Yanbu 4 IWP and its transmission pipe

This article was originally published in the Global Infrastructure Report, July 2021 by Project Finance International and is reproduced with permission from the publisher.

In late 2017, the former Water & Electricity Company (WEC) was given a new mandate to reinvigorate the procurement of desalination capacity within Saudi Arabia working under a PPP model. In 2018, to coincide with the launch of the National Water Strategy 2030 – itself aligned with Vision 2030 – a new board and management team were appointed and WEC was rebranded as Saudi Water Partnership Company (SWPC). With the kingdom’s renewable power programme kicking-off in earnest around the same time, one of SWPC’s first steps was to de-link the desalination capacity from power generation and to move from a combined independent water and power producer (IWPP) model to a stand-alone independent water producer (IWP) model, targeting projects using reverse osmosis (RO) technology.

Initially, four IWPs were launched, but the largest of these - Jubail 3 - was then split into two. All five projects have progressed successfully, see Table 1.

Yanbu 4 IWP procurement

Yanbu 4 was originally tendered as a stand-alone 450,000 m3/day greenfield IWP. The site is located 140km west of Madinah, near the town of Ar Rayyis, on the Red Sea coast of the kingdom. In common with SWPC’s other IWPs, Yanbu 4:

• is structured on a BOO basis with a 25-year term running from the project commercial operation date and a standard capacity and output based payment mechanism;
• provides for 100% private ownership of the project company with no government shareholding;
• includes the development of certain electrical special facilities including a sub-station and overhead lines connecting to the grid, which are to be transferred to National Grid SA ahead of the project commercial operation date; and
• includes a Ministry of Finance credit support agreement covering all payments due under the water purchase agreement.

Table 1 - The five IWPS

In addition, Yanbu 4 included on-site potable water storage facilities (PWSFs) of 900,000 m3 to be managed by the project company. The primary purpose of providing two days of on-site PWSFs was to enhance the security of supply by ensuring that dispatch instructions can be met even when there are outages at the main plant. This was considered critical in light of the fact that the plant serves the Makkah and Madinah regions.

Yanbu 4 was also the first of SWPC’s IWP projects to allow the use of on-site solar power, in this case for up to 20% of the plant’s specific power consumption. This provided a number of benefits including reducing reliance on the grid, reducing costs and improving overall environmental performance.

The request for proposals was issued to nine prequalified bidders/consortia on May 30 2019 and a total of six bids were received by October 7 2019. Following a detailed evaluation and clarification process SWPC announced the prices of five compliant bids, see Table 2

Table 2 - Yanbu 4 BIDS

On February 13 2020 SWPC appointed the consortium of International Power SA (Engie) and Mowah Co CJSC (Mowah) as the preferred bidder and the water purchase agreement and other project agreements were signed on February 27 2020.

Water transmission infrastructure

However, by this stage concerns had arisen that the pace of development of the IWPs was outstripping that of the desalinated water transmission network needed to transport the product water from the coastal IWPs to the population centres they were being developed to serve. Around this time SWPC’s mandate was further extended to include (among other things) the development of the desalinated water transmission network via a series of independent water transmission pipeline (IWTP) projects.

However, the lead-in time to implement the new IWTP programme meant that a different solution was needed in relation in the case of Yanbu 4 and permission was therefore sought and obtained to negotiate with the Engie-Mowah consortium for them to undertake the development and financing of the necessary water transmission infrastructure within the ambit of the water purchase agreement.

The required water transmission infrastructure included:

• a pumping station close to the IWP site in Ar Rayyis with an initial design capacity of 631,579 m3/day, the Rayis pumping station;
• four potable water storage tanks – in addition to the on-site PWSF described above - with 170,000 m3 capacity;
• the extension of an existing pumping station in the Yanbu Industrial Area, Pumping Station 1D;
• an interconnection pipeline of approximately 38km and a diameter of 84 inches from the Rayis Pumping Station to Pumping Station 1D; and
• all associated infrastructure and facilities.

Collectively, these are the water special facilities. The likely capital cost of these facilities was expected at this stage to be in excess of US$200m, which is a material amount relative to the approximate US$650m cost of the IWP.

Challenges

The introduction of the water special facilities presented a number of unique challenges.

• Operation and maintenance: At the time, a regulatory regime that might allow private entities to be licensed as desalinated water transmission system operators (DWTSOs) did not exist and the Saudi Arabian Desalination Code envisages a single DWTSO for the whole of the network. It was therefore decided that the project company would not be asked to take on responsibility for the operation and maintenance of the water special facilities. Those facilities are therefore to be transferred to the Saline Water Conversion Corporation (SWCC) or to the newly established Water Transmission and Technologies Company (WTTCo) prior to the project commercial operation date, following the well-established model for transferring the electrical special facilities.

  This means however that the cost of the water special facilities effectively has to be covered by the tariff paid in respect of the IWP. This obviously impacts sensitivities related to non¬performance of the IWP and changes the balance in respect of the lenders’ security package after the water special facilities are transferred, but the overall package was found to be sufficiently robust to accommodate these changes.

• Construction contracting structure: The appointed EPC contractor for the IWP was Doosan Heavy Industries & Construction (Doosan). Although initial consideration was given to the possibility of a split EPC contract structure – with a separate EPC contractor directly appointed by the project company for the water special facilities – it soon became clear that to maintain the required timetable, to keep the lenders on board and to achieve the most competitive debt pricing, a single EPC contract would have to be maintained. It was therefore agreed that Doosan would continue with full turnkey responsibility for the combined scope.
• Ensuring competitive pricing: Direct negotiation for works of the magnitude of the water special facilities is unusual and it was therefore critical to all of the government stakeholders that there were sufficient competitive elements and other controls within the process to ensure that the necessary value for money was achieved. The key elements of this control included: insisting that the Engie-Mowah consortium, through Doosan, ran a competitive tender to select the subcontractor to undertake the water special facilities works on an open-book basis; negotiating an appropriate margin for Doosan to provide the turnkey EPC wrap; and maintaining the same equity IRR from the original IWP bid after the water special facilities pricing was included.
• Increased equity requirement: The inclusion of the water special facilities gave rise to a material increase in the equity requirement. As a result, Engie and Mowah proposed to include a third entity, Nesma Company Ltd (Nesma) in the consortium. After an analysis of Nesma’s suitability – based on the criteria applied to other consortium members at the prequalification stage – this was approved.

• Pipeline corridor land: One of the most significant risks associated with any pipeline project is the acquisition of the necessary land rights. SWPC accepted at the outset that it would need to hold this risk and it assumed an obligation under the amended and restated water purchase agreement to provide the necessary rights to the project company.

  To mitigate this risk and to ensure that adequate rights of way existed for the project company to develop the pipeline corridor, an intra-governmental committee was set up consisting of representatives from the Ministry of Environment, Water and Agriculture (MEWA), SWPC, SWCC, the Ministry of Transportation – the route runs adjacent to a number of public roads – Madinah Amanah and the Madinah Development Authority. This committee was responsible for working with the landowners and other stakeholders to acquire the necessary rights of way.

• Additional senior debt requirement: At the initial commercial close of the IWP, the Engie-Mowah consortium had envisaged a commercial bank financing and even when it was known that the water special facilities were to be included, the consortium progressed the detailed development of this financing, while in parallel seeking additional facilities to meet the additional senior debt requirement. The US$711m financing ultimately put in place included commercial facilities from MUFG Bank, Riyad Bank, Standard Chartered Bank and the Korea.

  Development Bank; an Istisna-Ijara facility from National Commercial Bank; and a KEXIM Facility. The limited-recourse financing also benefits from Sustainable Green Loan certification.

• A dynamic environment: The Saudi PPP and project finance market is currently one of the most active anywhere in the world, but it is not without its challenges. In the period since the RFP was issued in May 2019 there has been massive change in terms of the PPP regulatory backdrop, sectoral reforms and general legal developments.

  Various changes in law, increases in the VAT rate, major changes in the customs duties regime and, of course, the impacts of the Covid-19 pandemic all had to be accommodated and it is a testament to all who were involved that the project progressed to the signature of amended and restated project agreements on February 1 2021 and to a successful financial close on March 19 2021.

Moving forward

SWPC has a broad portfolio covering waste- water treatment as well as desalination, water transmission and strategic water storage. At this stage the “Yanbu model” of combined IWPs and water transmission infrastructure does not look like it will be replicated, as SWPC’s main focus in this area is on the development of a series of stand-alone IWTPs. Expressions of interest have already been submitted for the first of these schemes, the Ras Mohaisen–Baha–Makkah IWTP, and it is expected that the formal procurement process will start imminently with the issue of the request for qualifications.

The overall Batch 1 IWTP programme includes eight schemes, see Table 3.

Table 3 - IWPT Batch 1

Each of these projects is significant in its own right, with many of them giving rise to major funding requirements. Bearing this in mind as well as the different skill sets and demands of developing, operating and maintain a potable water transmission system compared with an IWP, the separation of the schemes is perhaps unsurprising. Nevertheless, the inclusion of the water transmission infrastructure alongside the Yanbu 4 IWP provided a solution to a very real problem and will ensure the delivery of a critical resource to an area where it is badly needed.