Ras Al-Zour Change Raises Questions About IWPP Process, WEC’s Role

Ras Al-Zour Change Raises Questions About IWPP Process, WEC’s Role

The Saudi Arabian authorities have decided to implement the $5bn Ras al-Zour independent water and power project (IWPP) on an engineering, procurement and development (EPC) basis, rather than via the development consortium it chose as a preferred bidder last year (MEES, 4 May). Although a huge chunk of debt funding was in place for the project, which was being sponsored by the Kingdom’s Water and Electricity Company (WEC), the government has decided to retender the project on an EPC basis because it feared that disagreements with developers were slowing progress. The Kingdom is in the midst of an aggressive expansion of its power and water capacity in order to keep up with a jump in demand from industrial expansion and population growth.

A developer consortium was in place for Ras al-Zour, led by Sumitomo, along with locally based Al-Jomaih Automotive, but the project hit a road block when Malaysian contractor Malakoff pulled out of the group, and a dispute arose between the public sector offtakers and developers, after the latter attempted to raise tariffs. Despite the securing of good terms on the export credit agency (ECA) tranche of the funding, this resulted in part from financing costs on the bank tranches coming in higher – due to the financial crisis – than had been anticipated under the tariff agreement already struck , MEES understands.

Although bankers and developers are still hopeful of an eleventh hour solution to the problem, especially given that the project had raised $2.5bn from the Japanese Bank for International Cooperation (JBIC), with the Kingdom’s banks pledging $1.2bn in Saudi riyals and international banks agreeing to provide $495mn, the ruling now appears definitive. The decision to revert to the EPC process was taken at the highest levels, with involvement from the Supreme Economic Council, Ministry of Finance and Ministry of Water, so it is unlikely to be changed, said one expert, noting that there is discussion of Saline Water Conversion Corporation (SWCC) leading the EPC tender, rather than the project’s original sponsor, WEC.

While some have criticized the attempts to change the tariffs of a signed contract, others suggest that the government acted too quickly in reverting to an EPC tender. “Financing is one of the most important, if not the most important factor in implementing these projects, and it was shocking that they turned their back on $2.5bn from JBIC at sub-market pricing of around 150 bps,” said one banker. “I would have had clients lined up around the block to take that kind of money.” Project advisers suggested that if the tender for Ras al-Zour does take the EPC route, it should take place in line with best international practices, so it could possibly be turned over to a private sector developer when the market improves.

While the government’s shift to an EPC tender raises questions about the IWPP process in the Kingdom, many suggest that it is a project-specific problem, and that the way forward for most Gulf power and water projects is going to be through the IWPP model. WEC has already completed two IWPPs in the Kingdom, in the form of Shuaiba and Shuqaiq, other entities such as Marafiq have used the process, and Saudi Electricity Corp (SEC) is also using the independent power project (IPP) model, so it has proved successful, noted another power expert.

“The IWPP/IPP process is being used across the Gulf, in Saudi, Bahrain, Oman, Abu Dhabi, and Qatar successfully, and it’s the countries that haven’t embraced it that are having problems,” noted one banker. The reversion of Ras al-Zour to an EPC process, possibly under WEC’s remit, also raises questions about WEC’s future role in the Kingdom. “WEC’s mandate was to implement the Shuaiba, Shuqaiq, and Ras al-Zour projects, so once it finished Ras al-Zour, its future role was already up for debate,” said one insider, although he points out that the interaction and relationship of the companies implementing power and water projects in the Kingdom (the aforementioned SEC, Marafiq and SWCC) in addition to WEC “is the bigger question.”

Copyright MEES 2009.