Saudi Arabia's growing need for reliable sources of power and desalinated water has led the Kingdom to explore private investment in this sector, perhaps as early as October 2002.
When it embarked on the Saudi Gas Initiative several years ago, Saudi Arabia had envisioned that the international oil companies would develop independent power projects (IPPs) and independent water and power projects (IWPPs) to meet the country's growing power and water needs. Local press reports indicate that the delay in reaching agreement between the oil companies and Saudi Arabia has led the country to consider re-tendering the IPP and IWPP portions of the initiative. A key issue will be the internal rates of return that the Saudis will deem adequate for these projects to make them attractive to private sector investors.
In July, the Supreme Economic Council passed Resolution 5/23, which sets out the framework for engaging the private sector in IPP and IWPP projects. The Resolution favours IWPP projects, using energy conversion agreements.
The Kingdom has identified three projects for development: Shuaibah on the west coast, a fuel-oil fired plant to supply electric power and water to Jeddah, Mecca and Medina; and Ras Al-Zawr and Jubail on the east coast, two natural-gas-fired plants intended to serve Riyadh with electric power and water. The Saudi government seeks to attract private sector investment for up to 60% of the equity in these projects, with the balance to be held by public sector entities including the Saudi Electric Company, Saline Water Conversion Company and the Public Investment Fund. To help finance these projects, the government is considering a guarantee of Saline Water's offtake commitment for the water and a limited guarantee for Saudi Electric's offtake commitment for the electricity. It is widely believed that the Kingdom will look to European and Japanese developers for these projects given the variety of problems that have plagued US developers in recent years.
To attract private developers, the country will need to demonstrate that it can offer a reasonable rate of return on each project, that it can ensure timely payment to the developers from a creditworthy offtaker or guarantor, that it can and will abide by a transparent legal regime, and that it can offer greater comfort on security packages and environmental regulations. These issues have inhibited private sector investment (equity and debt) in previous projects in the past, although some smaller privately-owned power and water projects are being developed in the Kingdom. While Resolution 5/23 is a step forward, additional structural reform is likely to be required to make the government's projects attractive to foreign developers.
Stephen P Matthews and Nabil A Issa
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