PSMEC - Private Sector - S5 Dr Madani Alaqi

How it can contribute more to growth of electricity

and desalinated water sector in Saudi Arabia

(case of Shuqaiq Water and Electricity Company)

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Public Private Partnership

A Conference on Economic Growth, Government Policies, and the Private Sector

Dec 3rd, 2013 Riyadh, Saudi Arabia

Dr. Madani Alaki

Contents

Importance of Infrastructure Investment

PPP, Benefits and Opportunities

PPP in KSA Power & Water Sectors

Shuqaiq Case Study

Conclusions / Recommendations

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1

2

3

4

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1.0 Importance of Infrastructure Investment

Ensures effective functioning of the economy

Determines location of the economic activity

Plays an important role in determining the kinds of activities and

sectors that can develop in the economy

Reduces the effect of distance between regions

Integrates the national market and connects it at low cost to

markets in other countries and regions

Impacts economic growth and affects income inequalities and

poverty

Source: Global Competitiveness Report 2010-2011

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4

2.0 PPP, Benefits & Opportunities

2.0 Public Private Partnership

“while recognizing the importance of investment in infrastructure to help their economies grow, governments are increasingly turning to the private sector

as an alternative additional source of funding to meet the funding gap”

The World Bank

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••

••

••

••

•

•

Design/Build

Operations & Maintenance

Build/Finance

Build/Finance/Maintain

Lease/Develop/Operate

Design/Build/Finance/Maintain

Design/Build/Finance/Operate

Design/Build/Finance/Operate/Maintain

Build/Own/Operate

Concession

Degree of Private Sector Involvement

De

gre

e o

f P

riva

te S

ect

or

Ris

k

Public Private Partnership (PPP) is a government service or a private

business venture which is funded and operated through a partnership of

government and one or more private sector companies.

PPP is the ideal choice because:

it address Saudi Arabia’s infrastructure needs as it reduces the capital

burden on the government and

delivers the best technical solution, on time and within budget since it

engages the private sector in a highly competitive manner

2.0 What is Public Private Partnership?

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3.0 PPP in KSA

Power and Water Sectors

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3.1 Power: Actual & Forecast Peak Load (GW)

Source: ECRA

8

31

38

46

52

57

62

68

75

0

10

20

30

40

50

60

70

80

2006 2008 2010 2012 2014 2016 2018 2020

3.2 Forecast Desalinated Water Demand

(million m3/Day)

5.5

7.0

9.0

11.0

0

2

4

6

8

10

12

2000 2010 2020 2030

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3.3 Power/Water; Major Part of KSA Infrastructure Investment

60%20%

20%Transport

Utilities

SocialInfrastructure

The utilities sector

(power and water)

represent 20% of the

infrastructure projects

to be undertaken by

the Kingdom until

2020

Source: Zawya, “KSA has fat infra project pipeline of USD 209m till 2020”

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3.4 Challenges & Opportunities

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Challenges

High Demand Growth, fueled by population and in particular the ever growing younger populations segments.

Replacing old inefficient production capacity.

Rapid growth in Commercial & Industrial Sector

Opportunities

Developing human resources, technology, know-how through collaborative partnerships

Providing opportunities for private sector development

Developing financial and capital markets

Improving efficiency through competition and profit incentives

3.5 PPP shifts the various project risks

from the Government to the Private

Sector

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3.6 Delivering Value Through PPP

Capital Cost

Operating Cost

Financing cost

Conventional PPP

The difference in the Unit cost ofElectricity or Water or what ever other municipal services

Total cost of providing a service$/kWh of electricity or

$/cm water

Arguably governments

can borrow at a lower

cost efficiency gains

could be phenomenal….

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3.7 PPP Projects Completed and in Pipeline

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Sad

af IP

P

Tih

ama

ISP

P

Pe

tro

Rab

igh

IWSP

P

Shu

aib

ah IW

PP

Shu

aib

ah IW

P

Mar

afiq

Ju

bai

IWP

P

Shu

qai

q IW

PP

Rab

igh

IPP

Riy

adh

PP

11

IPP

Qu

rayy

ah IP

P

Pro

ject

val

ue

in M

illio

n U

S$

Fully operational

Under

construction

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3.8 KSA PPP Experience; A Success Story

Over USD 20 Billion of capital has been attracted to this sector. This is the proof

of how well the procurement process, the contracts that underpin the

programme and the credit risk is viewed.

The issue of Sovereign Guarantee - Entirely to do with the

standalone credit capacity of the off taker. SEC PPAs are the only

ones with no sovereign guarantee.

Each tender bids attract a wide enough number of credible participants. Typical

range is five consortiums.

On a normalized (comparable basis) Saudi power and desal water tariffs are the

lowest in the region and each successive bid reduces cost. (a reflection of the space

in each bid for innovation, competitive capex procurement and access to deeper pool

if liquidity which in turn significantly lowers debt pricing all leading to lower tariff.

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4.0 Shuqaiq IWPP Case Study

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A Public Private Partnershipmodel to follow?

4.1 Shuqaiq IWPP today

Shuqaiq Water and Electricity Co. “SqWEC”(Shuqaiq IWPP): Located at a remote site,with Arabian heavy crude oil as fuel, this plantutilizes steam for power production andreverse osmosis technology for desalination.

Project Details Snapshot

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Project Cost USD 1.8 B (SAR 6.8 B)

Power Capacity 850 MW

Water Capacity 212 000 m3/day

Contract Type 20 Yr PWPA - BOO

PCOD May 2011

4.2 Shuqaiq IWPP framework

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PIF, SEC, ACWA Power, Mitsubishi, GIC

(Public & Private Shareholders)

Project Company WEC(Offtaker)

Banks

Power & Water Purchase Agreement

Financing Agreements

NOMAC(O&M

Contractor)

Mitsubishi Heavy Industries

(EPC Contractor)

O&M Contract

EPC Contract

Shareholder Agreements

Aramco

Fuel Supply Arrangements

SECSWCC

Water Power

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Ahead of schedule,

Within budget,

With continued ability to deliver value,

Within set quality standards, under Independent control,

And complying to all International Environmental requirements

4.3 Shuqaiq IPP under the PP Model:

A Success Story

4.4 Private Sector Innovation - Delivering

Value in Shuqaiq Pre Bid

Introducing competitive tension by engaging the private sector, the PPP model ensures that the most optimal technical solution is selected for the project.

In the case of Shuqaiq, developer proposed different technology option that finally led to :

No steam means smaller boiler

Less fuel lead to lesser emissions and smaller treatment facilities

Lower quantity of sea water to be drawn in and process water discharged thereby protecting the shallow reef

Saving from original construction price

USD 0.45 BUSD

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As a result, the lowest tariff was 17% lower than the second lowest tariff, implying savings to the public

sector of SAR 2.3 Billion (NPV of the difference between the lowest two tariffs)

5.0 Conclusions / Recommendations

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• KSA power/water sector remains an attractive space for PPP development, which has so far been able to deliver its promise on efficiency, reliability and delivery at least cost.

Conclusions

• Success of Power/Water PPP Projects can be successfully replicated to other sectors of infrastructure development

• Ongoing power/water sector reforms should be accelerated to allow more transparency and space for the PPP

• Policies should be directed towards translating the fruits of PPP for further development and deepening of the financial and capital markets of KSA

Recommendations

Thank You

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