BAHRAIN SET TO BEGIN UTILITIES PRIVATIZATION

UNCLAS MANAMA 000496

SIPDIS

DEPT FOR EB, NEA/ARP, EB/TPP/BTA AND EB/CBA
DEPT PASS USTR JASON BUNTIN
USDOC FOR CLOUSTAUNAU

E.O. 12958: N/A
TAGS: ENRG ECON ETRD BEXP BA
SUBJECT: BAHRAIN SET TO BEGIN UTILITIES PRIVATIZATION



1. SUMMARY: The Government is looking to partial
privatization of its power and water sector to meet rising
demand when the GoB cannot support the construction of new
power plants. Beginning with a new power plant currently
under tender, the GoB intends to privatize subsequent power
and water production and management, while maintaining
control over supply. There is some concern among experts
that the details--subsidies and competition between state
and private companies--have not been worked out
sufficiently. Nevertheless, the GoB needs to undertake
measures now to meet increasing demands in the near future.
It is using two concurrent conferences, Water Middle East
and Power-Gen Middle East, to drum up interest in the
sector. These conferences will also afford U.S. companies
access to this important regional market. END SUMMARY

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Utility Considerations
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2. Power demand in Bahrain has been growing approximately 8
percent per year, Minister of Finance and National Economy
Abdulla Saif told the Shura Council at their weekly session
on April 5 according to local April 6 press reports. This
growth in demand requires the state to invest in new power
facilities every 2 to 3 years, according to statistics
published by the Ministry of Electricity and Water.
Likewise, current fresh water supply just meets demand, with
essentially no excess capacity. The current building boom,
population growth and economic activity are expected to
drive demand higher. An Ernst and Young study commissioned
by the Crown Prince in 2003 indicated that Bahrain would be
in urgent need of a new power generating facility by 2006.


3. Increasing concerns over spiraling costs, strains on the
national budget, and interests in energy security have been
driving the Government of Bahrain (GOB) to consider
seriously the privatization of its power and water utilities
as it strives to meet rising demand, former Undersecretary
of Electricity and Water and current President of the
Business Promotion Center Jamil Al-Alawi told EconOff March

27. In keeping with the suggestions of the Ernst and Young
study, the GOB is embarking on an incremental privatization
strategy beginning with the construction in 2006 of a new,
third power plant in the town of Hidd. From then on, new
power or power/water facilities would be privately financed
and managed, with the GoB retaining control over
distribution, Dr. Nabeel Al Muskati, Assistant
Undersecretary for Planning and Projects at the Ministry of
electricity and Water, explained to Econ FSN on March 29.


4. Plans to privatize the sector have not completely
factored in commercial interest and profit motives, Al-Alawi
explained to EconOff March 27. Since power cannot be stored
long term, a private facility would have little interest in
building up production capacity beyond the minimum
requirements, leaving the government to find ways to meet
demand during the peak summer season. Al-Alawi maintained
that a nimble private-sector provider will be able to reduce
operating costs by 30 percent over that of ungainly
government management, thus offsetting the GoB subsidy.
Efficient sector management ensure sufficient distribution
of power and supply stability, he said. The current Ministry
of Electricity and Water privatization plan approved by
Bahrain's Cabinet in December 2003 allows for a tender to
construct a privately managed 1000MW power-only facility
known as Al Azel in the Northeast town of Hidd on Muhurraq
Island, Al Muskati told EconFSN March 29. The Ministry has
stipulated its intention to retain authority over
distribution while reserving the authority of production and
management to the private company under a 20-year power
selling agreement.


5. COMMENT: GoB interest in power and water innovation is
underlined by two upcoming trade shows. Bahrain will host
Water Middle East for the second year, from September 13 to
15, this time in conjunction with Department of Commerce
approved Power-Gen Middle East. U.S. Embassy Manama, in
conjunction with the U.S. Consulate Dhahran and U.S. Embassy
Doha, will host a catalog show at this event, to facilitate
U.S. company presence at this event. Together with the
upcoming FTA with Bahrain and regional interest, this
exhibition will provide an excellent opportunity for
companies seeking to operate in the sectors, potentially in
areas of consulting, construction, management, and
distribution, alongside the associated logistical and
support related equipment required. END COMMENT