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Powering Salalah

Lim Yeow Keong narrates his experience of setting up the Salalah IWPP

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Sembcorp Salalah CEO Lim Yeow Keong
Sembcorp Salalah CEO Lim Yeow Keong

As Oman’s capital city Muscat continues to urbanise and undergo rapid development, the country’s second largest city, Salalah is quietly growing into an industrialised hub and one of the catalysts driving such growth is the Public Private Partnership (PPP) model introduced by the sultanate way back in 2004. While the need for PPPs in the utilities sector is debatable and so is its success in the face of a financial crisis, the amount of protection it provides investors is rather attractive.

Such is the success story of Sembcorp Salalah Power and Water Company, which owns and operates an electricity generation and seawater desalination plant, the Salalah Independent Water and Power Plant (IWPP), located between Taqah and Mirbat, approximately 50km from Salalah. The project provides power and water under a 15-year power and water purchase agreement with the Oman Power and Water Procurement Company (OPWP), which is indirectly wholly-owned by the government of Oman. It is one of 12 independent power and/or water production projects to be implemented by the government through OPWP on a ‘build, own and operate’ basis.

Sembcorp Salalah has invested approximately US$1bn to develop, finance, build, own and operate the IWPP. The plant has been in full commercial operation since May 2012 and consists of a gas-fired combined cycle power plant with a contracted power capacity of 445MW and a seawater desalination plant that employs reverse osmosis technology to produce 15MIGD water.

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As of July 2013, Sembcorp Salalah is said to supply approximately 72 per cent of the power dispatch and 100 per cent of the net installed water capacity of the Dhofar Governorate and given the projected growth in electricity and water demand, the plant is expected to remain critical to the continued supply of power and water in the area in the long term. “It all started in 2006 when the government invited bid for the plant in Salalah,” said Lim Yeow Keong, CEO of Sembcorp Salalah.

“I was in Fujeirah, looking at the Fujeirah F1 IWPP then. When we heard about this project in Oman, we decided to go for it. We were really interested in getting into Oman’s power market. Since we were already present in the region, we were confident."

Strong regulations and transparent policies are some of the main reasons why Oman has been able to bring in vast private sector investment. The country’s Royal Decree No. 77/2004 (Law of Privatisation) allows for the establishment of public private partnerships (PPP) and grants the private sector the right to construct, own and manage privatisation projects.

According to a 2012 report, following the promulgation of the Sector Law on August 1, 2004 (Royal Decree 78/2004), the government embarked on a comprehensive programme for the restructuring, regulation and privatisation of the electricity supply and related water industry in Oman. The decision to privatise in the electricity and water sectors stems from the belief that the private sector is better placed to drive innovation and reduce costs in what has become one of the most expensive items on the government’s balance sheet.

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There is now an extensive and successful track record of private participation in the electricity generation and water sector in Oman; to the extent that 85 per cent of the sector is priva-tised, the report added. According to Keong, the entire framework is pretty well set up in Oman and that attracts a lot of international investors to the country. “For international players to enter a market, it’s important that the system is fair and up to international standards.”

Back in 2008, during the financial crisis, many of the important projects across the GCC were put on hold. “The Omani government is very practical. The government accommodated the increased cost of the debt by 2009 and that’s how the project basically kicked off. Without the government’s understanding and support, it would not have been possible to complete the project because the cost of debt was amazingly high that time compared to the pre-financial crisis.”

“Not only did the government provide guarantee in the project, but it also participated as a gas supplier, water distributor and was responsible for electricity transmission. The regulations are of international standard which attract global investors like Sembcorp and allow international banks to sanction loans on a long term basis,” Keong said.

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More importantly, despite water and electricity being a subsidised commodity in Oman, the loss, if any, is borne by the government itself thereby, private investors are protected against risk. As far as Sembcorp Salalah is concerned, its power and water purchase agreement is with OPWP that is indirectly wholly-owned by the Omani government.

Further, the company’s cash flows are not affected by the amount of power and water actually required by OPWP as they are paid on an availability basis - ie based on the power and water that is made available. “The income stream is very stable. We have got 15-years financing deal so we have got absolute visibility
on that,” Keong said.

Similarly, the company is also entitled to receive capacity charges from OPWP for 100 per cent of the available power and water capacity of the plant, which is said to comprise approximately 90 per cent of the total revenue of Sembcorp Salalah. These capacity charges are payable by OPWP regardless of whether the actual output of the plant is dispatched by them.

Thus the company feels that there is strong government support and stable revenues due to the strategic importance of both the industry and project. Most recently, Sembcorp also signed a joint venture agreement with Takamul Investment, a subsidiary of Oman Oil, to develop centralised utilities facilities for the Duqm Special Economic Zone. Under the agreement, Takamul and Sembcorp’s 65-35 joint venture entity, centralised Utilities Company (CUC), will provide a range of utility services to multiple industrial customers in the Duqm SEZ in southern Oman.

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“We are the number nine power plant to come on board. This (PPP) model has been quite successful in the past few years in Oman. We are looking forward to work in this model as the utility industry is doing pretty well in this model,” Keong said.

This scenario is ideal for an Initial Public Offering (IPO) and Sembcorp Salalah did just that in August the year. The company expects to raise US $138mn, by making 35% of its shares public – potentially the biggest share offer in Oman so far in 2013. The current stakeholders of the company are - Sembcorp Utilities, with assets of S$13bn; Oman Investment Corporation (OIC), a private equity company based in Muscat and BDCC Investment company - who own 60, 35 and 5 per cent stake respectively.

“It’s a good model for developers in the first instance and it’s a good model for us to launch the IPO. Indirectly, the government is also one of the shareholders (through OIC),” Keong said. “We found the MSM (Muscat Securities Market) good to deal with and we find that there is a good investor base in Oman interested in this kind of long term IPOs. This is Oman’s largest power IPO and we are also looking beyond Oman and in the region and internationally. In the long term, we are hoping to bring in more international money into the MSM.”

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For incremental revenue growth, Sembcorp Salalah aims to expand existing facilities to deliver additional desalinated water capacity, in line with the current government policy to minimise use of groundwater. Additionally, the company also plans to sell current excess power capacity.

Talking about workers at the IWPP, Keong said, “Safety has always been after our utmost importance for us. We take out safety training programmes very seriously, whether it’s for the workers or for other staff. Further, we support the government’s Omanization drive.

Almost 40 per cent of employees in our company are Omanis. They are into operations, maintenance and administration. We have also launched several training programmes for Omani engineers, many of whom are fresh graduates from the industry.”

Salalah power plant is Sembcorp’s first project in Oman and second in the GCC. Its maiden entry in GCC was with Fujeirah in 2006. “At the personal level, the Salalah power plant project was very satisfying, very exciting and very challenging project. Sembcorp Salalah is focused only on the power plant in Salalah. Sembcorp is looking at various opportunities in the GCC.” Keong said

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