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Powering Ahead

How ADWEA has led the way in PPPs for power and water projects

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A 3D Model of the Fujairah II power and desalination plant .
A 3D Model of the Fujairah II power and desalination plant .

How ADWEA has led the way in PPPs for power and water projects in the Middle East.

The Middle East is engaged in a power struggle. Governments are racing to meet the skyrocketing demand for electricity and water of increasingly urban and industrialized societies, and are always in danger of falling behind.

In 2009 alone, power consumption in Abu Dhabi rose 11 percent to 6.255MW, the emirate’s largest ever annual increase. In 2010, peak power demand is likely to reach around 7.600MW, predicts the Abu Dhabi Water and Electricity Company.

Other countries are facing a similar mountain to climb. Saudi Arabia, the largest economy in the Middle East, is forecast to have power needs of 65.000MW in 2018.

Last year is was unable to satisfy consumption levels, which at 41.200MW outstripped the kingdom’s power capacity. Abu Dhabi, on the other hand, is meeting its needs comfortably, with an installed capacity of around 10.000MW.

To facilitate the development of the power and desalination sector, governments in the region turned to public private partnerships (PPPs) to finance Independent Water and Power Producers (IWPPs). Abu Dhabi is drawing power and water from eight IWPPs.

The Fujairah II project, which is currently in commission and which will supply both the Northern Emirates and Abu Dhabi, will be the largest in the GCC. Across the region, power and desalination projects are the result of partnerships between the government and private companies.

IWPPs in the Middle East differ from the common definition of a PPP. While the government will typically help out the private company involved in the project with direct or indirect subsidies, it will also hold a stake in the venture. The adaptation of the concept has varied, and different models have emerged.

Oman endorsed the private ownership of its power infrastructure early on, and has gone further down the route of privatisation than any other country in the region, even allowing for 100 percent private ownership.

The Adwea model
But it is the model endorsed by the Abu Dhabi Water and Electricity Authority (ADWEA) that has gained most traction in the region. “The ADWEA model is regarded as the leading independent power plant model certainly in North Africa and the Middle East, and everyone’s been imitating it for a long time,” says Ranald Spiers, executive director at International Power, which owns 20 percent of Fabco, the Fujairah II holding company.

ADWEA will take a 50 or 60 percent share in the IWPP holding company, while the remaining stake is divided up between private developers. These then tied into the project with power and water purchase agreements (PWPAs) of 20 to 25 years.

For the companies, a large part of the attraction lies in the fact that ADWEA is a partner in the project.

“We are comfortable with the model, because ADWEA is part of it,” says Michio Hayashibara, director at Marubeni Power Asset Management. Hayashibara is in charge of Marubeni’s operations in the gas and water sector in Abu Dhabi, where the company is involved in four of the IWPPs in the emirate, and owns the other 20 percent of Fabco.

“Because ADWEA participates as a shareholder in the project company they are motivated to try and help ameliorate any negative impact if there are any problems,” explains Spiers.

The government agency’s intervention to salvage the Shuweihat II IWPP in 2009 illustrates this point. When GDF Suez, who had been awarded a 40 percent stake in the project, struggled with the financing, ADWEA extended the power purchasing agreement (PPA).

Crucially, it also approached Marubeni and secured its participation by allotting it half of GDF Suez stake in the holding company. Because of the involvement of the Japanese company, the Japan Bank for International Cooperation (JBIC), an export credit agency (ECA) stepped in with a US$1.1 billion loan to get the project of the ground.

While extending a helping hand when necessary, ADWEA does not like to get involved in the operational side of an IWPP.

“As long as things go well, they leave the management to the shareholders,” says Hayashibara. “Even though they own a 60 percent majority share, all management decisions depend on the executive managing director of the holding company.”

In fact, interfering in the operating of the plant is not in the interest of a government agency. Financing aside, the main reason for private sector involvement in core infrastructure is for utilities to benefit from the efficiency gains that experienced operators bring to the table.

Financially robust
As Shuweihat II shows, the financial crisis did put IWPPs in the Middle East to the test, a test that confirmed the solidity of the model. Nevertheless, the turmoil in the financial markets did put a brake in PPPs in the region.

“It hasn’t stopped them altogether but it has slowed things. In Saudi Arabia it put a brake on the process,” says Marc Fèvre, senior associate at law firm Freshfields Bruckhaus Deringer.

A case in point was the Kingdom’s decision to not develop the Ras-al-Zour power and desalination plant on an IWPP basis, having lost patience with the inability of private companies to get the financing together.

But while financiers have become more selective, power and water projects were still seen as high quality projects and safe investments, says Fèvre.

“In the region as a whole, it meant that only the best projects got done. The projects with the best government support, with the best risk allocation, done in the sectors with most certainty to banks; principally power.”

As far as the long-term success of the model is concerned, some argue that because of the crisis, PPPs have become even more interesting to governments, which have come to appreciate the value that private sector involvement can unlock.

“Governments are now paying a lot more attention and efficiency in delivery in all infrastructure sectors, so they’re looking to the PPP models to deliver value for money,” says Michael Palmieri, corporate finance partner at KPMG.”

And it seems poised, because of a focus on value for money, for even more growth when the economies are coming back, which they seem to be.”

It is not only governments in the region who have spotted opportunity in crisis. Hayashibara is keen to stress Japan’s interest in developing ties with the oil rich countries in the Middle East.

“The GCC countries are very important to Japan. One quarter of our oil exports come from Saudi Arabia, and one quarter comes from the UAE. We think that investment in the region, especially in the UAE, is very important to maintain good relationships.”

JBIC’s loans to help finance IWPPs can be seen as goodwill gestures, while they also encourage utility providers to do business with Japanese firms.

But ECAs are not unique to Japan. The success of the South Korea’s Korea Electricity Power Corporation (Kepco) in securing the contract to built four nuclear reactors in Abu Dhabi was in no small part due to the help of such financing arrangements.

And it is not only Japanese companies that have profited from JBICs loans. As JBIC is able to borrow money at costs that are far lower than the market rates for many private companies, it is in turn able to provide funding to projects at attractive rates.

What is more, by providing around half of the debt required, they have been instrumental in making project finance work for IWPPs after lending activity declined in the financial crisis, according to Spiers.

“Throughout the last 12 months in terms of project finance, the ECAs have stepped up to the plate and been more active and have done a lot more than they have done in the past,” says Spiers.

“If there had just been commercial banks, you would be struggling to get the money together for a large deal. For in some ways the credit landscape has changed, a lot of banks have gone. Having an ECA act as an anchor lender, sometimes providing 50 to 60 percent of the project debt is very helpful”

Despite taking a cautious view of infrastructure investments in the Middle East, banks are still fundamental in providing capital to IWPPs.

While RBS has effectively pulled out of financing infrastructure in the region, it used to be one of the biggest players alongside HSBC, Standard Chartered and BNP Paribas. Local banks have also been active in lending, but most of the bigger projects have not been financed with their help.

Broadening the investor base beyond banks and ECAs has been difficult, says Fèvre. “Other than developer investors, there hasn’t been that much secondary market activity in terms of being able to buy into assets.”

While a few infrastructure investment funds have been set up, their activities have been limited. Part of the reason is that there are not enough projects that have been put into the market, thinks Favre.

On the back of limited opportunity, the ADIC-UBS Infrastructure Investment fund, a joint venture between the Abu Dhabi Investment Company and the asset management arm of UBS, is now being wound up, having failed to make a single investment.

Abu Dhabi’s TAQA is also heavily involved in investing in the Emirates IWPPs. It is, however, majority owned by the government though a 51 percent shareholding by ADWEA, and a 21 percent ownership by the government Farmer’s Fund, with only the remaining 28 percent floated on the stock exchange.

In countries whose coffers are not swelled by oil and gas revenues, PPP are much more critical in terms of financing. Here, PPPs are often used by development banks to get involved in infrastructure building.

In Jordan, several PPPs are being supported by the World Bank, while Egypt is receiving support from the World Bank, the European Investment Bank, and the German development bank KfW.

“In countries which need infrastructure but can’t afford it there is a strong development angle,” concludes Fèvre.

Powering ahead?
So far, governments have had few difficulities in attracting bidders for their projects, but there are a few misgivings.

While government participation drives down risk levels, a large ADWEA stake translates into a fairly small portion of ownership by the private companies.

“From a foreign bidder’s perspective, you are negotiating and implementing a very large contract, but you only might hold 20 percent of the equity in the project. So it is less material in terms of profit and net MW,” says Spiers.

Oman has been causing some consternation amongst private companies in the past when the government delayed tenders and stalled projects.

With no legal framework in place to boost investor confidence, countries rely on their track record, making Abu Dhabi a popular place to do business for developers. Some believe that implementing a PPP or concession laws could help countries without such a track record to boost their appeal to the private sector.

Practical improvements would also be welcomed. A report by Freshfields Bruckhaus Deringer points to the fact that most countries in the region lack a central government unit coordinating PPP activities, and advises governments to follow Egypt’s example in setting up such a unit.

Investors would profit from added certainty on the terms of transactions and a more transparent procurement process, the firm says. “If you have such a department, you usually end up with an official with key responsibilities,” adds Christian von Tschirschky, principal and head of Utilities for the MENA region at consultancy ATK Kearney.

“Having a key coordinator helps, especially as government institutions in the region are quite complex.”

Governments in Kuwait, Iraq and Dubai, which have not yet adopted the IWPP model to address their power and water needs, will have to consider all those issues.

Most observers see Kuwait some way off an IWPP. One problem for investors is the political system, says Fèvre. “In Kuwait, the big problem is political risk as there is the constant struggle between the executive and parliament and there is no certainty about what’s going to happen to any particular projects.”

Security concerns mean that Iraq will also have to wait some time before IWPPs become a possibility.

In Dubai, plans are underway to built the emirate’s first IWPP. The proposed 1.500MW plant at Hassyan is expected to come online in 2013 or 2014. The project is at the advisory stage, observers believe that the procurement period may take longer due to Dubai’s inexperience in handling IWPPs.

In light of the global financial meltdown and the impact is has had on the GCC, developers are cautious about committing. “Participating companies may have certain prerequisites they want to see, for example that power projects are backstopped by the government, and potentially further backstopped by national funds,” says one contractor.

These concerns about financing utility projects in the region highlights one thing: public private partnerships in the Middle East are only as strong as the government that support them.

The Fujairah II IWPP
With a net generating capacity of 2000 MW and approximately 600 000 cubic meters of potable water a day the Fujairah II project will be the largest IWPP in the UAE.

A consortium comprising ADEWA (60%), Marubeni (20%) and International Power (20%) own holding company Fujairah Asia Power Company (Fapco). Alstom and Sidem, a subsidiary of Veolia Water, have been awarded the engineering, procurement and construction (EPC) contract for Fujairah II.

Marubeni and International Power are charged with operating and maintaining the IWPP in a 50:50 joint venture, under a 20 year PWPA.

Power production rests on five Alstom GT26 gas turbines. These will be capable of dual fuel operation, burning natural gas, with the capability of operating on liquid fuel if the gas supply is interrupted. The GT26 has a rated output in open cycle application of 288.3 MW and an efficiency of 38.3 per cent.

The desalination plant is made up of two sections, one based on Multiple Effect Distillation (MED) and the other on Reverse Osmosis (RO). The largest of these, the MED section, takes steam from the combined-cycle power plant to generate potable water.

The smaller section based on RO is driven not by steam but by power. This combination allows for the optimisation of steam and power output from the combined-cycle power plant in order to provide constant water production as power demand varies with the seasons.

The total project costs of Fujairah II amount to US$2.7 billion. Of this, US$ 2.1 billion has been financed by long term debt, of which approximately half has been lent by JBIC.

The equity amount worth US$565 million was financed by an equity bridge facility, according to International Power, which will have to be repaid by ADWEA, Marubeni and International Power in proportion to their equity stake in July.

The plant is in the process of commissioning its gas turbines, and testing its desalination units. According to International Power managing director Ranald Spiers, Fujairah II will start becoming operational within Q2.

The project has been built adjacent to the existing Fujairah I plant.

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