Public private partnerships in the electricity and water sectors
Graham Mouat
Al Busaidy Mansoor Jamal & Co
Muscat
Graham Mouat (Bio)
The Omani economy has experienced consistent growth in the last decade. This is reflected by its expanding GDP, active capital markets, and rising per capita income. The high oil prices and the Sultanate's commitment towards increasing the private sector's involvement in the economy has played a large role in this growth, for example allowing private sector involvement in telecommunications, power, utilities and tourism.
The inaugural Oman Power & Water Summit was recently held in Muscat, Oman over four days. The presence of a substantial number of delegates and presenters from international companies supports the prevailing view that Oman continues to be viewed favourably by international investors.
The principal reason Oman is attractive for private sector investment is that it has the necessary regulatory framework and has developed sound, robust and transparent policies.
In 2004 Royal Decree No. 77/2004 (Law of Privatisation) was enacted to enable privatisation and public private partnerships (PPP). The Law of Privatisation provided that privatisation and PPPs may be effected in accordance with any one (or a combination) of the following methods:
a) granting the private sector the right to construct, own and manage privatisation projects or a concession right or licence for construction, management or leasing of such projects;
b) 2nd:selling shares owned by the Government in authorities, undertakings and commercial companies;
c) concluding contracts for participation in the capital and/or management; and
d) any other means the Ministerial Committee deems appropriate.
Following promulgation of the Sector Law on August 1 2004 (Royal Decree 78/2004), the Government embarked on a comprehensive program for the restructuring, regulation and privatisation of the electricity supply and related water industry in Oman. The decision to privatise in the electricity and water sectors stems from the belief that the private sector is better placed to drive innovation and reduce costs in what has become one of the most expensive items on the Government's balance sheet. This resulted in the unbundling of the vertically integrated service provider into various entities and the establishment of the new regulatory authority to oversee the power and related water sector.
The new industry structure involves the following:
- three Government owned distribution companies;
- a number of generation and desalination companies owned by the private sector;
- an independent electricity transmission and dispatch operator; namely the Oman Electricity Transmission Company (OETC);
- a central buyer of power and desalinated water; namely Oman Water and Power Procurement Company SAOC (OPWP); and
- :a regulatory authority, namely the Public Authority for Electricity and Water.
There is now an extensive and successful track record of private participation in the electricity generation and water sector in Oman; to the extent that 85% of the sector is privatised.
The structures adopted in the power and water sectors are known as IPPs (independent power projects), IWPPs (independent water and power projects) and IWPs (independent water projects).
Under a typical IPP, a private developer as owner will finance the construction and operation of a power generation plant. The developer and OPWP enter into a power and water purchase agreement under which OPWP commits to pay for the available power and water capacity in return for the developer making available the guaranteed contracted power capacity and/or the guaranteed contracted water capacity. The developer and the Ministry of Oil and Gas will enter into natural gas supply agreement under which the government undertakes to supply natural gas to the developer for the purposes of the power generation plant. The government also makes land available to the developer for the project. In respect of finance, lenders obtain security over the developer's rights and project assets by way of registerable mortgages and pledges.
OPWP is required by the Sector Law and its licence to ensure the adequacy of generation resources to meet future power demands. The Sector Law establishes OPWP's general responsibility to secure sufficient generation resources to meet the aggregate demands of licensed electricity suppliers. On an annual basis, OPWP prepares and publishes a seven year outlook on the demands for electricity and desalination water, and the power generation and water desalination resources required to meet those demands.
OPWP's seven year statement for the years 2011 - 2017 was recently issued. The report notes that electricity demand has increased at around 7-9% per year in the last decade. OPWP projects that for the next seven years demand will increase on average at a rate of 9%. Two new IPPs are currently under construction and a competitive procurement process has been undertaken for a new IPP to be located at Sur. A further addition of constructed capacity is expected to be provided around 2015 as a result of a Government initiative to promote the development of one or more grid-connected solar power projects. The report notes that additional constructed capacity is highly dependent on the path of demand. The potential requirements by 2017 range from 0 to 2000 MW, and 2015 being the earliest date that additional capacity might be needed.
In regard to water, OPWP's view is that for the next seven years demand is expected to increase on average at the rate of around 8% per year. The report notes that as a result of the assessment of demand / supply, the Government will seek bids from developers for the proposed 42 million gallons capacity Ghubra IWP in the fourth quarter of this year which is expected to cost roughly $350 million. In addition, three additional desalination plants, are projected to be required from 2013, 2018 and 2015 respectively.