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Sun 19 Jul 2009 04:00 AM

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Experience counts

Tabreed's new CEO, Sujit Parhar, is bringing in the people that will help him boost Abu Dhabi's district cooling capacity.

Experience counts
Experience counts
Sujit Parhar is the new CEO of the Abu Dhabi-based district cooling company Tabreed.

Tabreed's new CEO, Sujit Parhar, is bringing in the people that will help him boost Abu Dhabi's district cooling capacity.

Sujit Parhar is the newest incumbent in a tough job. As CEO of Tabreed, a district cooling company, he came to office when the company share price had taken a battering and investor confidence was wobbling.

Tabreed might not be the only company having a rough time at the hands of local traders, but it is the only utility listed on the Dubai Financial Market (DFM). A utility's position as a long-term investment, with a steady return, makes Tabreed's recent fluctuations look unjustified. According to Parhar, it is partly down to an issue of communication.

Just because you have got a long-term contract does not mean you have an iron rice bowl. - Sujit Parhar

"We're strengthening the management team to gear up for the next chapter of Tabreed, which is to deliver Abu Dhabi 2030, and I think investors are beginning to get that message," said Parhar. "We're spending a lot of effort and energy in talking about the business model, so we're creating awareness."

"The share price came off course as a consequence of the market. It was a very close correlation with what happened on the DFM," he said. "The recovery has been partially due to the market, but we've also been able to demonstrate, I think, in the last few months the board's commitment to bringing in a management team that is more familiar with and experienced in terms of utilities."

Team changes also include a new chief financial officer and managing director. One of their first jobs will be to work on further development of customer relations.

"We are also having a more concerted effort on customer relations," said Parhar. "A lot of our customers are investors as well. To keep them abreast of what the business is exactly about, where their earnings are coming from, and what it means going forward in terms of a forecast.

"I was probably lucky to be exposed to a multi-utility company supplying multiple customers in the same geographical location, with really complex pricing formulae and contract structures. Just because you have got a long-term contract does not mean you have an iron rice bowl," he said, revealing his Singaporean background.

"You have got to constantly focus on engaging with your customers, making sure your customers are satisfied with what they are getting. That's what I'll be bringing here in terms of dealing with customers. Do good deals, but do fair deals.

"Maybe the customers are getting a bit more sophisticated, but essentially district cooling is a very simple utility. We're selling chilled water in the desert. It's an interesting concept, but so simple to understand you can explain it to a five-year-old, and there is no rocket science behind how it is procured."

A reasonable assessment of the company's prospects can be made from the board room window, which looks out across some of Abu Dhabi's busiest development areas. It is development work which Tabreed will be a vital part of as Abu Dhabi heads toward its vision for 2030.

"Tabreed is an essential part of the Abu Dhabi 2030 plan, because district cooling is definitely part of the plan that Abu Dhabi has put together to meet its future cooling requirements," said Parhar.

"We foresee growth within the next 15 years that is going to be quite demanding on us. For Abu Dhabi 2030 to happen, you are looking at an addition of about 1.5 million tons of capacity. It's going to be a big challenge for everybody to reach [the targets], but I think Tabreed has what it takes to deliver."

He should be in a position to know. With 13 years working in privatised utilities, this is not the first time Parhar has been at the helm of this kind of business model. He also reports that business is still good, with the company expecting to commission 16 plants this year, of a total of 17 that are under construction.

This will add to Tabreed's existing installed base of 34 plants. Although the company has seen signs of a slowdown this has translated into work being held back, rather than shelved. But according to Parhar, there are already signs of change.

"As of the last couple of months, it has picked up again," he said. "We have seen developers come back again and say we're back on-stream again and are looking at district cooling for developments."

This is good news for revenues, which mostly come from developers. The company also enjoys a direct correlation between its growing installed base and its billable tonnage. This is primarily because it doesn't spec build its plants, instead building them on the back of contracts and targeting a just in time completion.

"One of our key goals is to basically be there when the customer is starting to fit-out his building," said Parhar. "A lot of our customers come to us and say I'm going to start fitting-out three months before I'm ready to transfer the apartments over to my tenants, so we're ready three months before, to send out chilled water."With messages delivered to developers and investors securing future business and capital, what about the issue of consumer mind share? The consumer is not currently getting the best deal out of district cooling, or at least, doesn't see it that way because of the billing systems and capital expenditure issues associated with the typical developer's approach to the utility.

A life cycle cost analysis of cooling from a district cooling plant, versus conventional air conditioning systems, will indicate district cooling is a lot cheaper. This is great for a developer who saves money, but consumers are wearing the capital cost of the infrastructure in recurring capacity charges. Parhar says Tabreed is discussing this issue with developers, including one who has taken the company's advice and has loaded recurring capacity charges into the sale price of the property.

We foresee growth within the next 15 years that is going to be quite demanding on us. For Abu Dhabi 2030 to happen, you are looking at an addition of about 1.5 million tons of capacity. - Sujit Parhar

"Those costs need to be transferred back to the end buyers," he said. "So the end buyer should know the difference between having cooling installed, and if they don't have cooling installed."

"Then what happens is the consumer looks at it and says, ‘you know what, the deferential from what I would have paid if the cooling was installed against buying district cooling, wasn't that big, it's not bad'. And the recurring charges are a lot lower.

"We found that just by loading 70% of the capital cost upfront, you would actually reduce the recurring the recurring costs by as much as 45%, over the full 30 year life cycle."

"[The developer] has sold over 40% of its development on that basis, just on our advice."

The company is working on packages that show the lifecycle cost and its Qatar subsidiary has done a similar thing already. There, Tabreed is working on a few of the key developments, including The Pearl, which will be the largest single district cooling plant in the world, with a deliverable capacity of 120 000 tons.

As well as Qatar, Tabreed is also active in Saudi Arabia, Bahrain, where a plant is at quite an advanced stage of construction and Jordan. The slow down in the real estate market has held things back, but Tabreed has only had two projects placed on hold.

"For us it means we don't have to build out plants as fast; we can hold off and control our capacity."

In Abu Dhabi some high-profile projects are coming to fruition. A plant on Yas Island was being commissioned as UME interviewed Parhar, with the first delivery of chilled water expected at the end of June. This first phase will start out pumping 35 000 tons, with a peak capacity of 60 000 tons.

There are challenges ahead if the company is to achieve its aims. Parhar says Tabreed needs to map out its opportunities, to figure out just how it will deliver the 2030 requirements. Another challenge is to bring the team of people who have been with the company for the last 11 years up to the next level, while still being able to take advantage of the intellectual capital it has accrued. Like most businesses in the current market, funding is also an issue.

"Today it's become a bit more difficult to fund projects," he said. "We are looking at a few options - some include asset-life strategies and JVs with developers - in order to get core funding and some money into the game. We're beginning to see the project finance market open up again."

With funding comes risk and risk management is high on Parhar's agenda. As well as considering how it will fund projects in the future, it is considering how it will manage risks appropriately. Parhar sounds a not of caution about utilities that have suffered at the hands of excessive risk.

"A lot of big utilities companies have gone down on risk management," he said. "I think this is something we are very, very aware and careful of, making sure that the relevant checks and balances and controls are in place. Any risks brought into the company are adequately managed. We also make sure the deals we do don't bring in any risks we can't handle."

Big businessDistrict cooling is a growing sector. According to a recent market analysis from Frost & Sullivan, a consultancy, the market earned revenues of US $580.0 million in 2008 and estimates this to reach US $2 billion in 2013, at a compound annual growth rate of 28%.

Among all Middle East countries, Saudi Arabia seems to have the most untapped potential, with more than US $100 billion worth construction projects underway, according to Frost & Sullivan. Its rapidly expanding industrial base and population have increased the demand for power, which averages an annual growth rate of nearly 5%.

The rising air conditioning needs account for almost 70% of this growth in power demand. By 2013, the district cooling market is expected to have an additional capacity of 4.5 million tons of refrigeration, mainly contributed by Saudi Arabia and Qatar.

Source:Analysis of the District Cooling Market in the Middle East Region

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