Time for Saudi Arabia to change back the electricity bidding rules

03 August 2010

Saudi Electricity Company was right to change bidding rules in 2009, but the market has now changed

Saudi Electricity Company (SEC) is expected to reveal changes in the rules for funding its next independent water and power project (IWPP) that will limit banks to backing just one prospective developer for the scheme.

After the disastrous outcome of the Ras al-Zour IWPP, Saudi Arabia is desperate to ensure that it avoids a similar situation arising again. The private Ras al-Zour scheme was scrapped in April 2009 to be relaunched under government ownership and funding.

At the time, the rationale was that power demand in the kingdom was rising so quickly that it could not afford the time to let the selected developer sort out its funding issues.

Over a year later, the scheme is still yet to be awarded, yet alone development started. In contrast, the PP11 scheme has been awarded, funded and construction has begun, all with private sector backing.

PP11 benefited from a change in the rules that allowed banks to club together and offer the same package to several bidders. Some developers whinged that this was uncompetitive, as it meant several banks had the same financing deal. But it allowed Riyadh to move quickly on the project in the middle of a global financial crisis when there was lack of appetite among banks for project finance loans.

Now the situation is different. Riyadh’s banks are bulging with cash and appetite is returning at some international lenders. Strong assets such as power schemes which carry government guarantees are just what banks are looking for.

On balance, SEC was right to give banks some leeway on the PP11 scheme in order to get the project done quickly. The bank market has now returned in Saudi Arabia at least, and in order to ensure it gets the most competitive bids SEC will need to limit banks to backing just one bid.

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