Very high capital expenditure requirements ( approximately 50% of the capital budget of the country, and high level of subsidies,) leading to excessive level of debt required the government to seek alternative ways to finance power & water. This expenditure was crowding out other expenditure. The government decided on privatization.
Accordingly Al Ezzel plant, was built by the private sector, in 2005 followed by the sale of Hidd Power plant to the private sector in 2006. In 2008 Further private capacity was added as the first of the three phase project for the generation of power and production of water. With the addition of this plant, a significant portion of sector would be owned and operated by the private sector. The private sector AlDur plant was estimated to cost US $ 2.2 billion, and power delivered to meet part of the summer peak of 2010.There was considerable relief to the government on financing.
The Al Dur project was financed through BOO [Build Own operate} a form of Public Private participation.
Instead of the government meeting the cost upfront, the government under these terms sought to pay the price of the plant and its operating cost over the long terms. The terms included payment in 25 years at a tariff of 13.9 fils/KwH. The private sector equity was US $ 400 m. Debt was US $ 1.8 m with margins 125 to 185 basis points.
The significance of this is that the government reduced its capital expenditure by US $ 2.2 billion, and reduced debt by a similar amount.
The implementation however, faced the biggest challenge so far .In 2008, the world financial situation was in turmoil. Financing of the project by the private sector was doubtful. In the region other similar plants facing these problems resorted seeking government help which was readily granted as these projects did have MAC [Material Adverse Clause] giving the developer the right to rescind the transaction. However, since the countries needed power, government took upon themselves to help out the private sector, either in providing equity or other guarantees, in securing the necessary finance.
The project in the Kingdom, did not contain this clause hence there was no escape clause for he private developer. This forced the developer either to absorb all the cost of failure or propose to restructure the deal amicably.
The government aware of the necessity to meet the summer peak agreed to receive revised financing plans.