ALMOST two months after the cabinet approved the formation of the Saudi Electricity Company (SEC), expectations that the restructuring of the electricity sector would swiftly follow have still to be fulfilled. Though it is still early days for the new unitary electricity company, industry officials say it is ‘business as usual’ in the power sector.
Grandiose plans to merge the country’s four main power authorities, the Saudi Consolidated Electric Companies (Scecos), into the SEC remain on ice. For the moment, the SEC is effectively a holding company for the Scecos, each of which is operating as an autonomous unit. So far, the only limit imposed on the Scecos’ freedom of operation is the requirement for the chairmen to report to the SEC chief executive. This key post remained vacant at the end of January.
As yet, there are few indications of the future direction of SEC strategy on the expansion of power generating capacity and the upgrading of transmission networks. Until a board of directors is appointed and the key personnel are in place, the Scecos will continue to promote their respective agendas, albeit under the SEC mantle.
Even so, Sceco strategists will be keenly aware that some of their own projects could still be reined in by the new company once it has found its feet. In this respect, the incentive to push ahead rapidly with expansion projects may be overwhelming. At the same time, Sceco directors are unlikely to relish the prospect of letting construction contracts for major schemes and run the risk of having to revise the plans at a later date at the SEC’s behest. On the evidence of the last few months, the lack of progress on major schemes such as Sceco-Central’s 1,800-MW PP-9 plant suggests that the restructuring of the sector is likely to slow down, rather than hasten expansion plans.
Some Scecos will have devised schemes over the past year with at least half an eye to the new structure for electricity provision. The SEC’s freedom to purchase power from wherever it chooses is certain to boost the chances of an independent power project (IPP) getting off the ground. It is also likely to have influenced the decision late in 1999 by Saudi Consolidated Electric Company for the Western Region (EWR) to invite bids on a build-own-operate (BOO) basis for the provision of two 350-MW steam units at the Shuaiba power plant, alongside a traditional turnkey alternative.
Many argue EWR’s BOO alternative is largely a kite-flying exercise, rather than a serious proposal to establish an IPP in the Western Province. Consultants and power developers are largely sceptical of the prospects for the private option, since the tender documents offer no provisions for turning the three 370-MW generating units currently under construction over to a private operator. The technical problems likely to result from having to operate three units built under lump sum turnkey contracts alongside two privately- run generators, together with a number of shared facilities, would make the scheme a relatively unattractive proposition to foreign investors. The failure to execute the first 1,110-MW expansion phase through BOO following contractor concerns over the lack of adequate revenue guarantees will hardly reassure potential bidders. Many contractors even appear unwilling to contemplate undertaking any projects whatsoever for EWR.
In the event, EWR is more likely to opt for letting a turnkey contract and there is no sign of a stampede of developers to Jeddah eager to set up the kingdom’s first IPP. Project sources suggest European developer ABB Alstom is the favourite to secure the project, having been awarded the $835 million contract to install the Shuaiba I generating capacity in late 1998.
Consultants also say the 29 March deadline for the BOO option is unrealistic as it would not allow sufficient time to arrange financing packages. A more likely candidate for private expansion is the PP-9 plant at Riyadh. Sceco-Central’s failure to appoint a consultant on the project may indicate that company strategists are deliberating over which method of project completion to opt for.
If Shuaiba is an unlikely candidate for the debut IPP, this does not completely rule out the chances of private schemes getting under way elsewhere over the next two years. Developers have broadly welcomed the new revenue structure that underpins the electricity reforms. Having written off the Scecos’ accumulated SR 25,000 million ($6,667 million) in debts and inaugurated a new set of tariffs that will double the charges for heavy users of electricity, the sector has been made significantly more attractive to private developers. Together with planned reforms tothe tax regime allowing foreign investors equal treatment with local investors, and an easing of foreign investment regulations, Saudi Arabia should ultimately prove fertile ground for private power provision. With revenues from build-operate-transfer (BOT) operations ring-fenced, private developers will be reassured that there is the opportunity to get a fair return on their investment.
By the same token, without action on the wider reform process, BOO schemes are only likely to attract those developers prepared to go out on a limb. The SEC will also have to act decisively to merge the Scecos, given continuing concerns over the creditworthiness of both EWR and Sceco-South. As a single, unified electricity company, the SEC needs to establish its credentials as a financially secure offtaker.
If action on these and other fronts is forthcoming, 2000 could yet witness the launch of the first Saudi IPP. The reorganisation of the sector will at least have the strong backing of Industry & Electricity Minister Hashim Yamani, whose political skills will be tested to the limit if the absorption of the Scecos proves problematic. Few anticipate an easy ride. ‘There are a lot of political issues involved and these will take time to resolve,’ says a senior consultant in the power sector.