I figure this must be a good time to be a developer of major water and power projects in the Middle East and not a bad time for engineering, procurement and construction (EPC) contractors either. Both are in big demand and both have their pick of the numerous projects in the region. It was apparent from discussion at the POWER-GEN Middle East conference, held in Bahrain in January, that the IPP and IWPP models remain the most effective way for countries in the region to add the capacity they so desperately need, in a timely fashion.
Examples of high demand growth can be found throughout the region. Bahrain itself plans to virtually double its existing capacity in the next couple of years. Abu Dhabi has recently announced a need to treble its capacity to 16.5 GW by 2020. Research covering MENA suggests that the region will add some 45 per cent of its installed capacity of 162 GW by 2010.
That is not to say that the independent model is without problems. To an extent, those problems result from the very success of the model and the competition for foreign capital and construction expertise, but the exponential growth in demand has put a strain on the ability to developers and EPC contractors to handle the number and size of projects. “
The challenge in financing projects is the limited number of EPC contractors and the desire of developers to have a single EPC handle the entire project,” commented Omar Al-Ghamdi, president of Saudi Arabia’s Water and Electricity Company (WEC). “The financial capability of EPCs to take on large projects is in question,” according to Vivek Ghambir of CMS Cameron McKenna. There is little doubt that most EPC contractors are currently busy and their balance sheets can only support a limited number of projects.
With project sizes as they are, contractors are finding it increasingly difficult to take on the entire project risk, as Dubai Electricity and Water Authority (DEWA) found when it tendered Jebel Ali M station last year. DEWA was forced to downsize both the power and water packages in order to attract enough competitive bids. Many view DEWA’s decision not to introduce outside ownership of its power and water projects as a potential encumbrance, as the Emirate looks to almost double its installed capacity by 2010 to 9500 MW. Power consumption growth in Dubai reached 15.2 per cent last year and neighbouring Abu Dhabi is supplying a constant 400 MW to Dubai though the recently completed interconnection. DEWA will have to find takers for around Dh50 billion ($13.6 billion) worth of work in power sector infrastructure, which will not be easy.
One EPC contractor believes it has an answer to reducing risk on projects it undertakes. “One approach is to use established technology and to base new projects on existing project models,” says Luther Balling, vice president of Siemens Power Generation. “Choosing the right joint-venture partners also reduces the risk.”
Industry veteran David Hadfield, managing director of Bahrain’s Hidd Power Company, jointly owned by Sumitomo, International power and Suez, believes that the current extreme growth pattern is part of a normal business cycle and that it will not go on forever. “The EPC contractor is in charge at the moment, but that will change. At the moment there is more demand than supply so costs will inevitably go up.”
Whatever the point in the cycle, it is unavoidable that utilities, owners and developers are to an extent dependent on the large equipment suppliers, given the limited number of these firms worldwide, capable of supplying equipment for a major project. “It is always a partnership and through good times and bad you shake hands on the deals,” says Gerhardt Gleissner, managing director of Abu Dhabi Water & Electricity Authority.
Where private capital has participated in new projects the results seem to have pleased the authorities concerned. “Following privatization we have seen improved plant availability and have better maintained plants. Owners know that if they keep their plant on line, they will get paid,” says Gleissner. Satisfaction levels are equally high in Bahrain where the Ministry of Electricity and Water is planning all new capacity additions to be private ventures: “We are quite happy with our short experience in Bahrain. The challenge will be to find investors for these new huge projects,” said a spokesman.
If the authorities are happy with the deals, what of the developers? David Hadfield summed up his view, “There are many projects we regret losing, but there are no projects we regret winning.”