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Time for a privatization retrospective

This issue of Middle East Energy magazine has a distinct Gulf Cooperation Council (GCC) flavour as we examine the impact of independent power and water projects (IWPPs) in supporting development in the region.

Within the wider Middle East, the GCC countries have seen the biggest transformation in the provision of power and water to their populations in the past ten years. A decade ago certain countries in the GCC embarked on a radical new approach to utility ownership and operation, replacing cumbersome and bureaucratic state-owned utilities with private investment, competitive tendering and allowing independent ownership and operation of some power and water assets ” mainly those involved in generation and desalination.

Privatization had arrived and appeared to be the solution to the challenge of meeting the growing demand for electricity and water in the region. But has it masked an underlying problem? After ten years, it is interesting to examine what has been achieved and how the strategy has spread around the region. It is certainly the case that privatization has resulted in some noteworthy projects. It has facilitated the construction of power and water plants using the very latest technology and operating methods, resulting in much improved operating and thermal efficiency together with lower emissions.

It has brought to the region some top industry talent and led to innovative financing deals, which have meant countries in the region have been able to keep pace with a skyrocketing increase in demand for electricity and fresh water.

However, the success has been largely on the supply side, as successive campaigns by authorities have failed to curb the region’s voracious appetite for power and water. The desired economies are unlikely to be achieved while consumers’ electricity and water bills are so generously subsidized. Healthy oil and gas revenues have meant subsidies are easily affordable and governments are unwilling to risk unpopularity by slashing them. Some blame a ‘subsidy culture’ for an under-investment in maintenance and infrastructure.

Although the private sector has provided substantial finance this is likely to be increasingly hard to come by in the global credit squeeze. It is estimated that in the last two years, the number of banks actively looking for infrastructure investment projects in the Middle East has fallen from 45 down to ten. New power projects in the Gulf stand “no chance” of securing funding before the end of the year, said Ranald Spiers, International Power’s executive director for the Middle East and Africa.

“Banks at the moment are like rabbits in the headlights,” he said. “If you’re looking for financing in the first quarter of 2009 then you’ve got a sporting chance for it, but if you’re looking before the end of this year, there’s no chance.”

The benefits of privatization are well known, but ultimately commercial and residential customers will have to face up to the true cost of essential services if only to avoid a catastrophic water shortage in the future. Controlling consumption through tariffs will have to play a part. As the Lebanon government found out, however, increasing tariffs never proves popular; public protests against tariff hikes forced Beirut to delay plans to privatize the electricity sector.

The theme of ‘A Decade of Privatization’ is one that is being examined in more detail at the forthcoming POWER-GEN Middle East conference that takes place in Bahrain on 17-19 February 2009. Regional industry experts, including Ranald Spiers, will gather to discuss the current state of the power and water sectors and to determine what lessons can be learned from the IWPP approach and what the logical next steps are if the industry is to meet the challenging goals of water and power provision. Come February, we are likely to have a clearer picture of the effect of the global credit crunch on project development in the GCC and whether the oil revenue surpluses oil can maintain the region’s desire to expand its infrastructure at such a rapid pace.

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Nigel Blackaby
Associate Editor