Is love still in the air?

How time flies. It was over a year ago, that I wrote about a blossoming relationship between Saudi Arabia and the private power sector (“Love is in the air”, MEE March 2004). One year on, love may still be in the air but at the moment it is more of a smouldering ember than a raging flame.

The Kingdom seems to remain committed to the development of its private power sector but few can argue that progress has been slow. Eighteen months ago, it seemed as though things were finally picking up. In October 2003 the Saudi electricity and water authorities announced plans to build 21 water and electricity projects, these included seven electricity generating plants that would provide 14 000 MW of new capacity. Then in December that year, national oil company, Saudi Aramco signed BOOT agreements with UK developer, International Power and local construction company Saudi Oger, to build four cogeneration facilities in the Eastern Province of Saudi Arabia.

After these announcements many thought the flood gates were finally opening. Yet the number of private bidders for Shoaiba, the Kingdom’s first IWPP project, indicates that the relationship between Saudi and the private sector is perhaps in need of counselling.

The tender ultimately resulted in just one bidder ” a 50:50 local/Malayasian consortium made up of Acwapower Projects, Tenaga Nasional Berhad and Malakoff Berhad. This is a poor turn out by any standards. Certainly, the fact that it is an oil fired project on the west coast had something to do with it. Although a number of pre-qualified developers had voiced reservations about bidding for such a project, two other groups were expected to take part in the bidding. However, both groups declined to bid after the Water & Electricity Company (WEC) refused to grant another bid extension beyond the March 5 deadline.

Nevertheless, WEC is going ahead with the evaluation regardless of the number of bids. It was reported as saying: “Uin terms of price, the offer is in the zone. There is no legal requirement for having more than one bidder in Saudi Arabia. WEC made it very clear right from the pre-bid conference last year that the selection process would not be governed by the number of bids received.”

This at least demonstrates that Saudi is committed to development of its private power programme and that it is determined to stick to schedules. Yet the situation shows that there is perhaps a fundamental problem with the attractiveness of private projects on offer. Industry observers believe that return on investment could be a key part of the problem. After all, why build a project in Saudi, which might offer a nine per cent return, when you can get 12-13 per cent in the neighbouring United Arab Emirates?

Perhaps this is why the Malaysians are becoming key players in the Middle East market. It may be that they are accustomed to lower rates of returns on IPP projects they develop in Malaysia. This may partly be due to the fact that in Malaysia the sole power purchaser is state utility TNB, which is also part-owner of most Malaysian IPP developers.

Still, Saudi Arabia continues to develop its market to attract further investment. A law, scheduled to be issued in December this year will define the role of the regulator. The independence of this regulator will be important if international investors are to feel confident in the market.

Fehied F. Al Shareef, governor of the Saline Water Conversion Corporation (SWCC) and chairman of the Saudi Water and Electricity Company said: “SWCC offers new opportunities for investment exceeding Riyals 36 billion ($9.6 billion ) over the next few years.”

So far four IWPPs with an investment outlay of Riyals 23 billion have been committed including the $2 billion Shoaiba project.

There is little doubt that opportunities are plenty and investors’ fascination with Saudi should continue even after Shoaiba. International Power said it planned to bid for the contract to build and run the larger Marafiq plant near the industrial city of Jubail, on Saudi Arabia’s Arab Gulf coast. This plant is expected to generate 2400 MW and 300 000 m3 of desalinated water per day.

So let’s wait and see what happens with Marafiq. The turn out of players for this will surely indicate whether the love affair with Saudi will ever become a true romance.

Junior Isles
Publisher & Editorial Director

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