ACWA Power International (API) and its previous incarnations have leveraged the use of project financing to achieve extraordinary growth in less than a decade. Since winning Saudi's first IWPP, Shuaibah, in 2005 ACWA has become a Saudi powerhouse with international aspirations, headquartered in Riyadh and offices in Dubai, Beijing, and Istanbul.

API now has a contracted portfolio of 6,485MW of power and 2.32 m3/day of water, some operational and some nearing commercial operation. Local knowledge and use of project financing has translated into six projects: Rabigh IWSPP, Shuaibah IWPP, Shuaibah Expansion IWP, Marafiq Jubail IWPP, Shuqaiq IWPP and Rabigh IPP. Additionally, API has constructed two, barge-mounted, self-supporting desalination plants, the first of their kind in the world.
2009 – a move outside of Saudi.

For API, 2009 is likely to prove a seminal year. It reached financial close in July on the 1,200MW oil-fired Rabigh IPP, keeping to the schedule and bid tariff despite the financial turbulence, and API made its first sortie outside of Saudi with a purchase of a 58% stake in the Barka 1 IWPP in Oman in late 2009.

Where once ACWA was regarded as a new and rapidly growing entrant to the established IPP/IWPP market, it is now an established player itself and competes with a new wave of entrants looking to get a foothold in the Middle East. A record eight consortia, including API, posted bids for the 650MW Barka 3 and 650MW Sohar 2 gas-fired IPPs in Oman at the end of 2009 – a record number for a power deal in the Middle East. The next closest project in terms of bidding group numbers is the 950MW Bahraini Al Ezzel IPP that was contested by five bidders in 2004.

API has some compelling competitive advantages over its rivals, however, as allied to its beefed up in-house capability, API has a stable of Saudi relationship banks to support its bidding activities and a growing number of international bank relationships. The liquidity of Saudi banks goes some way to explain how Rabigh IPP was the first project financed in 2009 without cash sweeps: the $1.45 billion riyal-denominated Islamic financing is the largest Islamic debt component of any IPP or IWPP to date.

Technical innovation

Besides having the ear of most Saudi banks, API has been able to undercut many of its rivals bidding for greenfield projects by pricing EPC and O&M costs on a bottom-up basis, rather than estimate market prices. This has seen API considerably and consistently undercut its rivals: on Shuqaiq IWPP it outbid the nearest rival by 20% – $613 million in NPV terms – and it outbid the second bidder by $480 million on Marafiq Jubail IWPP. On Rabigh, ACWA-Kepco's bid undercut its nearest rival by $800 million over the life of the PPA, with a tariff equivalent of $0.04 per kWh compared with $0.0533 per kWh posted by a Suez-IP consortium.

Beyond bottom-up pricing, what has so far distinguished API from its competitors has been its technical innovation. For example, on the captive oil-fired power, water and steam plant for the Rabigh petrochemical complex, API set up its own quarrying business to mine limestone to remove the sulphur dioxide from emmissions. API was able to undercut rival bidders which had simply costed in the market price of limestone. API's input cost for the limestone was less than half of the long-term market price available elsewhere.

Arguably API's greatest innovation to date has been its ability to bring in a Chinese EPC contractor for the first time for a large scale IPP or IWPP in the Gulf. On the oil-fired 1,200MW Rabigh, the bidding sponsors API and Kepco chose a Chinese EPC contractor, SepcoIII and Dongfang. To assuage lenders and allay fears over reliability and lack of track record, API is closely monitoring the assembly of the turbines and has several people based on the ground in China. The EPC contract also has belt and braces provisions to make sure the contracts perform to documented milestones that are checked by an independent technical adviser.

Following Rabigh IPP, SepcoIII was chosen as the EPC contractor for Sembcorp/OIC's Salalah IWPP in Oman. It is inevitable that more EPC contracts will be won by the Chinese and they will follow the Korean example and move in as shareholders to future IPP and IWPPs. API-Kepco's Rabigh deal set the precedent.

Expansion

Rabigh IPP is API's sixth mega project in five years. API is looking to maintain its blistering growth through a four-pronged strategy: new build expansion at existing assets, green-field development projects, acquiring portfolio of assets through privatization and/or negotiated sales and increased ownership of existing assets.

Translating the above objective into actual targets in terms of assets, API has an ambitious plan to achieve an overall portfolio target of 30,000MW and 5 million m3/day of desalinated water in the next five years.

Rajit Nanda, CFO of ACWA Power International says: "Our target markets in the coming five years are, apart from the consolidating and growing our leadership position in our domestic market of Saudi Arabia, to focus on Middle East, North Africa, Turkey, Jordan and South Africa."

Joining from Suez in late 2008, Nanda was one of the key hires made by ACWA during its restructuring into API. API has since followed Suez' model of building out its in-house legal, technical and financial capability to streamline its bidding procedures and cut lead times.

Its anchor market will remain Saudi, but API is now equipped to win projects across the Gulf and beyond. "It is projected that power demand in KSA will grow at 4.3% per annum for the next 4 years and for the next 15 years at around 3.62% per annum," says Nanda. "To cater to the future KSA power demand, ACWA envisions that large amount of investments into this sector and the private sector will play a pivotal role in this development story."

Turkey and South Africa

API is specifically targeting both Turkey and South Africa outside of the region – both power markets are going through a transformation require large amounts of private investment. API will probably enter into renewables for the first time in Turkey as a stepping stone into the conventional power market. Turkey is in the process of passing a new renewable energies law to promote wind, solar, hydro and geothermal energy through feed-in tariffs.

"We believe there is significant untapped potential in Turkey," adds Nanda. "The market is getting deregulated, is in a transition phase and is meant to become liquid once the government privatizes its power plants on a merchant basis." Enabling legislation would allow private developers like ACWA to develop operational experience on renewables to be able to be position for Genco privatisation.

South Africa is arguably even more compelling, given that it is in dire need of substantial amounts of capacity – even if the Department of Energy peakers come on line. Although demand has increased, capacity has actually shrunk. ACWA is targeting projects in South Africa and/or in neighbouring countries, ideally with a substantial portion of Eskom offtake, which provides cash flow stability due to the credit quality of Eskom. Also, South Africa has access to abundant natural resources including fossil fuels and liquidity is still available and the local financial markets have the appetite for project finance transactions.

Nanda says: "We believe that the target markets of ACWA will all continue to experience mega project financings in the coming period. The need for power and water is overwhelming in these markets and most of them have a demonstrated track record of project financings coupled with stable legal frameworks which augurs well for attracting private capital."

Rajit Nanda, CFO Q&A

PF: Are future multi-billion project financings in the Middle East likely to be concentrated on Saudi banks and JBIC? Are there any viable alternatives to these sources besides international bank debt?

Nanda: While JBIC will feature strongly in many of these transactions but we will also see more of Islamic finance in project finance, and other ECAs like Hermes, Coface, Sinosure, Cexim, Kexim, KEIC etc, will feature in several of these transactions. Project bonds will continue to be done more as an exception rather than as a permanent feature for some take out financings in the non-IPP sector.

Will procurers require full government backstops across the life of PPAs/PWPAs for the foreseeable future?

Procurers will require backstops or guarantees implicitly from governments for the life of the PPA. The current model could shift from the continuous government guarantees to some form of hybrid mechanism such as government stepping in and backing the obligations under the PPA when the offtaker's credit rating is downgraded below a certain threshold.

Do you foresee a wave of refinancings in two or three years?

Yes, but it will be jumpstarted from 2011 rather than 2010. For the last two years, in spite of the global credit crisis, project finance has been withstanding the turbulent times. Currently, the market seems to be picking up with lots of buoyancy and a strong deal pipeline. We believe that the markets will evolve in the short term adding more competitive pressure and giving rise to opportunities to refinance.

Should procurers share in refinancing gains?

We believe that the refinancing gains could be shared depending on the flexibility of the tariff structure, i.e. if the Request for Proposals allow the project to pass increased interest costs to the off-taker through a tariff adjustment, then,in such a scenario, the sharing of refinancing gains could be found reasonable and accepted by the developers and sponsors. n