Funds for power-production hard to find for Saudi's

Jul 14, 1997 02:00 AM

June 25, 1997 Saudi Arabia, trying to curb state spending and shying away from sovereign borrowing, is asking its public utilities increasingly to get banks to help finance the infrastructure projects it needs to meet fast-growing demand. The private sector is also being asked to take a role in providing and funding public services as the world's biggest oil producer suffers its 14th year with a budget deficit.
But bankers and economists said losses made by power and water companies in the heavily subsidised sector made raising finance and attracting private funds very difficult. "No-one is going to lend money to a financially insolvent company," said Anzar Ahmad of the Consulting Centre for Finance and Investment think-tank. He said the private sector would only be willing to invest in commercially viable firms, unlike the main Saudi power firms. "It is imperative the government finds funding for its ambitious project to expand power capacity to meet high population growth and bigger industry," one bankersaid. "But no banks want to lend to debt-ridden, loss-making enterprises."
Electricity Minister Hashem bin Abdullah bin Hashem Yamani has said $ 116.8 billion is needed to expand capacity to 69,520 MW by 2020 from 19,662 MW in 1995 in the developing state where the population is growing at 3.5-4.0 % a year.
To avoid taking a sovereign loan, like the $ 4.5 billion credit it took after the Gulf War, Saudi Arabia is keen to get its state-run firms to assume risk, bankers and economists say.
Recently the kingdom's largest power firm -- SCECO-East -- signed a $ 500 mm loan with 25 banks to help finance the $ 1.1 billion, 2,400 MW Ghazlan II power project. "This $ 500 million term loan facility represents the first international borrowing by a Saudi public utility company and we are confident it will not be the last," said Abdullah al-Quwais, general manager at arranger Gulf International Bank.
But the success of the Ghazlan loan -- which is at 90 basis points over LIBOR -- is unlikely to be repeated, analysts say. "Ghazlan is unique because it is backed up by (state oil firm Saudi) Aramco. Aramco has not given a guarantee but the loan is underpinned by Aramco receivables so you are assured of repayment," said a corporate finance manager at a Saudi bank. "You will see that few banks are willing to lend to firms like SCECO-West because they have not met their obligations on time," he said. SCECO-West plans the Shuaiba power plant, estimated to cost $ 2 billion, with over 1,750 MW of capacity.
Even if Saudi banks wanted more exposure to the sector, they would only be able to lend about 5 to 6 billion riyals ($ 1.3-1.6 billion) a year due to a central bank limit on loans at 60 % of deposits, which banks have already almost reached, Ahmad said.
International banks would be even less willing to lend given the commercial non-viability and technical bankruptcy of many Saudi power companies, analysts said, leaving the option to independent power projects (IPP's). But before these became attractive, they said Saudi Arabia would have to clear a number of issues, including giving a commitment to private ownership, setting up a realistic tariff structure, agreeing fuel supply deals with private operators and shortening various government approval processes.
"IPPs represent one of the biggest potentials for private sector involvement in power generation. If the political will is there to structure the arrangements, the funds and players will be forthcoming," Ahmad said.
If it goes ahead as scheduled, the Shuaiba plant will be one of the kingdom's first set up on a build-operate-transfer (BOT) basis. Similarly, utility expansion in Jubail and Yanbu industrial cities is expected to be on a build-lease-transfer basis. A utility firm with private and foreign participation is already being set up to provide equity and raise finance. ($ 1-3.75 riyals)

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