SAUDI ARABIA: Facing the cost of rising power needs

31 January 1997

RISING oil prices helped generate considerable extra revenue for Saudi Arabia in 1996, pushing once-fashionable talk of a financial crisis firmly into the background and allowing King Fahd to present a modestly expansionary budget for 1997. The expenditure allocations included an extra SR 2,500 million ($670 million) for infrastructure, industry and electricity. Some SR 2,000 million ($530 million) will be spent on power projects, it was announced.

However, firm oil prices alone will not allow Saudi Arabia to pay for the necessary investment in the electricity sector. The kingdom's large and rapidly rising power needs are such that current installed generating capacity of about 20,300 MW will have to reach 28,300 MW by 2000 and about 60,000 MW by 2020. This will require investment of SR 48,000 million ($12,800 million) by 2000 - SR 21,000 million ($5,600 million) for power generation and SR 27,000 million ($7,200 million) for distribution - and a staggering SR 438,000 million ($116,800 million) by 2020, according to Industry & Electricity Ministry estimates. Clearly, the scale of the need demands stronger medicine than any that buoyant oil prices can offer.

The first sign of an attempt to address the problem, ending a long period of inaction by the government, came in January 1995, when a special tariff was introduced for heavy consumers of power. The extra revenues generated by the so-called Helala Fund allowed the Saudi Consolidated Electric Company for the Central Region (Sceco-Central) to move ahead with the long-awaited grassroots PP9 power station 30 kilometres east of Riyadh.

The first 200-MW phase of the scheme is due to come on stream in April, with the first combined-cycle block, adding a further 300 MW, to follow by the end of the year. Full capacity of 1,200 MW should be reached by the end of 2000, according to main contractor Saudi American General Electric Company (Samge). This will free up some 1,700 MW of power currently being supplied to the capital area by the Saudi Consolidated Electric Company in the Eastern Province (Sceco-East).

Different approaches

Another departure for the kingdom came in the summer of 1996, when the government decided to part-finance the 2,400-MW expansion of the Ghazlan power station with an internationally syndicated commercial loan. The client, Sceco-East, is raising one third of the total $1,500 million cost through the loan, the first time that the kingdom has borrowed in this way for a power project.

The 10-year loan, arranged by Gulf International Bank (GIB), was opened to general syndication in late December 1996 and is expected to close in late January. The lump sum turnkey contractor on the scheme, Japan's Mitsubishi Heavy Industries (MHI), is scheduled to bring the first steam turbine generator on stream in December 1999. The fourth, and final, unit is due to be operational by February 2002.

Most analysts, however, do not expect to see the finance aspect of the scheme repeated without a radical restructuring of the power sector. Bankers express concern that agreeing to finance the scheme may not be the encouragement that the government needs to implement these changes.

With production costs outstripping power charges, which are centrally- controlled, Sceco-East, like the other Scecos, operates at a loss. The participation of international banks could only be secured, bankers say, because Sceco-East, unlike the other Scecos, can count industrial giants Saudi Aramco and Saudi Basic Industries Corporation (Sabic) among its customers.

So, with a temporary improvement in oil prices an insufficient boost to revenue, commercial lending an unattractive proposition for banks, and the Helala Fund largely consumed by PP9, the kingdom has been forced to cast its net wider still.

There has been much talk of the prospects for private sector involvement in the power sector. However, prospects are what they remain. Possibilities such as long-term leasing of government-owned companies to the private sector, and privatisation of the Scecos and regional companies by sale of government stock to the public, are not being considered for the near future. More palatable and suitable, perhaps, is the build-operate-transfer (BOT) approach.

The first move in this direction came from the Saudi Consolidated Electric Company for the Western Region (Sceco-West), whose finances are in the most parlous state of all the Scecos. Bidding for the long-awaited 1,750- MW grassroots power station at Shuaiba, 120 kilometres from Jeddah, finally opened in June 1996, following the completion of a feasibility study for the BOT option by a US/Canadian consortium. Tenderers were asked to submit commercial quotes on the basis of three scenarios: a standard lump sum turnkey contract; a deferred payments lump sum turnkey contract, such as that applied for PP9; and a BOT-type contract.

The tender attracted a strong response, with 20 local and international companies registering interest. The closing date for bids has been set for 26 March, following assurances from the client that the scheme will proceed on a BOT basis. If matters move ahead as planned, a model will have been put in place for Saudi Arabia's power projects of the future. However, there remains some uncertainty among contractors regarding both the government's commitment to the idea and flexibility as to the implementation.

A major implication of the BOT approach is that the politically sensitive issue of subsidies and low electricity prices will have to be addressed. If the private sector is to be involved, the likelihood is that the government will have to pay the difference between the notional sale price agreed with the private generator and the subsidised price paid by the consumer. The matter of monies owing to the Scecos from unpaid electricity bills will also have to be examined.

In addition to the issue of returns, foreign investors will be exercised by concerns such as the lack of legal safeguards and the credit worthiness of the power utilities. Analysts say that very clear welcoming signals must be sent if private capital is to come. It should become apparent in 1997 how far the government is prepared to go to address these concerns.

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