Public-private partnerships to underpin Oman's economic growth

 

There are approximately $2bn worth of public-private partnerships (PPPs) in the planning or implementation phase in Oman, according to research by Middle East Economic Digest published in October 2017. The sultanate pioneered the regional development and use of such projects in the utilities sector in particular, and PPPs now account for the bulk of electricity generated in the country and are the preferred model for building new generation capacity throughout the GCC region.

Against a backdrop of reduced hydrocarbons revenue, the authorities are seeking to extend the model to other sectors in order to reduce capital expenditure budgets, with areas such as health care and education likely to benefit. In order to help develop such activities, the government is working on a dedicated PPP law, as well as a one-stop shop to help attract private investors. However, segment experts caution against the potential of overly prescriptive regulations that would have the potential to stymie innovation in the field.

Independent Utility Projects

PPPs are already well established in the power-generation, water and desalination segments, where various independent power projects (IPPs), and independent water and power projects (IWPPs) are up and running. Indeed, Oman has been a PPP pioneer for utilities, and is home to the Al Manah power station, which was the first electricity plant in the GCC to be privately funded, built and operated, upon its launch in 1996. Similar such projects followed, and a law underpinning the implementation of PPPs in the power and water segments – the Sector Law, which unbundled the power sector and established a single unified entity, the Oman Power and Water Procurement Company – was passed in 2004.

The model has been remarkably successful, with IPPs now providing more than 70% of domestic power generation. The largest existing power plant in the country, the 2000-MW Sur facility, is also an IPP, owned and operated by Phoenix Power Company. This capacity is set to continue rising: according to Apicorp Energy Research, three more IPPs are due to be launched in 2018-19 in the sultanate, with a combined generation capacity of 2665 MW.

The largest of the three, the Sohar 3 project, is also the biggest IPP to have been tendered in the sultanate to date. It will have an initial capacity of 1710 MW and is due to launch in 2019. A second plant will later be added, boosting capacity to 3319 MW. All three projects are being developed by a consortium led by Japan’s Mitsui & Co, ACWA Power of Saudi Arabia, and Omani holding firm Dhofar International Development and Investment.

In May 2017 the Oman Power and Water Procurement Company announced plans to launch a tender for a solar IPP with at least 200 MW of generation capacity – the sultanate’s first large-scale solar power venture – which it expects to come on-line by 2020. The firm is also seeking to procure a minimum of 1600 MW of generation capacity through a mixture of both new projects and extensions of projects whose contracts are set to expire.

Furthermore, Oman Power and Water Procurement Company has plans in the pipeline to launch a hydrocarbons IPP in 2024 and a coal-powered project in the years following that. The authorities are seeking to encourage additional competition in the sector by launching a spot market for electricity in 2020. Operational trials of the market are anticipated to begin in 2019.

Supporting Framework

Various factors are responsible for the success of power and water PPPs in the sultanate. “The form of privatisation adopted for Oman IPPs and IWPPs is quite comprehensive.  For example, the Electricity and Related Water Sector Law permits 100% foreign ownership of IPP and IWPP companies, and there is no government shareholding requirement, something that is unusual in the region. The existence of long-term capacity and output contracts also means that if the plant is operated properly, investors can be sure of recovering all their fixed costs and returns on investments,” Mary Mackintosh Allan, partner at legal firm Curtis, told OBG. “Furthermore, the independence of the regulator is robustly upheld, and the sector’s regulatory framework is well structured.”

In addition to bolstering power supply without adding strain to government finances, IPPs and IWPPs have been helping develop capital markets. Projects are obliged to list 40% equity stakes on the Muscat Securities Market – the country’s stock market – within four years of their establishment. This has been a key driver for the development of the exchange in recent years, acting as one of the main sources of listings. In 2015 the initial public offering of Phoenix Power was the largest listing witnessed on the Muscat Securities Market in years (see Capital Markets chapter).

IPPs are also becoming increasingly popular throughout the region in general, accounting for an estimated 34% of installed power generation capacity the GCC in 2015, up from 23% in 2009, according to research from Strategy&, the global strategy consulting team at PwC. The firm said that while regional use is not yet as widespread as it is in Oman, “IPPs have almost entirely displaced traditional public power plants as sources for new electricity generation” in the GCC.

Attractive Model

A number of players would like to see the application of PPPs be extended to other sectors. “They have already worked well in the utilities sector, and they should be used to finance and construct infrastructure such as highways and ports that could eventually be privatised,” Panjak Khimji, director of Khimji Ramdas, one of the sultanate’s largest diversified conglomerates, told OBG.

Such hopes appear likely to come to fruition in the coming years. PPPs are becoming more attractive as low oil prices put pressure on government finances. With current expenditures difficult to cut due to political sensitivities, capital expenditure has borne the brunt of fiscal consolidation, and PPPs offer the promise of financing for public infrastructure without requiring government borrowing.

The authorities are taking a variety of steps to help facilitate a broader application of PPPs in the sultanate. In October 2016 the government announced that it intended to institute a one-stop shop for companies seeking to establish PPPs, which it has also cited as one of the financing sources for projects under the sultanate’s ninth five-year economic diversification strategy (see overview).

New Law

In a strong indication of plans to expand the use of the model, in April 2017 a government official said that a PPP law had been drafted and would be approved soon. However, this had yet to take place as of early 2018. Allan told OBG that she believed the PPP law would likely leave the current framework for IPPs and IWPPs unchanged. “There is a general consensus that the current system has been very successful for those PPP forms, and the authorities are unlikely to want to disturb that.”

Rather, she said, the legislation changes would likely focus on sectors including health care – for which she said there appeared to be particularly strong investment appetite – as well as schools and prisons, and would likely establish new bodies to approve and supervise such projects. These are likely to operate under UK private finance initiative-type models, whereby private firms finance, construct and operate assets on behalf of the state, which pays them fees to provide services to the public.

However, adaptability may be an important feature to ensure that the scheme remains attractive to investors. “There is often a need to design a structure that is appropriate for particular sectors, and even particular projects,” Allan told OBG. “A one-size-fits-all approach could therefore risk acting as a straitjacket on designing effective structures for individual PPPs, and restricting implementation and innovation, as has happened to a degree in some other countries in the region.”

The government is considering funding various projects using PPPs. According to local media reports in 2016, a OR300m ($779m) medical city was to be built in Barka, a coastal city in northern Oman. This could also extend to transport.

“The authorities are looking at using the private sector to develop new infrastructure projects,” Hettish Karmani, head of research at investment firm Ubhar Capital, told OBG. This could support both public and private sector growth.

In March 2017, for example, state-owned railway operator Oman Rail announced it was also considering using a PPP model for the construction of a 625-km railway line linking the port of Duqm with mineral-rich areas in the interior of the country.

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The Report: Oman 2018

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