Tariff cuts raise investor concerns

20 October 2000
Power And Water

Prospects for private investment in the power sector have been dealt a blow with the 9 October announcement of reductions in electricity tariffs, only months after price increases announced as part of a sector reform programme had gone into effect.

The tariff cuts mainly affect medium and heavy domestic, commercial and government consumers. Bills for users who consume more than 5,000 kWh a month are set to fall by 30-50 per cent. As well as cutting the tariffs, the government has also decided to apply the fixed industrial tariff to hospitals, clinics, schools and universities.

The original tariff increases were announced at the end of 1998 in the context of a sweeping reform package that centred around the creation of the new unified corporation Saudi Electricity Company (SEC). The higher tariffs finally went into effect in April 2000. The new, lower tariffs are to be applied from the beginning of the Islamic month of Shaaban, which starts on 28 October, a cabinet statement said.

Industry sources say the higher tariffs met resistance from consumers, particularly as the new prices took effect during the summer months, when consumption reaches a peak with heavier use of air-conditioners.

The tariff cuts will result in reduced revenues for SEC, and will raise questions in the minds of private investors looking at the power sector. 'There will certainly be a cashflow deficit, but the government is planning to take measures to deal with this and to avoid discouraging investment, ' says one senior local industry consultant. 'We owe it to the foreign investors to give a full answer to the legitimate question of how we think we can encourage investment if we change our minds every few months.'

The government is pinning great hopes on the private sector taking much of the burden of financing the expansion of the power sector. Plans call for some 50,000 MW of new capacity to be installed over the next 25 years.

New project activity is being held up for the moment, as work goes ahead on the restructuring of the sector under SEC. Kuwait-based Gulf Investment Corporation is advising the Industry & Electricity Ministry on the restructuring, and is poised to award a number of subcontracts to legal, management consultancy and human resources specialists. US law firms Arent Fox Plotkin & Kahn, White & Case, Clifford Chance and Baker & McKenzie are said to be among the bidders, along with US management consultants McKinsey & Company, Booz Allen & Hamilton and Arthur Andersen & Company (MEED 12:5:00).

A MEED Subscription...

Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications