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Foreign Investment in the Saudi Power Sector: Structures for Project Financing

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Saudi Arabia: Major Investment Opportunities in the 21st Century. November 13-15, 2000. Jubail Industrial City, Kingdom of Saudi Arabia ... – PowerPoint PPT presentation

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Title: Foreign Investment in the Saudi Power Sector: Structures for Project Financing


1
Foreign Investment in the Saudi Power Sector
Structures for Project Financing
  • Osman Shahenshah
  • Managing Director
  • Middle East, Africa and Europe

Jubail Industrial City, KSA November 15, 2000
2
Outline
  • Profile of Taylor-DeJongh
  • KSA Physical Challenges for Power Development
  • Power Capacity Growth Needs
  • Power Sector Organization
  • Tariff Structure Elements
  • KSA Power Financing Models
  • Structuring a Successful Power Project Financing
  • Future Developments

3
Who is Taylor-DeJongh?
  • Leading independent financial advisory,
    structuring and investment management firm.
  • Over 20 years experience in major international
    projects.
  • Developed, structured, negotiated and financed
    US30 billion of international capital projects
    in 75 countries. Active assignments in 25
    countries.
  • Ranked 1 Financial Advisor by Privatisation
    International in
  • Middle East and Africa (1996-2000).
  • Power Projects (overall period since 1994).

4
Taylor-DeJonghs Clients
  • We advise Sponsors in petroleum, petrochemical,
    power, telecommunications, water, industrial and
    infrastructure projects.
  • We advise Governments on privatizations, e.g.
  • Mozambique, Namibia, Senegal, Egypt, India,
    Poland, Kazakhstan, Philippines, Moldova,
    Colombia, Madagascar.
  • We advise major Lenders, e.g.
  • U.S. Export-Import Bank, ECGD (UK), SACE(Italy).
  • OPIC, MIGA, World Bank.
  • Co-Manager 350 million New Africa Infrastructure
    Private Equity Fund.
  • Developing Islamic Equity/Mezzanine Fund

5
Physical Challenges
  • Large country (2.2m sq km), and major load
    centers are widely separated
  • Jeddah
  • Makkah/Medinah
  • Al-Khobar/Dammam/Dhahran
  • Riyadh
  • Over 200,000 km of power transmission lines built
    over rough geography to reach small
    population/load centers.
  • Limited interconnection between regions.

6
Physical Challenges (cont.)
  • Harsh climate
  • A/C demand in hot summers (4-5 month period)
    means summer peak demand often double rest of
    year
  • Plants often forced to run well below rated
    capacity due to high temperatures
  • Lack of water limits use of large, cost-efficient
    steam plants to coastal areas.

7
Capacity
  • Estimated investment needed through 2020 around
    117 billion

8
Sector Organization
  • Originally 4 SCECOs (Saudi Consolidated
    Electricity Companies) covered west, central,
    east, and south, plus three special producers.
  • All SCECOs and EC merged into Saudi Electric
    Company (SEC) in December 1999.
  • Special Producers
  • General Electricity Corporation (EC) was
    responsible along with six smaller companies for
    the north.
  • Royal Commission for Jubail and Yanbu
    responsible for providing electricity to the two
    industrial cities. Until recently did not handle
    Jubail, but new Utility Company (UCO) will be in
    charge of all infrastructure in both cities.
  • Saline Water Conversion Corporation (SWCC)
    Governments desalination company also generates
    significant electricity of around 4,000 MW.

9
Tariff Structure
  • 1975 Government consolidated electricity system
    and set tariffs well below cost.
  • Tariffs revised three times through 92 still
    were below cost.
  • April 2000 Tariffs raised following
    establishment of SEC.
  • Previous rate structure was actually temporary
    increase made permanent. Excess funds went to
    Halala Fund for infrastructure projects.
  • Now mixed signals on tariff levels. Recent
    decreases.
  • Independent regulatory body will be established
    to periodically review rates.

10
Tariff Structure (cont.)
  • Latest Developments
  • Users over 5000 kWh/month receive 30-50
    reductions from end October 2000.
  • SEC faces consumer resistance to higher tariffs,
    particularly since new structure began during
    peak-use summer months.
  • Government to address cashflow deficit to avoid
    derailing private investor interest in sector
    question is how?

11
KSA Power Financing Models (1)
  • Ghazlan II
  • 1.7b 2400MW plant with four steam turbine units.
  • Owner SEC, originally SCECO East.
  • Completion expected in February 2002.
  • Security package of receivables from Aramco,
    supported by receivables from 3 SABIC companies.
  • Attractive receivables package brought in
    international banks.
  • Also attractive because facility governed by
    English law.
  • 500m 10-year internationally syndicated
    commercial loan (first such loan in Saudi
    history).
  • Reportedly less than 100bp pricing.

12
KSA Power Financing Models (2)
  • Riyadh PP-9
  • Continuation of Riyadh PP expansion by SCECO
    Central, now SEC.
  • Expansion of SCECO-Centrals Riyadh PP-9 plant by
    building 1200MW oil-fired combined-cycle plant.
  • First block commissioned 1997, completion by
    2001.
  • Financing covered by definitively allocated funds
    from Halala Fund Halala fund buildup behind
    schedule, project time frame extended to 6 years
    from 3.5.
  • Payments security structure allowed local banks
    to fund the contractors.
  • US Ex-Im providing political risk insurance for
    595m of equipment imports.

13
KSA Power Financing Models (3)
  • Qassim Expansion
  • 1998 upgrade of power station for SCECO-Central
    by adding 300MW of capacity.
  • Locally financed using consumer receivables as
    security.
  • virtually all electricity payments made through
    banks (few industrial customers).
  • If payment through a particular bank is
    relatively stable, trapping the cash creates a
    pool of receivables against which financing can
    be assured.
  • Local ANB and Al-Rajhi arranged a SR750m (200m)
    Islamic structure.

14
KSA Power Financing Models (4)
  • MoF support
  • Some financing facilities in early 90s received
    Ministry of Finance acknowledgement that
    provision would be made in budget to meet debt
    service.
  • Payments have been delayed due to conflicting
    demands on MoF, though always ultimately met.
  • Banks involved have all been local.

15
Structuring a Successful Limited Recourse Power
Project Financing
  • Turkey BO Model
  • InterGen/ Enka 3500 MW gas-fired IPPs just
    closed almost 2 BN.
  • Competitively bid on basis of lowest tariff.
  • Power sold to National Electric Company (TEAS),
    at a -denominated tariff. TEAS chooses the
    tariff it charges ultimate consumer. Capacity
    payments firm, and sufficient for all debt
    service.
  • Fuel supply risk passed through to TEAS.
    (Capacity payments still made, even if no fuel
    for generation).

16
Structuring a Successful Limited Recourse Power
Project Financing
  • Payment obligations of TEAS guaranteed by
    Treasury only in event of default.
  • Ample completion support from EPC and Sponsors.
  • Ample equity and liquidity from Sponsors.
  • General Considerations
  • Regulatory regime is critical
  • Tariff levels and structure are cornerstone of
    successful limited recourse power project
    financings

17
Future Developments?
  • Long term commitment to private power clear
  • Short term financial viability of sector less
    certain, particularly given recent tariff
    uncertainties.
  • Numerous innovative financing models available
  • Interest of international and local banks in
    financing Saudi projects is significant
    continued interest depends on good structuring
    and reliable regulatory scheme.

18
  • Thank you.
  • www.taylor-dejongh.com
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