After years of sitting on the sidelines watching much of the rest of the GCC privatize their electricity and water industries, Dubai has finally launched its first Independent Power Producer (IPP) project, which will see at least part-private ownership of a major generating facility in the emirate for the first time. The Dubai Electricity and Water Authority (DEWA) plans to float a tender for Hassyan 1, a green-field gas fired 1500 MW power station with a view to commissioning the plant in three years’ time. Earlier plans to include a desalination aspect were dropped after DEWA reassessed future water demand. Expressions of Interest (EOI) are sought by 30 March. Given Dubai’s shaky financial condition, it is a change of strategy brought about by necessity rather than choice, but will it be a successful one?
For the first 50 years of its history of providing electrical and water services, DEWA has retained full ownership of all its faculties, resisting the temptation to contract out services and only retaining sub-contractors as required on an EPC basis. And it has done so pretty successfully, having underpinned the spectacular growth of Dubai in recent decades with reliable supplies to its customers. Since 2005 it has managed to double installed capacity from 3822 MW to 7830 MW today.
Now, with its coffers depleted, DEWA is seeking help in the next stage of its planned development. But this in unlikely to proceed without some difficulties. Experienced advisors have been appointed to smooth the process, in the form of bankers HSBC, law firm Clifford Chance and engineering consultant Mott MacDonald. DEWA lacks experience in launching tenders of this sort and will need people with a new skill-set within its mid-upper management. Its relationship with the potential partners in this new venture will be very different from those in past projects, which were more one of master and servants, rather than co-venturers. Some prospective bidders are understood to have concerns that the DEWA mindset will struggle to adapt to the new relationship.
Another big obstacle to getting this deal away will be providing sufficient financial comfort to potential bidders. With rating agency Fitch about to withdraw its rating from DEWA, the spotlight falls on the need for some sort of sovereign guarantee. Fitch said the withdrawal is due to the lack of information to assess the emirate of Dubai: “DEWA’s creditworthiness has historically been a reflection of the agency’s view on the creditworthiness of the sovereign.” So will Dubai offer such a guarantee and if so, will it be enough? There is a fair chance that some lenders will have a problem with this for such a big project and that the spotlight will then fall on the rulers of neighbouring Abu Dhabi to step in – a move unlikely to be well received in either emirate.
The issue of developers securing project finance will undoubtedly impact the price being bid and if there are real concerns, this could lead to a delay. Finding sufficient lenders willing to live with the lack of a sovereign guarantee may be a problem and those willing to participate will want a higher return. The stage may be set for a developer that can bring to the table some state-backed finance, which most likely points to one of the Asian-based consortia, several of which have been active in the Middle East region in recent times.
Having pointed out some of the challenges, it is only fair to make the point that the Hassyan 1 project has quite a lot going for it. It is a very solid proposition, based on a real demand for electricity and will benefit from a good Power Purchase Agreement (PPA). Other IPPs in the region have shown that it is perfectly possible to make money from such projects after construction risks have been worked through, with some demonstrating innovative ways to profit from re-financing deals along the way.
It is also the case that developers interested in the region are unlikely to be spoilt for choice for projects in the coming years with only Taweelah C yet to be tendered in Abu Dhabi and only small pipeline-projects left in Oman. Qatar has a surplus of electricity at present although the World Cup may add to future demand, which just leaves Saudi Arabia in the GCC as a hunting ground for projects. After that, developers may be looking at projects arising in Syria, Jordan and Syria, which could raise the Dubai IPP’s relative appeal.
It will be interesting to see if the project finance market has recovered enough to support DEWA’s proposition, coming not long after Abu Dhabi postponed its Taweelah C tender, which would need to raise $4 billion in debt. It will also be fascinating to see which developers and consortium partners are willing to throw their hat in the ring and work with DEWA in an unaccustomed way.