Kuwait's diversification strategy includes public-private partnerships in energy sector

In 2017 Kuwaiti citizens were offered an opportunity to own a piece of history in an unprecedented stock market floatation. An initial public offering (IPO), which was due to take place by the end of 2017, was for a 50% stake in the country’s first independent water and power project (IWPP), the initial phase of Al Zour north.

The IPO was required by Kuwait’s new PPP Act, Law No. 116 of 2014, which officially went into force in 2015. The legislation was designed to create a framework for increased foreign direct investment (FDI) in Kuwait by facilitating the PPP model.

New Model

The construction of Al Zour North One, which is located on a government-owned greenfield site 100 km south of Kuwait City, was completed on schedule on November 26, 2016, three years after the contract was awarded. The power and desalination plant was constructed on a build-own-operate-transfer basis by a consortium including Sumitoto of Japan, the French firm Engie, formerly GDF Suez, and the Kuwaiti company Abdullah Hamad Al Sagar and Brothers. The engineering, procurement and construction (EPC) contractors for the power plant were Hyundai Heavy Industries, while Sidem, a subsidiary of Veolia, was the EPC contractor for the desalination facilities.

Construction began in December 2013. Al Zour North One IWPP is owned and operated by Shamal Azzour Al Oula, which is 40% owned by the aforementioned consortium, with the remaining 60% of the equity owned by the government of Kuwait, with the Kuwait Investment Authority and the Public Institution for Social Security each holding 5%. The government is mandated to sell a 50% stake to Kuwaiti citizens through an IPO in 2017, but will retain a 10% interest in the venture. The plant began commercial operations in December 2016 and makes a significant contribution to Kuwait’s growing demand for power and water. The $1.7bn facility has a 1539-MW power generation capacity, equal to 10% of Kuwait’s current peak load, and can produce 107m gallons of desalinated water daily, 20% of Kuwait’s demand. All of the power and water produced by the plant is being bought by the Ministry of Electricity and Water (MEW) under a 40-year energy conversion and water purchase agreement (ECWPA). Engie and Sumitoto are equally responsible for the plant’s operation and maintenance.

Financing

The project was funded by a mix of project finance debt and equity with a ratio of 80:20. Capital investment of $360m constituted 20% of the cost, with the Kuwaiti government contributing 60%, and Engie and Sumitoto each funding 17.5%. The remaining $1.4bn was co-financed by the Japan Bank for International Cooperation and other international commercial banks, with the Nippon Export and Investment Insurance covering the Japanese financing of the scheme.

Technology

The Al Zour power plant uses combined-cycle gas turbine technology with heat recovery steam generators and steam turbines. The power station is designed to operate using natural gas as the primary feedstock with fuel oil as a back-up. Natural gas, which will be a blend of Kuwait’s own gas and imported liquefied natural gas, is being supplied by the MEW using a 102-cm pipeline constructed by the Kuwait Oil Company, while a 41-cm pipeline has been constructed for gas oil using a common oil fuel facility shared by existing facilities adjacent to the Al Zour site. The desalination plant uses a multiple-effect distillation unit to convert seawater to drinking water. A new intake and discharge network has been constructed, which will be shared with subsequent phases of the desalination site. Four new pipelines were built to connect the potable water output to the existing grid.

Al Zour North 2

The new IWPP is the first of five planned phases of development in the Al Zour area to be tendered over a period of four to six years, with a total capacity of 4800 MW of electricity and 280m imperial gallons per day (MIGD) of desalinated water. The development is being driven by an anticipated 7.6% per annum increase in demand for electricity until 2020, according to MEW estimates, which assume peak demand of 25 GW by 2025. Main contract bids have been invited for phase two of the Al Zour North IWPP, which aims to produce 1800 MW of electricity and 102 MIGD of desalinated water.

Seven out of eight bidders were initially pre-qualified for the project in August 2015, and by 2016, two bidders had been invited for talks following the decision to request three consortia to participate in a request for proposals phase in June 2016. According to industry media reports those three consortia were: International Company for Water and Power Projects with Al-Mulla Group Holding Company and Mutsui Company; Marubeni Corporation and Fouad Al-Ghanim and Sons; and Sumitomo Corporation with OSAKA Gas Company and National Industries Group Holdings.

Al Khairan

Beyond Al Zour North Two, on land adjacent to Al Zour South, Kuwait is planning to develop a power generation and water desalination site at Al Khairan. The Al Khairan project includes the development of shared facilities including a seawater intake and outfall, which will be built in the first phase.

When all three phases have been completed the Al Khairan site will have a 4500-MW power generation capacity and will produce 125 MIGD of desalinated water. The first phase of the project will be Kuwait’s third IWPP. It is expected to run on low-sulphur fuel oil as a primary feedstock, with back-up provided by gas, crude oil or gas oil. The low-sulphur fuel oil will be provided from the new $15bn Al Zour refinery, which is to be built near the site. Primary and back-up fuels will be provided by MEW under an ECWPA.

Combined Solar

Another PPP project that was midway through the tendering process in early 2017 is the Al Abdaliyah Integrated Solar Combined Cycle plant. The project consists of a gas turbine unit and solar island. The total capacity of the plant will be 280 MW, with solar contributing 60 MW. The result of this use of renewable energy will be a reduction in annual emissions of 48,000 tonnes when compared to a comparable conventional plant. Seven consortia from Kuwait, Saudi Arabia, South Korea, Germany, Japan, the UK and Spain have qualified for the project and are awaiting a decision from the government.

New Authorities

The new law governing PPPs stipulated that a higher committee for such partnerships should be established to replace the previous higher committee for projects as the main decision-making body. According to the international law firm Ashurst, the Higher Committee for PPPs can approve project procurement by PPP with powers to approve feasibility studies, land allocations and contracts, and can also terminate a PPP at the request of a public entity if it is deemed to be in the public interest. Under the new law, the public authority responsible for overseeing PPPs also changed from the Partnerships Technical Bureau to the Kuwait Authority for Partnership Projects (KAPP). The new authority is attached to the Ministry of Finance and is overseen by the Higher Committee for PPPs. The new law gives the KAPP the power to establish joint stock companies for PPP projects. According to Ashurst, the new PPP law makes involvement in projects in Kuwait more straight forward for foreign firms by lifting foreign ownership restrictions on project companies and by removing automatic prequalification for companies listed on the Kuwait Stock Exchange.

PPP Template

The successful completion of construction at Al Zour North One, and the legal formula used to divide equity in the development, gives the KAPP a template that can be applied to any further PPP developments in Kuwait. With demand for both electricity and water driven by a growing population and an expanding economy, the PPP model could be a powerful vehicle for infrastructure development that will have a reduced impact on the public purse. A successful IPO will be the final piece of the jigsaw puzzle and should be achieved by the end of 2017. Advisers for the IPO were appointed in March 2017, according to state news agency KUNA, with the National Investment Company leading the consortium of advisors.

“The PPP model will reduce fiscal pressure for governments while also attracting the transfer of technology and knowledge as well as foreign investment,” Motlaq Al Sanei, general manager of the KAPP, told OBG. “In the past Kuwait has not received the same level of FDI as some if its neighbours and we believe the PPP model will facilitate this.”

The use of PPPs in the development of power, desalination and cogeneration plants is an established model elsewhere in the GCC. However, the KAPP is keen to adapt hybrid public-private financing models to a much broader spectrum of developments, from the construction and management of schools and hospitals, to the development of wastewater facilities and housing developments. To smooth the way for greater use of the funding mechanism, the KAPP is marketing the advantages of PPP to those responsible for procurement in different government departments. In this way, it hopes to see partnerships developed that can underpin the diversification of Kuwait’s economy.