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Sun 21 Nov 2010 12:00 AM

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The Saudi Powerhouse

To achieve its ambitious growth targets, ACWA Power International wants to profit from the burgeoning power sector in its native Saudi Arabia, while at the same time expanding its presence in the region, says CEO Paddy Padmanathan.

The Saudi Powerhouse
Padmanathan speaks at this year’s Saudi Water & Power Forum in Jeddah.

Exponential growth is not something many companies dare
dream off. But by aiming to grow its asset base to 30,000MW and 5 million cubic
meters of desalinated water per day by 2014, from a current base of 6,500MW and
2.25 million cubic meters, ACWA Power International is doing just that.

“On the face of it sounds staggering,” admits Paddy
Padmanathan, ACWA’s CEO and the man behind the ambition. “When you set up
targets you don’t want to try to overreach but at the same time you don’t want
to set up very comfortable targets that you can just achieve in three years and
say ‘How clever have I been?’. We think it’s a fairly reasonable target, we’re
going to certainly go hard for it and we’ll get there,
we hope.”

Padmanathan’s optimism is rooted in the company’s performance
so far. He points to the current asset base: “We achieved that from zero within
five years. It’s a hell of an achievement given the fact that plants take three
to four years to build in the first place so it’s been done at an accelerated
pace. It’s always difficult to start,
but once you get going, the momentum is there to propel you.”

Arabia has been, and will remain, the main
engine of ACWA’s growth. ACWA Power International is a Saudi Arabian company,
owned in equal parts by three Saudi conglomerates, the A.K. Al Muhaidib &
Sons Group, the Abdullah Abunayyan Group and the Al Rajhi Group.

The Saudi government has committed itself to private sector
involvement in its power infrastructure, and is forging public private
parternships (PPPs) in the shape of independent power projects (IPPs) or
independent water and power projects (IWPPs). ACWA is a 30 percent stakeholder
in the countries first IWPP, the 900MW crude-fired Shuaibah plant on the coast
of the Red Sea (see next article), and has several
other stakes in major power projects. It is hungry for more.

The country’s power market represents 65 percent of the
GCC’s total, and is growing at a rate of 10 percent per annum, says the CEO.
Government plans are to increase installed capacity from the current 42,000MW
to 60,000MW by 2020, and Padmanathan believes ACWA are in a strong position to
capitalise from this expansion.

And it is not only new plants that offer opportunities to
power companies. “Don’t forget that of the existing 42,000MW, 20,000MW need
replacement. They’re all very old assets, they’re very inefficient, and today
people are much more concerned about efficient utilisation of fuel.  We’ve got plants here in Saudi Arabia
that are running at 28 percent thermal efficiency, when we can get up to 50

Out of Saudi

Arabia is not the only GCC country that is
adding to its power generation capacity in a big way. “Every country around us
is experiencing a growth. Maybe not necessarily 10 percent, but certainly they
have got anything above six to seven percent.
And every country has already either got the private sector involved or
is moving towards it,” says Padmanathan.

The latest country to embrace private sector participation
is Kuwait,
which in July passed legislation that every power project over 500MW has to be
a public private partnership, opening up plenty of opportunities for private

ACWA is looking for opportunities such as these, and
Padmanathan is certainly not shy about making grand comparisons when
formulating his vision for the company: “We are a Saudi company, and our vision
is to become a company operating on a global platform emulating the
hundred-year established players like GDF Suez. Here is a brand that’s coming
out of Saudi Arabia
that’s going to do the same thing. But hopefully we won’t take a hundred years,
we will do it over the next 10 to 20 years.”

So while the company will retain a strong  presence in the Kingdom,  it is looking to build up an asset base
outside its borders. The target is to be present in a minimum of three
countries other than Saudi
Arabia, and in two regions other than the
GCC, by 2014. The company has already penetrated the Omani market, snapping up
a majority stake in the Barka I IWPP in August this year.

Padmanathan would like to see half of the company assets
abroad within 10 years: “Personally what I would like to see us get to a 50:50
split within the next 10 years. Beyond that, if it shifts to 30 percent Saudi,
70 percent global, why not? Time will tell.”

He is happy to list the countries he is targeting: “Outside
of Saudi Arabia and the GCC,
we are concentrating on Turkey,
Morocco and South Africa.
We’ve picked these locations very carefully because they give us size, the
growth in those places is big. In South Africa
private sector participation is yet to take hold, but in the other two private
sector participation in infrastructure and service delivery and utilities are
extremely well established, so we are very welcome there.”

South Africa
will have no choice but to turn to PPPs, he believes, because demand for power
will grow as a consequence of a buoyant economy, on the back of China’s
insatiable hunger for raw materials.

No time to waste

ACWA’s lofty ambitions leave little time to idle around. In
the next six months, the company will be bidding for tenders totaling 6000MW of
new capacity, all of which will be Greenfield
projects. They include tenders for a power plant in Saudi
Arabia, an IPP in Beirut
and one in Egypt, the Al
Zour North IWPP in Kuwait,
and the Al Zur IPP in Oman.

On the water side, the company is equally keen to get
involved, and sees potential especially in Saudi Arabia. “The six-odd million
cubic metres of desalination capacity in Saudi Arabia needs to be increased
to 10 million in the same timeframe. Of the six million, at least one million
and half needs to be replaced or refurbished, so there is the opportunity for
the public sector to co-invest on the existing assets,” says  the CEO.

An increasing amount of ACWA’s asset base will come from
acquisitions. In the current portfolio, only the Barka I plant has been bought,
with all other projects having been built from the ground up. “Going forward I
would imagine it doesn’t make sense to be thinking about having a hell of a lot
of a greenfields under construction at the same time. We want to keep the risk balanced,” says
Padmanathan. “Of the 30,000MW, I would imagine we would acquire through
acquisitions about 40 percent.”

One of the markets that lends itself to acquisitions is Turkey, where
the government is due to privatise 14,000MW of generation capacity. The company
will be looking to buy up some of those assets, confirms the CEO.

New Renewables targets?

Renewables energy are a hot topic in the industry, and the
ACWA has not shut its eyes to this emerging trend. The company is aiming to
generate a minimum of 5 percent of its energy from renewables, which would
equate to 1,500MW by 2014 if the asset growth strategy goes according to plan.

Padmanathan is free to admit that the company’s ambition in
growing its portfolio is not matched by its efforts to go green. “This is one
target where we have not necessarily been very imaginative or very stretching,
so we should be reviewing it, I think the potential is much higher. But let’s
get a couple of projects under our belt and then we’ll reconsider.”

The company is already working on several renewables
projects. The most noteworthy is a 75MW concentrated solar power (CSP) plant in
South Africa.
The government has already implemented a feed-in tariff, which will make
expensive solar power production feasible for private providers. With the CSP
project, ACWA is positioning itself for a procurement programme, which is to be
launched in around four months time, say Padmanathan. Under this programme, the
government will enter purchase agreements with suppliers who have projects in
the advanced stages of development. “There’s a very clear definition of
readiness, and we’ve got to do a lot of work to do, but we are fairly advanced
with one project, so when they open the race we’ll be one of the first at the
goal post.”

ACWA is also in the prequalifying stages for a CSP plant in Morocco, and has taken the initiative in Saudi Arabia,
where it last year submitted two unsolicited proposals for renewables projects.
“We’ve got very competitive tariffs on the table, and we’re pushing those
forward. No procurement tender that has been announced yet, but there will be
one going forward and we will be there.”

Loosening purse strings

One key aspect of expansion is ready access to the requisite
funding. To ensure that financing is forthcoming, environmental concerns cannot
be ignored by power generation companies. Most banks have signed up to the
Equator Principles, a voluntary code that requires borrowers to conform to the
World Bank Operational Directive Number 1 standards. Thus, power plants are
regularly assessed. Should they fail to meet the required standards during the
course the repayment period, the financiers have the option of recalling their
loans, leading to a default of the project’s holding company.

During the financial crisis, power companies experienced
some difficulties in raising capital, although PPPs in the power sector still
enjoyed a high standing amongst lenders. Furthermore, export credit agencies
such as South Korea’s KEXIM
or Germany’s
Hermes have stepped up to the plate and provided a large part of the funding,
as was the case with Shuaibah III.

As is common with large power projects, ACWA’s plants have
been funded by limited recourse financing, in which the lender only has access
to the asset in question in case of default. Lenders usually provide 80 percent
of the costs, with the power companies providing 20 percent equity, model that
often includes a bridge loan facility for the equity portion.

It was one of ACWA’s projects that signaled a renewed
optimism in the finance community, removing any constraints the company might
have felt before. “The Rabigh IPP project which we financially closed in July
2009, was the first limited recourse financial transaction that was closed in
the world post-Lehman’s collapse, it was a $2.5 billion transaction.  The equity there was put in cash because it
was tough period and the banks were only coming back online for new products,”
says Padmanathan.

The CEO is also happy to talk about the plans for an initial
public offering at the Tadawul, the Saudi Stock Exchange. “We will IPO when
we’ve got a stable platform of cash flows, which we have now, we’ll be starting
to work on an IPO in the first quarter of next year. The IPO will be by the end
of next year, or early in the year after, it will take 12 months to prepare for
and implement.” The listing will make a significant proportion of the company
publically traded. “It will need to be a meaningful proportion. As it will be
the first offering it cannot be big and it cannot be small, it should strike
the right balance, so 30 percent is probable.”

If ACWA’s expansion plans come to fruition, there should be
no shortage of takers.

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