Sector Reform: Flying the flag for privatization

Nigel Blackaby, Features Editor

The Emirate of Abu Dhabi has been the pioneer of structural and regulatory reform in the electricity and water sectors in the MIddle East. Having established a template for IWPPs, attention is now turning to transmission and distribution.

The distinctive flag of the Abu Dhabi Water & Electricity Authority (Adwea), marking out its smart headquarters building in downtown Abu Dhabi, has come to symbolize an organization that is the standard bearer for the march towards privatization in the power industry taking place across the Middle East.

Up until now, the framework for this privatization has been through the establishment of independent water and power projects (IWPPs), in which a strategic investor takes 40 per cent and government-owned Adwea retains 60 per cent. In the last few months Adwea has announced its firm intention to extend private participation to its transmission and distribution activities, once again demonstrating its intention to blaze the trail in a region, not known for devolution of government functions.

New management

Adwea was established in 1998 replacing the Water and Electricity Department (WED) in Abu Dhabi. It is responsible for formulating, developing and implementing the policy of the government in relation to water and electricity in the Emirate of Abu Dhabi, including all matters relating to privatization within the sector. Adwea supplies more than 1.4 million people over a 67 340 km2 area, representing 39 per cent of the United Arab Emirates (UAE) population and 87 per cent of the total area of the UAE.

The utility manages its business through nine wholly-owned companies spanning the fields of power and water production, transmission and dispatch, distribution and central services. Additionally, Adwea holds 60 per cent of the equity in four established IWPPs. The Adwea group of companies had an asset base of approximately Dh37 billion ($10 bn) and an annual turnover of Dh6.7 billion in 2003.

Prior to 1999, Adwea and its predecessor WED was responsible for all activities in the sector i.e. generation, desalination, transmission, distribution and supply. WED operated as a single, vertically-integrated government department, albeit with some internal organizational division along geographic and functional lines. Under Adwea a restructuring and unbundling took place both vertically and horizontally which resulted in three separate companies being established for power generation and desalination, Al Taweelah Power Company, Al Mirfa Power Company and Bainounah Power Company. A single buyer company, the Abu Dhabi Water and Electricity Company (Adwec) look over responsibility for planning and contracting new production and for sale of bulk supplies of water and electricity to distribution companies. Dispatch and transmission was to be handled by Transco and two distribution companies, Abu Dhabi Distribution Company and Al Ain Distribution Company, were formed.

In order to safeguard the interests of all stakeholders including customers, an independent regulatory body for the Abu Dhabi water and electricity sector was created. This Regulation and Supervision Bureau is responsible for licensing of all activity in the sector.

Planning for growth

The rapid development of Abu Dhabi in recent years has given rise to escalating demand for electricity and water. The climate means that substantial reserve capacity is needed to meet the summer cooling requirements. The use of irrigation for agriculture, and in order to keep the emirate green, makes huge demands on the potable water supply. Abu Dhabi has the largest demand and consequent growth in electricity production in the UAE. Its demand is currently increasing at a rate of eight to ten per cent per annum.

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Figure 1. Adwea has been a pioneer in the region

In addressing these demands, Adwea has had to plan for increases in both its electricity and water desalination generating capacity. Whilst it would have had the resources to proceed with the necessary expansion itself, Adwea’s vision was to establish special purpose companies to undertake the projects and to attract the involvement of private investors to take a 40 per cent stake in these companies. The new companies would build the units required on a build, own, operate (BOO) basis with the security of a 20-year government-backed power and water purchase guarantee.

Private option

The motivation behind Abu Dhabi’s privatization policy is not simply financial, although undoubtedly the reduction in government finance requirement has enabled resources to be redirected towards other social and infrastructure needs. Adwea believes that its IWPP programme has provided job opportunities to UAE Nationals and has also resulted in improved economic efficiency and reduced operational costs. Through its international partnerships it has seen the introduction of advanced technologies to the sector. Adwea has been able to use the performance of the IWPPs to benchmark the performance of its other production companies.

The first IWPP was the Al Taweelah A2 project, completed in 2003 by CMS Energy. Taweelah A1, a sale, refurbishment and extension project undertaken by the Gulf Total Tractebel Power Company, followed it. The third and largest project, the first stage of which is now nearing completion, is the 1500 MW and 452 million litres/day (l/d) Shuweihat IWPP, developed by CMS Energy and International Power. Sheikh Dhiyab bin Zayed Al Nahyan, Chairman of Adwea commented recently: “We have gained huge benefits from the sell-off of these five IWPPs. We used to heavily subsidise the electricity and water to the consumers…and money for this purpose used to come from federal budget. Now, with greater production efficiencies achieved by the handing over of these companies to private sector we have managed to achieve our desired objectives by diverting budget outlays to other areas instead of spending on subsidies.”

The Arabian Power Company was set up to undertake Adwea’s fourth IWPP ” the Umm Al Nar Power and Desalination Project. International Power, Tokyo Electric Power Company and Mitsui & Co. are the partners on this brownfield site project which will have a net capacity of 1550 MW of power and 114 million l/d of water.

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Figure 2. The new market structure

In January 2005 a consortium led by Japan’s Marubeni Corp. and BTU Power from the USA was awarded the contract to develop Abu Dhabi’s fifth IWPP at Taweelah B. The plant currently produces 1000 MW and 341 million l/d of water. The $2 billion project will add generating capacity of 1000 MW and produce an extra 246 million l/d.

The sixth and most recent project to be initiated is the takeover and expansion of the Qidfa power and desalination plant in Fujairah, which had been under the control of a smaller state-owned utility, Union Water and Electricity Company. Qidfa was commissioned in early 2004 and has power generating capacity of 656 MW and 455 million l/d of water. The size of the expansion is yet to be announced although it is expected to be in the region of 200 MW. Adwea is planning to use the same model as in previous IWPPs where a foreign developer has been involved and is expected to issue a Request for Proposals in June. An advisory team made up of Fichtner, HSBC, White & Case (international legal) and Simmons & Simmons (local legal) will act as advisors on the project. Plans to privatize Adwea’s Al Mirfa complex on an IWPP basis are currently on hold.

Beyond generation

Adwea has made it clear that it would like to see private involvement in most of its power and water generation. Government interest in projects to date has been 60 per cent but even that could be changing.

Adwea is establishing a holding company with a paid-up capital of at least Dh2 billion, which will manage all of the shareholdings in the IWPPs. Through an IPO process, ten per cent shares in the IWPP will be offered to UAE Nationals in order to broaden the share base and give local consumers an opportunity to invest. Adwea says that the government holding in each IWPP will not drop below 50 per cent. Given that the most likely new shareholders will include government-backed Abu Dhabi banks and members of the ruling family, it is safe to assume that overall control of the IWPPs will not be relinquished by the government. No timetable for such a share sale has been announced yet.

The desire to see a role for the private sector in utility activity in Abu Dhabi is expected to be extended during the course of this year with the privatization of Abu Dhabi’s transmission and distribution sector. Abdulla Saif Al Neaimi, director of privatization at Adwea has said that private placements in Abu Dhabi Distribution Company and Al Ain Distribution Company are under consideration. He said that BNP Paribas was advising on the arrangements and that the plan would be to offer minority stakes, without any public offering of shares.

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Figure 3. Historical growth in power supply and demand

Abu Dhabi is not alone in the region in looking at privatizing its transmission and distribution assets. Oman is considering a similar strategy and Qatar went as far as employing Germany’s Fichtner to complete a study into doing the same, although it has decided to put the proposals on hold.

Adwea is also looking elsewhere in the GCC region for opportunities and is expected to sign a deal to take a 40 per cent stake in Oman’s Sohar Aluminium smelter shortly. The planned smelter will have a capacity of 500 000 tonnes per year and a 1100 MW power plant.

Success story

Since embarking on its privatization strategy Adwea has accumulated over Dh35 billion ($9.5 bn) but more importantly to the Emirate the policy has resulted in the construction of power generation and desalination plants with a total capacity of more than 7000 MW and 1.89 billion litres of water per day.

“Global and local experiences have proven that the private sector is more competent and capable of managing and developing these infrastructure facilities to the international standards,” said Sheikh Dhiyab bin Zayed Al Nahyan, Chairman of ADWEA at a recent conference held in Abu Dhabi on the subject of privatization. MEE

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