The changing face of Saudi Arabia's water industry

16 January 2019
Since the restructuring of Saudi Arabia's Water & Electricity Company in 2017, water tariffs in the kingdom have been on an extraordinary downward trajectory

Saudi Arabia’s Water & Electricity Company (WEC) plodded along for nearly 15 years with moderate success. Created in 2003 to encourage private sector participation in the procurement of water production, it launched three independent water and power projects (IWPPs) early on, and has since successfully managed these under 20-year build, own, operate (BOO) purchase agreements.

In early 2017, it awarded, on a negotiated basis, an extension to one of its projects managed by lead developer Acwa Power for an additional 250,000 cubic metres a day (cm/d). Delivery of first water was expected by the end of the second quarter this year.

However, something happened in late 2017. WEC received a new mandate, a new board and a new management team. Within a year, the company had changed the face of the region’s water industry by announcing world-record-breaking tariffs.

The record prices were not only achieved for its 25-year BOO desalination projects, but also for the first sewage treatment plant in the country launched on a public private partnership (PPP) basis, known as an independent sewage treatment plant (ISTP).

The publicly announced levelised water cost (LWC) by WEC reached new lows in 2018. The Rabigh 3 independent water project (IWP), announced in August 2018, came in at SR1.99, or about 53 $cents, a cubic metre, beating New Water in Singapore, in what had traditionally been regarded as the lowest production cost of desalinated water worldwide.

While the record low cost lasted only a few months, until Abu Dhabi’s Taweelah IWP broke it with a cost of just 49 $cents a cubic metre, the industry was clearly moving the pricing bar lower.

Bid prices for WEC’s latest IWPs

 

Rabigh 3 IWP – 600,000 cm/d

 

Shuqaiq 3 IWP – 450,000 cm/d

 

Lead developer

LWC per cubic metre

 

Lead developer

LWC per cubic metre

SR

$cents*

SR

$cents*

Acwa Power

1.99

53.1

Marubeni

1.95

52.1

Marubeni

2.02

53.9

Acwa Power

1.96

52.4

Veolia

2.12

56.5

Engie

1.97

52.5

Valoriza

2.29

61.0

Veolia Middle East

1.97

52.5

FCC Aqualia

2.62

69.7

FCC Aqualia

2.02

53.9

*=Based on SR3.75=$1

Cobra

2.07

55.2

Even lower record water prices

Four months later, WEC announced pricing for the Shuqaiq 3 IWP, setting the bar in the kingdom even lower at SR1.95, or about 52 $cents, a cubic metre of water. What is astonishing is not so much that Acwa did not win, but that the top four bids were within a 0.5 $cents of each other, with Marubeni taking the top prize.

FCC Aqualia, which was the highest priced bidder for the Rabigh 3 IWP, could not compete even after sharpening its pencils and reducing its bid price for the Shuqaiq 3 IWP by more than 20 per cent compared with its Rabigh 3 IWP bid price.

WEC signed the water purchase agreement (WPA) with Acwa Power on 24 December 2018 in Riyadh and announced, at the same time, Marubeni as the preferred bidder for the Shuqaiq 3 IWP. As expected, the WPA was signed with Marubeni on 29 January.

These record-low prices are remarkable for a number of reasons, but most notably due to the fact that water conditions are less favourable for seawater desalination based on reverse osmosis technologies in Saudi Arabia than locations in either the Mediterranean or throughout Asia.

Plants in Saudi Arabia must be designed to handle total dissolved solids (TDS) as high as 43,500 parts per million (ppm), while TDS levels in open seas tend to be 35,000 ppm or lower. This suggests that process designs and associated membranes for systems based on reverse osmosis must be more sophisticated to handle the higher level of TDS, implying somewhat higher costs.

Bidders for the Rabigh 3 IWP also had to submit for two water qualities: Base Water Quality with much more stringent requirements in regards to parameters such chloride levels, potable water temperatures, pH and sulfate levels; and, an Alternative Water Quality with less stringent requirements.

In addition, the contracted capacity was set at 98 per cent, which is higher than the norm for the region, as the water was being delivered to Mecca.

Both IWPs also had to meet two other mandatory conditions:

  • Saudisation and local content requirements – In line with the country’s Vision 2030 to develop the economy and workforce and in addition to meeting all legal requirements relating to the employment of Saudi nationals, the successful bidder has to meet specific local content targets. These were set at 40 per cent during the design and construction phase and 50 per cent during the first five years of operation and maintenance (O&M) and 70 per cent for years six and beyond. These targets applied not only to the developer, but also to the engineering, procurement and construction (EPC) and O&M contractors. Significant liquidated damages are in place if these targets are not met, so bidders are encouraged to meet them.
     
  • Energy-efficient operations – The successful bidder must also commit to using no more than 3.5 kilowatt-hour (kWh) per cubic metre of water produced. This is a significant improvement over existing plant operations where energy usage can easily exceed 4 kWh per cubic metre. And the rules are simple. If a developer bids 3.2 kWh, it is compensated for this amount only. If it uses more energy, it is not compensated for the added cost above 3.2 kWh. And if it uses less, then 50 per cent of the savings are shared with WEC. These rules are clearly designed to minimise “gaming” during the bid and evaluation process.
Falling sewage treatment costs

A similar trend appears to be developing for WEC’s sewage treatment plant programme, in which all of the ISTPs are structured as 25-year build, own, operate and transfer (BOOT) projects.

The company’s first ISTP, to be located at Dammam, is a 350,000 cm/d sewage treatment plant implemented in stages, with the first stage of 200,000 cm/d expected to be operational early in 2022.

The Jeddah 2 ISTP will also be delivered in stages, with the first stage of 300,000 cm/d targeted for operation by the end of 2021.

For both projects, the investors hold 100 per cent of the project, with no restrictions in terms of ownership.

Bid prices for WEC’s first two ISTPs

 

Dammam ISTP – 350,000 cm/d

 

Jeddah 2 ISTP – 500,000 cm/d

 

Lead developer

LSTC per cubic metre

 

Lead developer

LSTC per cubic metre

SR

$cents*

SR

$cents*

Metito

1.27

33.9

Marafiq

0.90

23.9

Suez Group

1.48

39.4

Mitsui

0.91

24.4

Acciona

1.54

41.1

FCC Aqualia

1.02

27.2

Mitsui

1.70

45.4

Acciona Agua

1.10

29.3

Veolia Middle East

1.90

50.8

Suez Group

1.25

33.4

FCC Aqualia

2.14

57.1

Cobra

1.40

37.8

Saur SAS

2.62

69.8

*=Based on SR3.75=$1

The preferred bidder for Dammam, Metito, was announced on 24 December 2018 with a levelised sewage treatment cost (LSTC) of SR1.27, or 33.8 $cents, a cubic metre.

The second placed bidder’s cost is nearly 17 per cent higher than Metito’s. Moreover, Metito’s LSTC is less than half of the highest cost bidder. Not surprisingly, the contract was officially awarded to Metito on 21 January 2019.

Bid costs for the Jeddah 2 ISTP were announced on 29 January 2019. Marafiq, the preferred bidder, significantly challenged Metito with an astonishing LSTC of SR89.75, or 23.9 $cents, a cubic metre.

This represents a 29 per cent lower cost than Metito. Moreover, all of the bidders except Cobra beat Metito’s lowest cost bid.  The contract agreement with Marafiq was signed in late February 2019.

WEC’s privatisation programme is clearly breaking ground in the sewage treatment industry. To begin with, the tariff announced for Dammam was one of the lowest in the region.

The benchmark tariff for Saudi Arabia is SR1.47 to SR1.73 a cubic metre of sewage treated. Tariffs in the UAE are in the range of SR1.48 to SR1.80 for Wathba 1 and 2. Sulaibiya in Kuwait comes in at about SR1.76. The Jeddah 2 ISTP is now the new benchmark in the region.

Both ISTP projects must achieve even more stringent local content requirements than the IWPs. The local content target is set at 50 per cent during design and construction, higher by 10 percentage points compared to IWPs.

The targets for O&M are the same as those for IWPs: 50 per cent for the first five years and 70 per cent thereafter. As with the IWPs, there are significant liquidated damages if these targets are not met.

There are also stringent environmental targets for the ISTPs; specifically:

  • “Zero” sludge disposal – only “beneficial” sludge can leave the plant
  • Very low levels for odour and noise control
  • Low chemical usage over the O&M period

Both ISTPs must be developed, constructed and operated in accordance with the environmental protection regulations and stipulations of the kingdom, including those issued by the environmental regulatory agency known as GAMEP and within the latest relevant World Bank & IFC Equator Principles and Guidelines.

Developers and EPC contractors would be well-advised to prepare for a busy few years in Saudi Arabia. They will need to pony up with experienced resources to meet the challenge, propose some innovative technology solutions to improve throughput and overall energy efficiency, along with sharpening their pencils when preparing their bid prices
Robert Bryniak, Golden Sands Management (Marketing) Consulting

Executive turnaround at WEC

Much of what has been achieved is due to the company’s restructuring that took place in mid-2017, when the board underwent a major restructuring.

In the primary executive seat, career engineer Khaled al-Qureshi (pictured right) was parachuted in as the new CEO, tasked with the mandate to meet the growing demands of potable water in the kingdom by leveraging private sector resources, as part of Vision 2030.

Al-Qureshi’s entire career has been in the utility business, starting with Saline Water Conversion Company (SWCC) in 1995 as a shift power supervisor. He then worked his way up the ladder at SWCC, taking on more responsibility until he was promoted to operations division manager, looking after a combined power and water plant.

In 2006, Khaled made a major move by joining Marafiq, a semi privately owned company responsible for provision of various utility services to industrial, commercial and residential customers in the industrial cities of Jubail and Yanbu. He started as chief process engineer, and again rose up the ranks to vice-president of operations and maintenance, responsible for the P/L of all multi-utility services, covering not only desalinated and process water but also power, sanitary and industrial waste water treatment, seawater and cooling systems.

Minister of environment, water and agriculture Abdulrahman al-Fadli meanwhile took over and took on a direct oversight role as chair. Other members joining the board included representatives from the Ministry of Finance, National Centre for Privatisation (NCP), the Ministry of Environment, Water & Agriculture (MEWA) and the private sector. 

Al-Fadli is also the chair of SWCC and the National Water Company (NWC), two key stakeholders in the kingdom’s water industry, making it easier to achieve its mandate.

Lower water tariffs to continue

The question facing developers is whether or not it will take even lower tariffs to win future water projects, particularly in the kingdom. The current drive to lower tariffs has been due in part to several developments affecting the industry, resulting in a perfect storm for lower tariffs.

The water industry throughout the Middle East was relatively quiet over the past few years, with only a few major projects in play. Existing developers and EPC contractors have been anxious to take on new projects and expand their portfolios. New market players from Europe and Asia have also been keen to gain a foothold in the water market.

The past few years have been challenging for local contractors and suppliers throughout the GCC, with a general slowdown in construction activities.  Large water projects offer opportunities for them to maintain their presence in the market in anticipation of future growth prospects.

Timing was also right from a financial perspective. Interest rates have been at a low for years now, making the cost of project financing attractive. Equity returns have also been driven down for both power and water projects, especially in Saudi Arabia, which is now considered far less risky than it was 10 or 15 years ago. And there has certainly been sufficient liquidity in both international and domestic debt markets to provide the much-needed capital to finance large water projects.

With little evidence to suggest that interest rates are set to rise, coupled with sufficient liquidity in the debt and capital markets for project financing, and developers and EPC contractors hungry for more projects, expectations are that lower tariffs are in store at least in the short term. How much lower remains to be seen.


About the author

Robert Bryniak is CEO of Golden Sands Management (Marketing) Consulting, a UAE-based establishment that specialises in the provision of strategic management services to both private and public sector companies in the power and water sector throughout the GCC. He has more than 30 years of experience in the power and water sector. As an independent adviser, he specialises in providing due diligence services and financial valuations, along with market analysis and business development.

 

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