Shu'aiba Financing Acts As Blueprint For Saudi IWPP Program
The successful financing for Saudi Arabia’s first independent water and power project (IWPP), Shu'aiba Water and Electricity Company (SWEC), is expected to provide a blueprint for the other IWPP projects in the kingdom, according to John Dewar, partner at law firm Milbank, which advised lenders on the deal. He was addressing the Projects International conference in Parison 15 March. The $2.1bn financing agreement was struck with lenders on 21 December last year and includes a $1.347bn commercial bank tranche: $400mn of this is covered by German export credit agency (ECA) Euler-Hermes; $450mn is a direct loan from Korean ECA Kexim; and $300mn is an Islamic tranche in which Saudi’s Arabia’s National Commercial Bank and Al-Rajhi Banking and Investment Corporation are participating (MEES, 26 December 2005).
The Saudi government’s IWPP program aims to meet growing electricity demand – according to the Saudi Electricity Company, the kingdom must increase capacity from the current 29,000mw to 59,000mw by 2024 to keep pace with rapid industrial development and an estimated population growth of 3% per year. The failure of previous attempts to increase power and water capacity meant the kingdom needed additional power quickly. Furthermore, it was looking for competitive tariffs and wanted to stimulate private sector investment, so decided to follow the successful model used by the Abu Dhabi Water and Electricity Authority (ADWEA).
In the original Shu'aiba request for proposal (RFP), the project was to be governed by Saudi law. “This proved problematic for sponsors and lenders, and after protracted negotiations it was agreed that the PWPA would be governed by English law with the seat of arbitration moved from Riyadhto Bahrain,” said Mr Dewar. The next IWPPs, al-Shuqaiq (which has issued a list of pre-qualified bidders – MEES 12 December), Ras al-Zur and al-Jubail, will follow the Shu'aiba model and use English law. The Marafiq project, which does not fall under the auspices of the Saudi Water and Electricity (WEC) schemes but is sponsored by the Royal Commission, is expected to follow suit.
The kingdom’s Islamic financiers could not follow the Abu Dhabi model due to the different requirements stipulated by their Shari'a law. They were concerned by particulars of the lease-back structure, so for Shu'aiba they acquired assets from the EPC contractor and then leased them back to the company. “The deal was structured with a view to bringing in as much liquidity as possible and the risk allocation is at the better end of the spectrum in Middle East power and water purchase agreements (PWPAs),” said Mr Dewar, adding that the multi-source deal was one of the first in the kingdom where ECAs teamed up with Islamic banks.
A key to clinching the build-own-operate Shu'aiba deal was the Ministry of Finance guarantee – important in the kingdom’s evolving power landscape where privatization plays a key role. “Saudi Arabia’s electricity code is still in formulation and is expected to be published soon,” Mr Dewar told delegates. “Most are expecting a standardized approach to be adopted.” SWEC, established in August 2005, is a joint venture: a Malaysia-led consortium comprising Acwa Power and Tenagh Nacional Berhad holds 60%; the Public Investment Fund (PIF –32%); and Saudi Energy Company (8%); with additional shares to be issued through a later IPO. Shu'aiba is expected to come on-stream in May 2008, providing 880,000 cu ms/day of desalinated water and 900mw of power.
