Making privatisation work

IPPs allow governments in the region to expand power generation capacity without large front-end investment.

Independent power projects are now the norm for newly installed power generation in the GCC. George Sarraf and Walid Fayad from Booz & Co. look at the potential pitfalls of the model.

Independent power projects (IPPs) and independent water and power projects (IWPPs) are a relatively new phenomenon in the GCC. Up until the mid-1990s, power plants in the region were exclusively financed and developed by governments and government-backed corporations.

In the last 15 years, however, IPPs and IWPPs have proliferated across the region, starting with initial forays in Oman in 1996 and Abu Dhabi in 2002, and expanding to Qatar, Bahrain, Saudi Arabia, and recently Kuwait and Dubai.

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Across the GCC, more than two dozen IPPs and IWPPs are now in operation, with a combined installed capacity of 20 gigawatts, in addition to the many captive power plants dedicated to serving specific industrial users. Current expansion plans will more than double the region’s IPP and IWPP capacity over the next five years, bringing the privately developed share of aggregate electricity generation to about 34 percent.

The reason IPPs have almost entirely displaced the traditional public power plants for new generation stems from several
distinct advantages it offers to governments:

Amortization of public expenditures: The GCC’s rapidly growing economies and populations require enormous investment in infrastructure and other public goods. IPPs allow governments to install the power capacity they need without large front-end public investments.

Competitive cost of power: IPP bidders are evaluated on the basis of a levelised electricity cost; although cost comparisons with government-funded plants are inherently imprecise, IPP prices appear to be competitive, despite higher financing costs.

Predictable timing and often faster execution: IPP developers have strong discipline in bidding, financing, designing, building, and commissioning plants, as well as cost incentives to begin producing power as quickly as possible.

Establishment of performance benchmarks: IPPs provide operational and financial benchmarks that can raise the game for all power plants, especially those operating in identical environments.

Promotion of a favourable business environment: IPPs create private-sector employment opportunities and engage an array of stakeholders - local and international banks, investors, and export credit agencies - whose health and vitality are critical to the region’s continued growth.