Special Report: Abu Dhabi power privatisation shows the way ahead

In October 1998, when Abu Dhabi Water and Electricity Authority (Adwea) signed an agreement with CMS Energy Corp to develop the UAE's first independent water and power project (IWPP), the Taweelah A-2, it was hailed a landmark achievement, the first and most ambitious privatisation move by any Gulf state.

Indeed, the event was in more ways than one significant for the region. A pioneering move, it proclaimed to one and all that privatisation for the UAE is a strategic option, not only for sustainable development, but an attempt to expand private sector investment opportunities and raise efficiency.

"By embarking on privatisation and corporatisation of its water and electricity sector, Abu Dhabi has set a precedent in the region which will serve as a benchmark for other Gulf countries," declared Victor Fryling, chief operating officer at CMS Energy.

Other dignitaries voiced their opinion, including the Saudi Minister for Electricity and Industry, Dr. Hashim Yamani, and Robert Mallet, U.S. deputy commerce secretary.

Encouraged by the response, Abu Dhabi moved swiftly to select a developer for its second IWPP, the Taweelah A-1. In July 2000, it selected the Franco-Belgian joint alliance of TotalFinaElf and Tractebel.

Last month, the CMS Energy-National Power alliance was selected for the $1.6 billion Shuweihat-1 power and desalination plant. The selection of a developer for Abu Dhabi's fourth project, the Umm Al Nar, is underway.

Yet another greenfield power project is on the cards.

Abu Dhabi can justifiably claim to having the most ambitious utility privatisation plan in the Gulf, having successfully begun the development of its power and water projects with foreign partners.

Which is noteworthy. However, the moot question is: Do independent power plants or corporatisation of the power and water sector constitute privatisation? Does it result in cost savings and wider benefits to consumers?

According to Richard Ingham, senior vice-president, ABN Amro, one of the advisors to Oman on privatisation, what the UAE has undertaken is no more than corporatisation.

"Letting out only new individual generating capacity projects on a build-own-operate (BOO) or build-own-transfer (BOT) basis to private developers, but retaining ownership, is not privatisation per se."

Corroborating the above view, a senior official of Japan's Marubeni Corp, which bid for the project, said that IWPPs or corporatisation of utilities may eliminate government spending, but do not deliver broader benefits of privatisation of the power sector and may not really lead to cost savings.

"The UAE's privatisation programme is uniquely focussed on private sector power generation and water production and the government has only corporatised a previously run government institution. The power and water sector is not run as a pure private entity."

Ingham points out that GCC governments want to reduce capital expenditure without undertaking the entire privatisation procedure. "Governments are transferring significant risk of performance on the developer."

What then is wholesale privatisation? Citing the example of neighbouring Oman, Ingham says true privatisation projects are structured on BOO basis with separate power purchase agreements (PPAs) and fuel supply agreements (FSAs).

It would be pertinent to point out that Gulf countries secured a 'zero rating' from the World Bank in so far as security of supply at long-term economic cost.

While privatisation should result in reduced costs, it is believed tariffs may only increase in the UAE and other Gulf countries embarking on similar privatisation models. The UAE's power and water sector is subsidised by the government and is uniquely dependent on government policies.