Al Dur Water & Power Plant
Electricity & Water Authority

The Problem

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.

Solution and Key Benefits

 What is the initiative about? (the solution)
The solution to the financing problem was to restructure the deal.

The restructure involved the following new structure:

(a) Reduce senior debt
Total Senior debt USD 1,700 m
(b) Increase equity
Equity USD 500 m

Equity injection upfront
(c) Tenor was increased
Tenor changed from 20 to 25 years post Commercial operation date Margins 230 – 300 bps

These conditions reflected the onerous conditions required by lenders

(d) The initial production schedule was also changed. Power output to be approximately 400 MW power in May 2010, instead of 600 MW and there will be no water production until June 2011 and full water capacity postponed to August 2011..
No delay liquidated damages were to be paid to the contractor.
And the project sponsors became lender of the last resort.

The initiative was for the developer to provide the changes necessary and for the government to be proactive and provide comfort by agreeing to discuss the changes so that the developer can proceed with the project and meet the new deadlines.
There was no abandoning of the project nor was there any government financial input. The changes that were made was merely to make the project bankable in the face of unprecedented changes in the financial world.
One of the principal achievement was that the original price quoted ([unit price] did not change
This was the first IWPP in the region which closed without tariff adjustment.

Actors and Stakeholders

 Who proposed the solution, who implemented it and who were the stakeholders?
Initially the Developer came up with proposals similar to the regional response that is for more government aid. But the Ministry of Finance and its advisors, BNP Paribas and EWA pursued the option that no variation on the MAC clause under which the developer was liable to meet the new financing terms in a changed environment continued to be the basis of the solution.
The solution came about through long negotiations among the Developer, the Consultants who were originally engaged to select the preferred bidder, including Ministry of Finance [MoF] ,& Electricity and Water Authority [EWA].

Ministry of Finance of was committed to the task of privatization and was confident that a negotiated solution would be found

(a) Strategies

 Describe how and when the initiative was implemented by answering these questions
 a.      What were the strategies used to implement the initiative? In no more than 500 words, provide a summary of the main objectives and strategies of the initiative, how they were established and by whom.
The strategy of the whole project was to reduce the financial burden of the government by enabling the private sector to share the burden of development. This was also the strategy laid out by the National Vision 2030.
The strategies used was to grant extension of the period, without affecting the original price of the deal. It also meant some early output was delayed within the parameter that it would not unduly harm supply during the critical summer period for power.
The negotiations were at the highest level from the developers and the team from Bahrain, and the advisors (consultants)

(b) Implementation

 b.      What were the key development and implementation steps and the chronology? No more than 500 words
The key implementation steps were the new schedule for generation of power albeit at a slightly lower output from 600 to 400 MW in May 2010.and to delay the rest to the next year 2011.
The first of the schedule of producing 400 MW of power was met and was helpful in meeting the summer peak. but the second in June 2011 schedule was delayed, as issues of technical nature arose. These are being resolved now..
As agreed now:
The power plant will be functioning by early 2010 to deliver 1400 MW of power. Teasing has commenced.
Water (48 MGPD) will also be commissioned soon, and tests have commenced.

(c) Overcoming Obstacles

 c.      What were the main obstacles encountered? How were they overcome? No more than 500 words
The main obstacle was the challenging time table to meet the summer schedule in 2011, and determining the ability of the developers, the EPC contractor, and the financiers to meet the new deadline.
The developer faced the new world, with very little credit available. There was therefore the necessity to provide some changes which will be a sweetener to the financing institutions.
The Government agreed to extend the period from 20 to 25 years. The government will pay for 5 more years. However if the financial situation turned favorable and price of credit dropped the government will get the benefit such that all amounts in excess of the return of 13% p.ato the developer will be paid to the government.

(d) Use of Resources

 d.      What resources were used for the initiative and what were its key benefits? In no more than 500 words, specify what were the financial, technical and human resources’ costs associated with this initiative. Describe how resources were mobilized
The resources used were to stick to the original consultants to renegotiate the terms. The benefit was that everyone knew each other very well in terms of the tactics adopted. BNP as financial advisors provided the resources to determine the financial parameters, and technical consultants Mott McDonald provide the detailed support to determine the changing technical requirements to meet the new deadlines. The legal advisors Freshfeild did the revisions on the agreements
Revised agreements ( Amendment agreements) has been signed, which give the revised timetable for the projects.
The government side has also to abide by the agreements which defined the risks events for the government among others. These set the levels for the government to perform. If these are not performed in accordance with the agreement, it could be declared a buyer failure and penalties imposed on the Government entity is the electricity & Water authority.
The work and performance is defined for the next 26 years. These agreements can be extended further after negotiations. This therefore sets the roadmap on the performance of the institutions in the future.
These are new areas for the government where performance is stated and penalties imposed for non compliance.
Thus the government will be working at productivity levels of the private sector.

Sustainability and Transferability

  Is the initiative sustainable and transferable?
Privatizations through the PPP models needs huge amount of technical input to reach the final agreement. This commences with the preparation of the RFP, having clarification meetings, detailed evaluation of the bid documents, and follow up. It also entails proper steps to be taken by the government purchasing authority to be aware of the need to conform to all the agreements, so that no “buyer failure” demands are made on the government during the following 25 years of the operation of the plant. This means strict following of the KPIs, and other terms.

The agreements are very clear, and cannot be changed. Thus the initiative is sustainable and transferable, as the period extends to 25 years and over.

The revisions were made to the all the relevant agreements, and new Amendment ….. agreements were signed

The team that is formed become aware of the details of operating such a PPP project. This is very helpful in the following operation period.

There is therefore considerable amount of knowledge passed on to the government bodies. Since successive groups of employees are detailed to continue the work, there is considerable transfers of knowledge.

Since there is considerable contact and interaction with International players: lenders, EPC contractors, Developers etc. there is considerable technical know gained.

Lessons Learned

 What are the impact of your initiative and the lessons learned?
The impact is that the Kingdom has got a good reputation on a very positive way the crisis was met, with considerable understanding. Further this was done without any new payment in the form of a tariff increase being imposed on the government.
The negotiation skill learned will enhance later PPP projects, to be implemented smoothly.
There is also repel effect in that more projects on the same basis Private Public partnership with BOO/BOT are being developed
One of the lessons leant is that objectives must be very clear from the outset. We must be aware of what is required at the end of the project cycle. Since everyone was clear that the output should be available to meet a critical deadline, and that the solution to the problem should come without any new burden in the form of tariff increase, it was easy to concentrate of the ways to structure the deal
Always insisting on having a MAC clause is very helpful.

Contact Information

Institution Name:   Electricity & Water Authority
Institution Type:   Government Agency  
Contact Person:   Hassan Jabal
Title:   Director - Economic Studies and Research Directora  
Telephone/ Fax:   17575756
Institution's / Project's Website:
Address:   P.O Box 333
Postal Code:  
City:   Manama
Country:   Bahrain

          Go Back

Print friendly Page