Saudi Arabia begins privatisation push with $3.5bn Ras al-Khair plant

Saudi Arabia’s move to invite investors to prequalify for the tender to acquire the majority stake in the $3.5bn Ras al-Khair power and desalination plant marks progress with the long-awaited privatisation of state-owned utilities assets in the Middle East’s largest utilities market.

Saudi Arabia’s Saline Water Conversion Corporation (SWCC) has invited firms to submit statements of qualification (SOQ) by 20 September for the privatisation of the brownfield Ras al-Khair plant, which houses one of the world’s desalination facilities with a capacity of 1.05 million cubic metres a day in addition to the sizable 2.65GW power plant.

The kingdom's first utilities privatisation scheme has attracted much interest, with 37 firms submitting expressions of interest (EOI) in June.

Plans to privatise existing SWCC assets were first drawn up in 2008, six years before the Ras al-Khair plant began initial operations. Plans to privatise generation assets of Saudi Electricity Company (SEC), the kingdom’s majority government owned power provider, were devised even earlier, with prepration for the unbundling beginning in 2007 and the plans approved in 2010.

Progress with both privatisation programmes was slower than anticiptated until the initiatives were given fresh impetus with the launch of the Saudi Vision 2030 economic plan in 2016. The privatisation of state assets forms a central pillar of Vision 2030, with Riyadh’s ultimate goal for the government to assume a regulatory role, reducing the heavy burden of capex and opex from state balance sheets.

Following the launch of Vision 2030 in 2016, initial work began to identify the assets that could be used to launch the privatisation programme. SWCC appointed France’s BNP Paribas as the lead and financial adviser for the planned Ras al-Khair privatisation in October 2017.

The selection of the plant as the first utilities plant to be sold off to the market was confirmed in 2018, when the plant was included in the National Centre for Privatisation (NCP) Delivery Plan. The Ras al-Khair facility privatisation formed the centrepiece of the 2020 plan, with a target of raising $7bn of the $10bn the government seeking to garner from privatising five state entities in this period.

In July, Saudi Arabia completed the privatisation of two flour milling companies, marking the first privatisation under the NCP, a body established to divest state assets in line with the kingdom’s Vision 2030 economic reform programme

Completion of the flour milling companies will show investors that the kingdom is committed to raising funds and reducing expenditure on its utilities sector. Money cut from utilities budgets can be directed elsewhere to provide social infrastructure such as schools and hospitals, where implementing successful public-private partnership (PPP) models remain a challenge for governments across the Gulf.

Although the move to begin the process for privatisatising the Ras al-Khair plant has raised much interest in the market, turning interest into bids may prove harder than envisaged for the kingdom’s water company.

The sheer size and scale of the project, and its hefty $3.5bn book value, will present a challenge for many regional and international investors this year, with the twin shocks of the Covid-19 pandemic and the drop in oil prices.

While Energy & Utilities recently heard during our Covid-19/energy sector programme of webinars that liquidity remains for well-structured and bankable greenfield projects, taking on ownership of existing assets presents a more complicated task for investors, particularly during a global economic downturn.

The fact that the Ras al-Khair plant was only completed in 2016, however, makes it a more attractive proposition than most. The technologies and efficiency of both the power and water components will ensure that no drastic overhaul of the asset is required to maximise profits.

Progress with the Ras al-Khair privatisation will be eagerly watched across the GCC, where neighbouring oil exporting countries are also seeking to privatise utilities plants. Earlier this year, Kuwait invited consultants to bid for the advisory and valuation contracts for the privatisation of the estimated $1.26bn North Shuaiba power plant.

Successful execution of the Ras al-Khair privatisation deal will not only provide a starting point for the kingdom’s privatisation goals, but could spur on others to follow in its footsteps.