Shift towards utilities privatisation underscores investment opportunities in Saudi Arabia

Saudi Arabia’s government has indicated it wants to raise as much as $200bn through the privatisation of state-owned assets, with one of its largest desalination plants among the first targets for disposal. The Ras Al Khair cogeneration plant has the capacity to produce more than 1m cu metres of desalinated water daily, and in 2018 the authorities announced it would be included in privatisation efforts. Indeed, it is anticipated that the plant will generate $7bn of the $10bn that is expected to be raised by the National Centre for Privatisation’s 2020 Delivery Plan, which also included the sale of four flour mills.

The privatisations would build off momentum from the December 2019 initial public offering (IPO) of oil and chemical giant Saudi Aramco. That month the company raised $25.6bn through the IPO by selling 3bn shares. The next month the company sold an additional 450m shares through a greenshoe option, bringing the total raised to $29.4bn.

In January 2019 state-run desalinated water producer Saline Water Conversion Corporation (SWCC) invited banks to submit proposals to act in an advisory role in the sale of assets of as many as six plants. While plans for privatisation in the utilities sector have been delayed, it is anticipated that the government will press ahead with plans to privatise water works in the coming years.

Privatisation Plans

Efforts to privatise utilities began as early as 2008, when a decree was issued to privatise the SWCC’s assets. While initial progress was slow, efforts were redoubled in 2016 with the launch of Vision 2030, the Kingdom’s blueprint for economic and social reform. Vision 2030 contains commitments to ensure the public is serviced by efficient and high-quality water and energy services, as well as plans to cut subsidies and open stateowned utilities to private investment.

In May 2017 a Council of Ministers resolution gave the board of directors of the National Centre for Privatisation (NCP) the authority to produce the regulatory and procedural framework for the overall strategy. In April 2018 the Privatisation Programme, one of 13 Vision Realisation Programmes, published further details related to the water sector. The programme had three pillars: to establish the legal and regulatory basis for privatisation and public-private partnerships; establish government entities with the ability to implement privatisation in a manner that serves the interest of the government while guaranteeing fairness for participants in the private sector; and steer privatisation programmes. By unlocking state-owned assets to the private sector and privatising select services, the plan would improve the quality of services provided, attract foreign direct investment, grow small and medium-sized enterprises’ contribution to the economy, diversify government revenues, design a leaner and more effective government structure and enhance the performance of government entities.

The Privatisation Programme identified the privatisation of Ras Al Khair as a potentially game-changing project that would pave the way for further restructuring of the water sector. Privatisation of the facility had the overall aim of increasing efficiency and raising revenues for the government. According to the document, the target date for Ras Al Khair’s sale was 2020 and would be the first step in the privatisation of the SWCC’s assets.

SWCC

The SWCC’s assets are substantial, as the company produces 22% of the world’s desalinated water. Meanwhile, the Electricity and Cogeneration Regulatory Authority found that the SWCC produced around 60% of all desalinated water that was manufactured in the country in 2018 from 17 facilities on the eastern and western coasts. That year, the company produced 4.6m cu metres of water a day, for a total of 1.8bn cu metres. The company also operates the 5600-km water transmission network.

Greenfield Success

Once efforts to privatise pick up steam, there will be significant potential for private investment as utilities services have been expanding at pace. Importantly, this growth has already facilitated the private sector’s involvement. There are three independent water and power providers that operate in the market: Jubail Water and Power Company (2.9 GW), Shuaibah Water and Electricity Company (1.2 GW), and Shaqaiq Water and Electricity Company (1 GW). Shuaibah and Shaqaiq each contributed 1% of total electricity produced in 2018, while Jubail contributed 3%. On the western coast, two project companies, Shuaibah Water and Electricity Company (SWEC) and Shuaibah Expansion Project Company (SEPCO) collectively have a daily output capacity of 1m cu metres, with 888,000 cu metres coming from SWEC and 150,000 cu metres from SEPCO. The Shuaibah facility accounts for 14% of total water produced in the Kingdom. Jubail, managed by the SWCC, has a daily output of 805,500 cu metres and accounted for 10% of all water produced in 2018, while Shuqaiq produced 212,000 cu metres of water a day and accounted for 3% of total output.

ACWA Power is a key investor in these schemes, as well as in two integrated solar cogeneration plants called Rabigh-1 and Rabigh-2, with daily capacities of 134,000 and 54,000 cu metres, respectively, as well as the independent water provider (IWP) Bowarege, a reverse-osmosis desalination facility with a daily capacity of 50,000 cubic metres. In total, ACWA Power had a stake in projects that produce some 2.5m cu metres of water a day, according to its 2018 annual report. As of 2018 the company had an asset portfolio of 50 projects worldwide, comprised of 32 operational assets, 10 under construction and eight in the advanced development phase. Nine projects came into operation in 2018 – more than any year since the company was established in 2004 – with ACWA Power’s water portfolio expanding by 26%.

The company’s portfolio grew further in 2019. In July of that year Shuaibah II Expansion IWP was inaugurated, with commercial operations beginning in May. The facility, managed by ACWA Power, came on-stream just 21 months after construction started and adds 250,000 cu metres of water to the network. ACWA Power also owns and operates Shuaibah IWPP, the first IWPP developed in the Kingdom. By January 2020 ACWA Power had 56 assets in 11 countries, making it the largest power and water operator in the GCC region.

Project Pipeline

The future of greenfield development is expected to be bright, with the principal off-taker, Saudi Water Partnership Company (SWPC), lining up projects that will give the private sector a greater role. Two new reverse-osmosis (RO) plants will be constructed on a build-own-operate (BOO) basis and are due to commence commercial operations in 2021. These facilities are Rabigh-3, built by ACWA Power with a daily capacity of 600,000 cu metres; and Shuqaiq-3, with a capacity of 450,000 cu metres developed by Marubeni Corporation, a Japanese trading and investment conglomerate.

In February 2020 SWPC signed a 25-year agreement with Saudi Mowah Group and Engie of France to build the Yanbu 4 IWP, with a capacity of 450,000 cu metre a day and commercial operations beginning in 2023. As of March 2020 two other RO IWP projects in the Eastern Province – Jubail 3(A) and Jubail 3(B) – with daily cu metre capacities of 600,000 and 570,000, respectively, were in the tendering process, again as BOO models. It is expected that the two plants will be operational by 2022.

Additional desalination plant projects are due to be tendered, according to SWPC’s seven-year strategy spanning 2019 to 2025. By 2023 Al Hassa and Ras Al Khair 2 are due to be operational, adding 300,000 and 600,000 cu metres, respectively. In 2024 Ras Al Khair 3, with a daily capacity of 400,000 cubic metres, will come online, while in 2025 Jubail 4 will add 300,000 cu metres of water a day to the supply. Five new plants are planned in the Western Province and are expected to come on-stream between 2022 and 2025: Ras Mohaisan (300,000 cu metres a day); Rabigh-4 (600,000 cu metres a day); Tabuk (400,000 cu metres a day); Rabigh-5 (400,000 cu metres a day); and Rayis 2 (300,000 cu metres a day). In the Southern Region, Shuqaiq-4 (400,000 cu metres a day) and Jazan-1 (300,000 cu metres a day) are due to start operations by 2023. SWPC’s roadmap sees 5.5m cu metres a day of desalinated water added to the supply by 2025.

There are opportunities for private participation beyond traditional water services as well. “In light of privatisation and public-private partnerships, the water segment is expanding at a rapid rate,” Awaadh Al Otaibi, CEO of water treatment company Miahona, told OBG. “This offers significant investment opportunities for local and international developers and contractors alike, including through the establishment of independent sewage treatment projects.”