Increasing private ownership in Kuwait's energy facilities

The decision to offer its citizens an opportunity to buy shares in its newest water and electricity generating plant is, in a sense, a case of transferring power to the people. The floatation of 50% of the equity of Al Zour North One, which began operating in December 2016, was always part of the plan. It is not a case of a long-established public sector body being privatised. However, with three more public-private power and water projects set to receive the green light in 2017, a fair proportion of power generation capacity in Kuwait looks likely to be in private hands in the next 10 years.

Private Sector Growth

According to the US Energy Information Administration (EIA), Kuwait had 15.7 GW of installed electricity generation capacity in 2015, but it is aiming to increase its total baseload capacity to 25 GW by 2025. If, as seems likely, the increased capacity is financed using the public-private partnership (PPP) model and the pioneering Al Zour North One as the template, then 9.3 GW of newly opened power and water plants would operate as private companies with an initial government stake followed by an IPO within the first year of commercial operations. The formula for Al Zour North is that 40% is owned and financed by private companies on a build, own, operate, transfer basis. The remaining 60% of the equity is initially owned by the Kuwaiti government through the Kuwait Authority for Public Partnerships during the planning and construction phase, but as soon as the new utility is operating commercially, the government divests five-sixths of its interests in an IPO available only to Kuwaiti citizens, while still retaining a 10% holding in the company. Using this formula for future projects suggests that 90% of the additional 9.3 GW, or 8.4 GW, of power generated in Kuwait will be in private ownership, which in turn would be 33.6% of the total installed generating capacity of 25 GW.

People’s Power

Although the development of these independent water and power projects (IWPP) and independent power projects (IPP) utility companies will effectively place more than a third of Kuwait’s water and power sector in private hands within a few years, the move appears to be driven more by expediency rather than by a stated desire to rebalance the economy by reducing public sector employment and raising revenue by selling off government assets. Indeed, attempting an aggressive and overt privatisation drive around Kuwait’s energy sector would be controversial. When Kuwait became independent in 1961, it was already a member of Organisation of the Petroleum Exporting Countries (OPEC) and the subsequent nationalisation of the energy sector in the 1970s was about reclaiming the benefits of hydrocarbons wealth for the government and the people. It is worth noting that four years after independence, the 1965 census published by the Central Statistical Bureau (CSB) showed there were only 168,793 Kuwaiti citizens at that time. It is the oil wealth bestowed upon these people through nationalisation that is at stake for their descendants.

Benefit Sharing

The Al Zour North One template for PPPs is geared to offer an alternative form of remuneration for Kuwaitis. Traditionally, one of the key ways Kuwait’s leaders have shared and distributed oil wealth in the country is through government employment. The latest labour force survey for 2015 published by CSB showed that 92% of employed Kuwaitis were either working for the government directly or for a government-owned entity. Of the 267,109 Kuwaitis working directly for government departments, almost 18,000 were working for the Ministry of Electricity and Water (MEW). The construction of a raft of new IWPPs will provide some direct jobs for Kuwaiti citizens, as well as power and water that can act as an enabler for broader economic growth. Kuwaitis who choose to buy shares in these new firms when they are listed will also be able to draw an income from them through dividends. The share distribution is limited to Kuwaiti citizens.

Public Sector Ecosystem

In the Kuwaiti context IWPPs and IPPs would appear to be safe investments, because each business is underpinned by a long-term energy conversion and water purchase agreement (ECWPA), with the length of time for Al Zour set at 40 years. Under these terms the sole supplier of feedstock to the plants and the same entity, the MEW, is also the only customer buying electricity and desalinated water from each enterprise at prices stipulated in the ECWPA. Although each IWPP or IPP will be subject to an individual IPO limiting its scope of operations within the 40-year life of the contract, if it is managed efficiently during that time by private sector partners, each floated company should be able to offer a safe return for shareholders with such fixed parameters of expenditure and revenue. In addition, population growth and expansion forecast for the economy suggest a growing need for more power and water treatment works.

PPP Popularity

The PPP model has become the financing mechanism of choice, particularly for power and water, in the GCC over the last two decades. In 1996, 20 years before Al Zour was completed in Kuwait, Oman’s 270-MW Al Manah plant in Batinah became the region’s first PPP project in the sector. The first IWPP appeared in Abu Dhabi six years later with the opening of the Taweelah A2 cogeneration facility. By 2009 the consultancy Booz & Co was reporting that more than 20 GW of installed capacity had been built across the GCC using the PPP model. Prior to that, all water and power generation facilities in the region had been built and operated by public entities.

The draw for private sector developers was the lowrisk profile associated with long-term power purchase agreements (PPA), that enabled them to access attractive project financing schemes with debt ratios averaging 75-85%. For GCC governments, these PPP schemes enabled them to tap the most advanced technology and to work with private sector companies focused on ensuring well-built plants that they would operate themselves were up and running in the shortest available time to optimise their earnings. Implicit in these agreements is a transfer of responsibility for governments from utility builders and operators to regulators.

As a case in point, Al Zour IWPP was delivered on time and on budget, as soon as responsibility for the construction was transferred to the private sector. Faced with difficulties in meeting rapidly growing demand for electricity and water, these efficiencies in timely project execution assume a greater significance. The PPP model also relieves a significant strain on the public purse in delivering complex engineering solutions.

PPP Risks

However, there are risks for GCC governments with the PPP solutions they are adopting to speed up critical infrastructure development. In Kuwait the Al Zour plant’s principle feedstock is natural gas. The PPA locks the government into a long-term commitment to supply this feedstock, and at a price. Although Kuwait has 1.8trn cu metres of natural gas reserves, consumption has outstripped production since 2009, so the government must import some of the feedstock for its new generation of power and water plants at global prices. Most long-term energy forecasts predict that relatively clean natural gas will assume a growing share of global primary energy consumption. A comparative study by Duke University in the US comparing forecasts from the EIA, OPEC, BP, Shell and ExxonMobil found that in 1980 oil accounted for 43% of primary energy consumption and natural gas just 17%, while current forecasts for 2040 suggest that natural gas accounts for 22-28% of global primary energy consumption, outstripping consumption of crude oil in three out of seven forecasts. These long-term outlooks suggest uncertainties in the long-term comparative values and prices of oil and natural gas that will have an impact on the Kuwait government’s revenues and expenditures.

Other Sectors

The recent context of lower global oil prices and the impact the slump since 2014 has had on Kuwait’s government revenues may also give a greater impetus to seeking savings through privatisation of some assets in the energy sector. In December 2016, the emir appointed a new oil minister, Essam Al Marzouq. In April 2016 local media reported that his predecessor, Anas Al Saleh, then acting oil minister and deputy prime minister and finance minister, ruled out privatisation of oil and gas production in Kuwait under any future economic reform strategies.

However, in a television interview in mid-January 2017, Al Marzouq appeared to suggest that some of Kuwait’s state oil industry services companies might be considered for privatisation “within two to three years”. As a direct result of these remarks, members of Kuwait Oil Company’s trade union held a sit-in at its headquarters, with the national media reporting that MPs also attended the protest. The reaction suggests that the rationale for any form of privatisation of existing entities in the sector would have to be explained clearly to employees and parliamentarians before such a move could be considered. However, Al Marzouq does have first-hand experience with privatisation measures. He was previously chairman of the Kuwait Stock Exchange, which was transferred to private hands, Boursa Kuwait, in 2016, with an IPO planned for the near future.