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Within a very short space of time ACWA Power International has transformed itself from a small speculative investment firm into one of the leading private power and water developers in Saudi Arabia, but its aspirations do not stop there. MEE talks with Paddy Padmanathan, its charismatic president and CEO.

Dr. Heather Johnstone, Senior Editor

ACWA Power International was founded in 2004 with a vision of becoming a world class, fully capacitated developer, owner and operator of power generation and desalinated water production plants operating on a global platform delivering reliable lowest cost bulk power and water.

The company’s strategy was to initially focus on the Kingdom of Saudi Arabia utilizing the steady stream of independent power project (IPP) and independent water and power project (IWPP) opportunities to establish a track record, build capability and capacity, and then progressively step out into the Gulf Cooperation Council (GCC) region and subsequently beyond.

ACWA Power International is involved in seven projects – Shuaibah IWPP, Rabigh IWSPP, Shuaibah Expansion IWP, Marafiq Jubail IWPP, Shuqaiq IWPP and Rabig IPP, with a mix of technologies spanning from gas and oil fired power plants to MED, MSF and RO desalination processes.

Additionally, ACWA Power International has also constructed two, barge mounted, self-contained desalination plants each capable of producing 25 000 m3 of water per day (m3/d), which, according to the company, represents a world first.

Once all of these projects are fully operational, they will collectively deliver 6000 MW of power and 2.24 million m3/day of desalinated water, representing a total asset value of $12.4 billion.

MEE: What was the rationale behind the restructuring last year to create ACWA Power International?

PP: In 2004, we incorporated a limited liability company, which is the quickest way to set up a business.

Given that our ambition was to widen the ownership beyond a few private companies – ACWA Power International is owned by eight Saudi conglomerates – to include the wider public once we had assembled a portfolio of projects, managed out the construction risk of the initial set of projects and established a stable going concern; in 2008 we incorporated ACWA Power International as a Joint Stock Company, which is the type of corporate entity that can be listed on the stock exchange.

The addition of the word ‘International’ to our name at this time also was to reflect the next phase of our development, that of stepping outside the Kingdom of Saudi Arabia.

MEE: How has ACWA Power International, which came from relatively lowly beginnings, transformed itself into one of the leading IWPPs in the Middle East region?

PP: By working with a committed set of shareholders, a hard working, visionary chairman and a utterly focused and committed management team that is fully empowered we have managed to identify the optimum technical solution, negotiate the most competitive EPC and O&M contracts, and structure the least-cost financing solution.

We have achieved all this by being a fully involved local developer maximizing the use of not only the very relevant local knowledge we have, but also utilizing our far-reaching and wide access to the local supply chain through our reputable and well-established diverse shareholder base.

All but one of the projects we are involved with have been won through a competitive tendering process wherein each instance well-established international developers also participated and in each and every instance we delivered tariffs that were lower than 20 per cent compared to the next tendered and in the case of Rabig IPP, 30 per cent lower.

Given that these are 20-year off take contracts, these tariff differences represent significant money. One way to look at it is that we have already delivered in excess of $3 billion in value to the Saudi economy, this being the net present value difference between our tariff and the next one on the contracts won to date.

Proof of the pudding is in the eating. We are now eating; as our plants are getting constructed on time and within budget and we are dispatching power and water, and earning the due revenue.

MEE: You previously said you had plans to list the company on the Stock Exchange next year. Is that still the plan?

PP: As I mentioned previously, we wanted to open up the ownership to the Saudi public as soon as we had managed out the construction risk of the first set of projects and established a steady income profile. We will have achieved this by the first quarter of 2011. We will then fine-tune the timing to suit the market conditions at that time.

It is still very much our intention to open the ownership to the Saudi public but only when it is responsible to do so.

MEE: Of the four IWPPs that ACWA Power International has participated in to-date, which is the most important for the company and why?

PP: All are equally important because they are all very large plants and therefore the consequence of failure of even a single plant will have a significant impact on the economy.

We are in the business of delivering water and power, two vital inputs to the social and economic development of Saudi Arabia. So every project is important. Each project represents a significant investment.

Saudi Arabia’s Rabigh IWSPP supplies water, power and steam to the new integrated petrochemical complex being developed by Saudi Aramco and Sumitomo Chemicals
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MEE: The Saudi Arabian government’s model to encourage greater private sector involvement in its water and power sectors has proved very successful for ACWA Power International. In your opinion, why is it proving to be more successful than others used elsewhere?

PP: IPP and IWPP models of procuring competitively priced water and power services have been very successful in the GCC region from the first project launched in Oman over 15 years ago (the 90 MW Al Manah). Only recently, since the cyclone blew through the financial services sector, have a few projects struggled.

However, in Saudi Arabia it has been a spectacular success from the outset and even after the collapse of Lehman Brothers, as we demonstrated by structuring $2 billion of 20+ year project finance debt on competitive terms for Rabigh IPP in July this year.

There are three reasons, I think, as to why. Firstly, Saudi Arabia positively encouraged the participation of local developers, whereas some countries in fact positively discouraged such participation. In Saudi Arabia we have proved the value of the local developer by delivering significant savings on each and every bid to date.

Secondly, the Saudi Financial Services sector is solid and more importantly liquid, and thus has the capacity to commit significant amounts of funds to this IPP and IWPP sector.

And finally, Saudi Arabia is regarded as a very credible risk. Saudi sovereign is rated highly. The Kingdom is rated as a safe long-term destination for investment as proven by the active participation in this sector by international developers and financial institutions, contractors and suppliers.

MEE: What is ACWA Power International’s ‘unique selling point’ (USP) over other developers in the Middle East region?

PP: If you want me to highlight the single most valuable USP, it is that we are a fully capacitated developer who actively participates in each development to deliver the lowest possible tariff for reliable bulk water and power – lowest possible tariff, not a market tariff.

We are not a passive investor, nor are we agents or standby local participants but a very active developer.

MEE: ACWA Power International has worked with a variety of development partners on different projects. Why is this, and how do you ensure you work with the right partners?

PP: Our entire focus is on how best to deliver the lowest tariff for the customer’s specific requirement on each project. We start by selecting the most appropriate technical configuration, then select the optimum equipment.

We then identify the most competitive EPC arrangement, then decide how best to finance it and finally select the development partner who can add value to the task of financing or managing the EPC contractor.

Using this approach we have ended up with different partners for the various projects we are involved with. As we do more projects, we will inevitably work with partners we have worked with before, which of course will be very helpful.

MEE: The Middle East region has not been immune to the global economic downturn. Do you think we have seen the worst, and that next year we will see signs of a recovery?

PP: Even through the worst of the last two-year period, good projects with credible and committed sponsors got done. We ourselves can proudly point to the Rabigh IWSPP.

Looking forward, liquidity in the financial markets is starting to improve and confidence is slowly returning to launch projects. Given that demand for water and power is still growing and there is a significant gap between supply and demand, we expect activity in the sector to start pickling up in 2010.

In the last month of this year, tenders for 3500 MW of IPPs (PP11 in Saudi Arabia, and Barka 3 and Sohar 2 in Oman) will be submitted. So in my view the market is already starting to move.

Once operational in 2010, the Marafiq IWPP will supply 2743 MW of power and 800 000 m3/d of desalinated water
Source: GE Energy
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MEE: Some say that one of the positives to come out of the global recession is that the previously constrained equipment supply market has been freed-up. Would you agree with this?

PP: Absolutely! We keep saying to all who will listen that this is the best time to go forward with projects because you can take advantage of the equipment suppliers and EPC contractors free/spare capacity.

The fundamentals are there, as we said before, the demand has not gone away. All that is happening is that projects are being deferred. I fully expect equipment suppliers and contractors to start getting busy in the second to third quarter of 2011. So, now is the time.

MEE: The ability to finance projects is now much more difficult. Even Saudi Arabia is being affected – the Ras Al Zour IWPP will now be government-funded because the developer was unable to raise the required equity. Are you concerned this may indicate a potential trend?

PP: There continues to be a lot of myth propagated about Raz Al Zour in spite of people who were directly involved in the project standing up and explaining what happened.

Raz Al Zour did not collapse because of lack of equity or debt financing. The fact of the matter was there were $5 billion of debt available and $1 billion of equity bridge financing committed.

The project collapsed because the consortium that submitted the lowest tariff simply could not deliver the tariff they bid. Everything else was a side show and consequence.

Once again I repeat, in July of this year we closed a $2.5 billion IPP. The debt financing was not mini perm or a short-term bridge or any such like, but it was a 20-year term project finance with a 17.5 per cent non- amortizing balloon – effectively a 23.5 year tenor loan!

The longest tenor ever for a transaction that did not have a sovereign guarantee; the first IPP or IWPP to be done without a sovereign guarantee ever, in the GCC region.

So no, it is not a trend and I am not concerned. Contrary to the public perception the Saudi Arabia government has not changed its policy. We are due to submit a bid for a 2000 MW IPP on 20 December 2009. There is a long list of IPPs to follow.

MEE: What are ACWA Power International longer term plans within the Kingdom of Saudi Arabia?

PP: We will continue to pursue every credible opportunity, both greenfield and brownfield. We will actively participate in any sale of assets currently owned by the Saline Water Conversion Corporation (SWCC) and the Saudi Electricity Company (SEC).

We will continue to bid for new IPPs and IWPPs. This is our home market, so we are very comfortable with this market. We clearly have experience and have demonstrated our capability and capacity to deliver financial value to the country and to bring the projects in on time.

MEE: You have said previously that one of ACWA Power International’s goals is to expand into the regional market. How is that progressing?

PP: We are on track. We have expanded our team, and now have a very large team of professionals with the full range of expertise spanning from engineering, project finance, financial modeling, project and contract law, environmental science, insurance, contract management and transaction management.

Our team of 120 in the development company is based in Riyadh and Dubai. We are preparing a bid for Barka 3 and Sohar 2 in Oman, and are working on opportunities elsewhere.

MEE: Do you have ambitions worldwide? If so, what countries have you identified as growth areas?

PP: The world is a big place and it will take us a long time to get there. Our plan is to grow step-by-step. Our next phase of growth is to focus on the GCC region, Morocco and Algeria, Turkey and South Africa.

Once we have established a footprint in at least three other countries from this target list and one other geographic region than GCC, we will then look to move further towards the East – East rather than the West because that is where the growth is.

MEE: Why are you confident you can replicate ACWA Power International’s success in Saudi Arabia both within the Gulf region and worldwide?

PP: We have a highly talented and motivated team of professionals who will continue to deliver value regardless of the location.

We are also fortunate in having established a solid network of partnerships with equipment suppliers, EPC contractors, financial institutions and development companies that we can still rely on as we step outside Saudi Arabia.

So, we are quietly but cautiously confident because we recognize that we do still need to prove that we can win and deliver in new markets. MEE

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