Saudi water: Trouble in the pipes?
Saudi Arabia’s independent water project (IWP) pipeline continues to deliver. But project flow in other essential elements of the water network – transmission, storage and sewage – is much slower. With one hot market and others much cooler, could the imbalance in project flow significantly curb the value-added of Saudi's IWP programme?
Saudi Arabia is attempting to procure water infrastructure at breakneck speed, setting aside $80 billion for water-related projects over the next few years. With a population set to grow from 35 million to 40.1 million people by 2030, Saudi has launched multiple tenders for desalination plants, water storage facilities, water transmission pipelines and sewage treatment plants.
But there is a potential glitch in the planning – the development of desalination plants is outpacing that of other privately owned and operated water infrastructure.
Figures from the Saudi Water Partnership Company (SWPC) – Saudi Arabia’s water procurement authority – show that there are eight operational independent water projects (IWPs), with another three under construction and a further ten in procurement or planning.
By contrast, there are currently no privately developed water storage, water transmission or sewage treatment projects that are operational, although there are a number of projects under construction or in procurement.
The history of private sector involvement in the Saudi water sector began with independent water and power projects (IWPPs). Today, IWPs have replaced IWPPs in the project pipeline. This is largely due to the lower costs and greater efficiency of the reverse osmosis technology used by IWPs when compared to the multi-stage flash technology used by IWPPs.
Explaining this shift, David Johnston, a partner at Norton Rose Fulbright notes: “The older desalination plants tended to use multi-stage flashing (MSF) technology, which requires heat energy to boil water. Therefore they had to be co-located with thermal power generation plants (gas or oil). The problem with this is that the power plants must be dispatched in order to provide the heat to produce water, which requires the consumption of gas rather than relying on renewable energy. Increasingly, thermal power generation is being pushed out of the merit order in favour of renewables, meaning that needing to generate thermal power in order to desalinate water is not desirable.
“Reverse osmosis (RO) desalination plants, on the other hand, are only powered by electricity, and so can be directly connected to the grid and take advantage of the greater levels of renewable energy penetration that exist today. This avoids greenhouse gas emissions and conserves natural gas for other uses. As a result, we no longer see large scale thermal power and water projects being procured together in the form of IWPPs and, indeed, some of the older IWPP plants have been decommissioned before the end of their useful life, in favour of replacing them with decoupled power generation and desalinated water production facilities.”
The most notable instance of an early decommissioning of an IWPP took place in 2022, when Shuaibah IWPP was scheduled for replacement by Shuaibah 3 IWP. IWPs have lower capex requirements than IWPPs and, unlike IWPPs, do not need oil or gas as feedstock. Saudi Aramco typically supplies this feedstock to IWPPs at around cost price, meaning that oil and gas diverted away from IWPPs can be sold far more profitably on the open market.
The ability of IWPs to use cheap on-site solar as an energy source further lowers their levelised cost of water production, again making IWPs less expensive to run than IWPPs. IWPs are, however, only allowed to use on-site solar to offset their energy needs and cannot sell energy to the grid, which would require a totally separate licence and potentially even a different type of project company. SWPC is also set up only to procure water assets, rather than grid-connected power projects.
A standardised financing structure emerges
The efficiency of the reverse osmosis technology used by IWPs and the low-risk nature of the concessions through which they are procured has made IWP financings increasingly routine, if not yet quite commoditised. Over the last three years, one IWP project financing has closed each year with seemingly metronomic regularity. Financings for Jubail 3B IWP and Shuaibah 3 IWP reached financial close in October 2021 and 2022, respectively.
The most recent deal – for Rabigh 4 IWP – closed around September 2023, raising SAR2.05 billion ($546.6 million) from Standard Chartered, The Saudi National bank, Riyad Bank, The Saudi Investment Bank, and Bank of China. The project is sponsored by ACWA Power, Almoayyed Contracting Group (AMCG), and Haji Abdullah Alireza & Co (HAAISCO), with ACWA Power holding a 45% stake. There could be a financing for Jubail 4 & 6 IWP in 2024, with SWPC issuing the request for proposals (RfP) on 1 January this year.
Lenders are typically very comfortable with Saudi IWP concession structures, which usually offer two revenue streams. The first is an availability-style payment, which is paid subject to all an IWP’s contracted capacity being available, regardless of how much capacity is actually used. Provided the IWP is functioning, payment is received in full with no volume or demand risk. The other revenue stream is based on the amount of water produced, but is effectively a pass-through of the running costs for the IWP in question. A plant malfunction is, ultimately, the only major risk to lenders once construction is completed.
Market sources confirm that concessions are structured similarly for other water infrastructure and that project agreements are very similar, regardless of the specific type of water project being built. Although the various types of water projects function differently, they all have a contracted capacity and running costs and, in broad terms, can receive revenue on a similar basis to IWPs.
Financings for several independent sewage treatment plants (ISTPs) have reached financial close, such as the $700 million project financing for the Al-Madina-3, Buraidah-2, and Tabuk-2 ISTPs, which closed in 2022. According to SWPC, six ISTPs are under construction, meaning that some ISTPs should soon be operational. No financings have yet closed for independent strategic water reservoir projects (ISWRs) or independent water transmission pipelines (IWTPs).
Project agreements have, nonetheless, been signed for the Juranah ISWR and the Rayis-Rabigh IWTP, both of which are currently expected to reach financial close in 2024. Juranah ISWR is being developed by TAQA, Vision International Investment Company, and Gulf Investment Corporation (GIC), while Rayis-Rabigh ISWR has been awarded to a consortium comprising Alkhorayef Water and Power Technologies Company and Cobra Company.
IWTPs present legal complications
Progress on procuring and financing IWTPs has been slower than on most other areas of Saudi water infrastructure. This is due both to the nature of transmission projects and to a quirk of the Saudi legal system. Transmission projects for water, electricity, or oil and gas are notoriously complicated in most jurisdictions, owing to the fact that they often run for hundreds of miles across large areas of land and must, therefore, obtain permission from a number of different landowners. Development timelines for transmission assets are generally long, unless the route taken by the project is very straightforward in relation to land rights.
In Saudi Arabia, the ordinary legal issues with transmission projects are amplified considerably by the fact that there is no title register and title does not always formally exist for certain parts of the land. As a result, it can be difficult to establish if anyone has rights to particular pieces of land.
In the case of Rayis-Rabigh IWTP, the process was simplified by the fact that the project runs for 150km, which is short in the context of water transmission projects. By contrast, Ras Mohaisen-Baha-Makkah IWTP will span around 300km. The RfP for the project was released in August 2022. Parts of Rayis-Rabigh IWTP also run along a road, meaning that land rights will already have been established. Permitting for other IWTPs is likely to be more tortuous.
If the due diligence on land rights for a given IWTP is insufficient, the project can be subject to legal challenges from third parties during construction or at a later date. The project would have a contractual right of access to the land on which it sits, rather than a lease, meaning that project sponsors could take no direct action in the case of an objection from another entity. It would be the responsibility of SWPC and/or the Saudi government to resolve any issue.
The project would get relief under its contract with SWPC and would not be subject to deductions or default remedies if the project were to fall behind schedule or to be terminated. But sponsors and lenders will not generate the same overall return if IWTPs fail due to legal challenges over land rights. IWPs, ISTPs, and ISWRs fall within the same legal framework in terms of land, but land-related problems are more rare, given that these projects only occupy single sites.
The Proximo perspective
It is vital that all parts of Saudi Arabia’s water network are developed concurrently. With a strong pipeline of IWP projects, the country is expected to be able to produce 2.18 billion cubic metres of desalinated water per year by 2030. This production capacity is of far less use if water cannot be transported from IWPs to points of consumption or to storage facilities. Water storage assets must also be developed at a rate that is aligned with rapidly expanding IWP capacity. Consumption of water tends, naturally, to be higher in summer, meaning that the ability to store water over winter months is critical.
Beyond the obvious necessity of a stable water supply, the Saudi government needs to ensure that the required water transmission and storage capacity is available to ensure the full value of IWPs is realised. IWPs generate revenue for debt service and distributions to shareholders as long as they are available, regardless of how much water is used. ISWRs and IWTPs must be operational alongside IWPs to make sure that the government can take full advantage of the desalination plants for which it is paying.
Solving the issue of land rights for IWTPs is likely to be a question of robust due diligence on the part of SWPC. The solidity of IWTP tenders and concessions will, in part, be determined by the extent to which the technical work of determining whether rights to the relevant land can be offered and on what grounds has been completed. But it seems improbable that concerns surrounding land for IWTPs will not be ironed out eventually, particularly given the success of water procurement in other areas.
The Saudi government has also demonstrated a willingness to make wholesale changes in order to secure private-sector investment, which is crucial to delivering its Vision 2030 programme. Such changes include the Private Sector Participation (PSP) Law, which has helped to bring PPPs in line with international standards. IWTP project cancellations due to legal wrangling would be an opportunity cost to sponsors and lenders, meaning that having a clear methodology for guaranteeing IWTPs land is essential to securing continued investment in the sector.