects will add an enormous 4,000MW of electricity and 253 million gallons a day of water to the country’s power and water generation capacity. The three schemes include Water & Electricity Company’s (WEC) Ras al-Zour independent water and power project (IWPP), Saudi Electricity Company’s (SEC) Rabigh independent power project (IPP) and Power & Water Utility Company for Jubail & Yanbu’s (Marafiq) IWPP at Yanbu.

In late May, WEC announced it was postponing the deadline for bids for Ras al-Zour, the largest desalination plant in the world, for the third time since issuing a request for proposals in June 2007. The latest deadline of 28 June is more than four months behind the original 10 February date.

The delays have been caused by potential bidders who have requested more time to secure engineering, procurement and construction (EPC) contractors, and to address problems with raising debt from the financial markets.

Despite the difficulties posed by scarce EPC resources and the credit crunch, international and local developers are still keen to participate in the lucrative Saudi market.

Domestic focus

While the interests and resources of inter-national developers are dispersed across the region, Saudi developers have benefited from their focus on the domestic market. The rapid growth of local developer Acwa Power is well known in the power and water sector.

The company has come a long way since winning its first IWPP at Shuaiba in 2002, and other Saudi firms are seeking to replicate Acwa Power’s success. National Power Company (NPC) is one of the local developers aiming to increase its share of the market. Sadaf, the firm that executed the kingdom’s first ever independent power project (IPP) in 2004 at Saudi Petrochemical Company’s complex in Jubail Industrial City, has not won an IPP or IWPP since then. This year, in partnership with Abu Dhabi National Energy Company (Taqa), it has prequalified for the Yanbu IWPP and SEC’s first IPP at Rabigh.

And then there are the newcomers. In February, Arabian Bemco Contracting launched a new development arm under the name of United Infrastructure Developers Company (UIDC). The new entity expressed interest in the Rabigh IPP but did not make it onto the list of prequalifiers. Although it did prequalify for the Ras al-Zour IWPP, it was forced to pull out after failing to secure an EPC contractor.

Another new entrant has managed to stay in the race for the megaproject. Saudi Masader, a joint venture of Al-Rajhi International Investment and Al-Khorayef Group, plans to bid for the Ras al-Zour IWPP in a consortium with Taiwan Power Company, Taiwan Cogeneration Company and Taiwan Water Company.

“Al-Rajhi and Al-Khorayef Group have a long history of experience and market participation,” says Walid Basoudan, president and chief executive officer (CEO) of Masader. “We are the strongest party in the banking business from the Rajhi side and Khorayef has carried out a lot of projects with the Water & Electricity Ministry. We believe we have a very strong position.”

While the increase in the number of local developers is a welcome trend, not everyone is convinced that newcomers are ready to deliver projects on the scale of Ras al-Zour. “We have seen so many newcomers but the question is whether they have had experience in this field,” says Fareed Alyagout, president of NPC.

Although new firms may be financially robust, their lack of technical credentials could let them down. For this reason, partnering with the right firms will be critical to the success of local developers.

“Newcomers have to select somebody to come up with,” says Alyagout. “Sumitomo [Corporation of Japan] never develops a plant alone. It came to the market on others’ shoulders. Marubeni [Corporation, also of Japan] did the same thing. Now it has opened an office in London and has started doing projects by itself.”

Without a more experienced partner, newcomers risk taking on more than they are capable of delivering. “Local developers are understandably keen but need to slow down a little bit on their appetite,” says Zaid al-Buti, general manager of IWPP at Marafiq. “It would be a good idea for newcomers to take only a partial share in activities, to be a minority shareholder in projects. It is a highly specialised type of business. There are intricate bits and pieces, and putting them together is more of an art than a science.”

Masader’s choice of Taiwanese partners for its Ras al-Zour bid has not gone down well. “I don’t know what it wants to do,” says Alyagout. “It went to Taiwanese companies. If you bring in a newcomer and you yourself are not well-established and do not have good experience of the market, it is the blind leading the blind.”

But Masader is confident that its choice of consortium partners for Ras al-Zour will not hurt its chances of winning the project. “Sometimes too big is too difficult to move,” says Basoudan, referring to larger, well-established developers. “We prefer to get newcomers to come and push [for work].”

UIDC is also conscious of how important choosing the right partner will be for its growth. For Yanbu, it has teamed up with the UK’s International Power and Abu Dhabi-based Oasis IP, while on the Rabigh IPP it has formed a consortium with Marubeni.

“We have just started,” says Hans-Dieter Martin, CEO of UIDC. “All the tenders call for references, which we don’t have. So the conclusion is to team up with somebody.”

The partnering strategy is one that Acwa Power has perfected. The company has won projects worth a total of $9.8bn and owns 4,900MW of power and 480 million gallons a day of desalinated water capacity.

However, with none of its projects operational yet, there is still some way to go before it is considered a truly established player.

“Acwa by now has gone through the winning awards and construction portion of projects,” says Al-Buti. “We are looking forward to similar success rates in the operation and management part of projects in which it is involved.”

With international developers still eager to win work in the kingdom, and the number of their Saudi counterparts growing, there is no dearth of developers bidding for contracts. It is the global shortage of EPC contractors that places a greater constraint on the market. But the level of activity in the region has attracted new contractors.

In May, two companies bid for the EPC contract to build a 2,400MW captive power plant at the planned Ras al-Zour integrated aluminium complex. The bids came from China Harbour Engineering Company and South Korea’s Hyundai Heavy Industries, making it the first time a Chinese company has ever bid for a power generation or desalination project in the GCC.

More contractors means more competition and a larger pool of resources. At the same time, new contractors lack local experience and are often unable to provide the financial guarantees required by banks financing an IWPP or IPP.

“Chinese contractors also need to prove themselves in the region,” says Al-Buti. “We are aware of some cases where they are finding issues with their expertise in certain projects - frequency [of generators] is an example.”

Insufficient guarantees

Even for a developer, teaming up with a Chinese EPC firm is not without risks. “We had a Chinese contractor [for Ras al-Zour] but apparently this company had not been made aware of the commercial consequences of a project like this,” says Martin. “It would not be able to come up with the guarantees required. To keep on track, we tried to find another company but the bank said the guarantee was not sufficient.”

EPC cost inflation has taken its toll on contractors and developers. The problem is exacerbated by state-owned clients asking for fixed prices throughout the tenor of the project. For contractors that are new to the Saudi market, calculating costs may prove more difficult than for those with previous local experience.

“We have met with three Chinese companies and have explained all our ideas,” says Alyagout. “But newcomers do not have manpower or equipment, and they do not have visas to come to Saudi Arabia. How will they give you a reasonable price that you can commit to for 25 years? The EPC costs count for 65-70 per cent of the tariff. If the price is not calculated correctly, you [the developer] take on the risk for 25 years.”

The EPC problem is unlikely to go away soon. Growing demand for power and water in the kingdom means clients will tender more and more projects. There is plenty of work for new contractors and developers but they will need to prove that they are capable of delivering first.

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