Face to face: Paddy Padmanathan, ACWA Power
Paddy Padmanathan of ACWA Power says that while his company remains committed to global expansion, it is also augmenting its resources in the kingdom to take advantage of Saudi Vision 2030-related opportunities
As chief executive officer and president of ACWA Power, Paddy Padmanathan spends a lot of his time travelling so much so that the company’s staff can’t give a straight answer to the question of where he is based. This is hardly surprising, however, given that the company has been rapidly expanding its global footprint during recent years.
Although founded and headquartered in Saudi Arabia, the developer, investor, co-owner, and operator of power-generation and desalinated water-production plants now has 50% of its assets outside of the kingdom, and is presently undertaking – and planning to undertake – several projects in other countries.
These include a 50-megawatt (MW) photovoltaic (PV) plant in Jordan that is about to go into construction; and two PV plants of similar capacity in Egypt, both of which are currently in the financing stage.
The company also has under-construction projects in Oman, including a coal plant and a natural gas-fired power plant, and is waiting for the next tender for the Salalah 2 project.
In Morocco, it has broken ground on the NOOR Ouarzazate IV plant, the first phase of the NOOR PV 1 programme, and is awaiting the issuance of a request for proposal (RFP) for a gas-to-power project.
In the UAE, ACWA Power is preparing the tender for a 200MW concentrated solar power (CSP) plant, the first phase of the 1,000MW CSP project planned for the Mohammed bin Rashid Al Maktoum Solar Park. The CSP plant is based on the independent power producer (IPP) model, as was the recently inaugurated 200MW Phase 2 of the park, of which ACWA Power was the main developer.
Padmanathan, it turns out, is a huge supporter of the IPP model, telling Construction Week that it is a cost-effective way to deliver energy, since the private sector has always displayed more perspicacity when it comes to keeping costs down on energy projects than the public sector.
“No matter where in the world, when governments buy, they buy expensive,” he says. “Part of it has to do with not wanting to make a mistake, so they over-specify. Part of it has to do with the private companies supplying to the government. Those companies probably think to themselves: These guys are going to pay me late, or interfere while I’m supplying. So they put these contingencies and buffers [in place].”
He explains that for those reasons and others, it has become “a universal rule” that when a government buys, it ends up spending more.
“But when the private sector buys, it squeezes. It fights with the supplier and negotiates the best price,” he continues. “So the capital cost itself, in the case of the government, tends to be higher to start with. And you will also find, when comparing MW to MW, that private-sector-run plants are always more efficient than those run by the government.”
Padmanathan points out that for those in the private sector, money talks, which is why they value operational efficiency. “I need to make sure that the plant is working, and that it continues to work at the contracted level, otherwise, I don’t get the money.”
At the end of the day, it is all about having the right incentive in the right place, he notes, adding: “I am incentivised to get the plant built on time, because the minute my plant is delayed, I’m incurring costs; I’m incentivised to make sure that a 300MW plant delivers 300MW and not 1MW less, because every MW less means money lost.”
Padmanathan’s reasons for supporting the IPP model may shed light on why it’s an attractive proposition for governments, but he understands that it may not be clear to some why public-private partnerships (PPPs) should appeal to the private sector – especially since companies have to wait years, even decades, before they can see a return on their investments.
To this, he responds with what he acknowledges is not a very popular sentiment: “This is something that I want to tell people: Sorry, but you don’t have the right to make a profit. Who gave you the right to make a profit? You only have the right to make a profit if you add value, or if you take [on] and manage risks. Get off this idea that you can be in the buy-and-sell business; that you can buy for $1 and sell for $2. That world is gone; it’s finished.”
He notes that the market environment, especially in the Middle East, has become competitive – a development he is pleased with, believing that competition drives quality and value.
“This part of the world continues to be a very attractive market. All the capacity out there is now being focussed on this region, increasing competitive tension,” says Padmanathan. “In order for me to play, I need to be competitive and, for me to be competitive, I have to be efficient; I have to be reasonable in the rate of return I expect.”
This competitive tension, he adds, is the reason investments in water and power projects are “perfect”, in the sense that they are stable. Padmanathan elaborates: “Power and water are basic requirements. Nobody is going to switch off the lights and go back to the caves. As long as you are a reliable and competitive service provider, and not charging a crazily exorbitant tariff, you will continue to be paid, because [people] know that the day they stop paying you, you may very well switch off [their utilities] and walk away.”
He further points out that competition in the region is only going to get tougher in the coming years, owing to Saudi Vision 2030 – the kingdom’s reform package, which was launched in April 2016.
With Saudi Arabia looking to reduce its dependence on oil exports and pursuing alternative income channels like the privatisation of government-owned assets, ACWA Power’s chief is expecting “enormous opportunities” to open up in the energy and water sectors – for which, he reveals, the company is busy preparing.
“We’ve been specifically positioning ourselves by starting to rebuild our team in Saudi,” Padmanathan explains, clarifying: “But not by moving people from outside, because we still have our international business – that’s continuing to grow.”
Instead, he says that the company is adding new capacity to its Saudi team. “We’ve been taking on young people [and] more experienced people. So we’ve been growing the Saudi team in the last year, and they are very busy getting ready, working, getting data, and preparing for the privatisation of state-owned assets, and for the National Renewable Energy Program (NREP),” he adds.
Launched in support of Saudi Vision 2030, the kingdom’s NREP established an initial generation target of 9.5GW of renewable energy by 2023.
To make sure that it is covered on all fronts, and does not leave anything to chance, ACWA Power has also been finding ways to supplement its financial resources.
“We already have our own resources, but we want to be sure, with the enormous opportunities we see coming, that we have enough in our coffers,” Padmanathan emphasises. “We don’t want to be left scrambling for money or constrained by equity capital.”
In line with its goal of augmenting its finances, the company announced last year that it will be making a $1bn bond issuance in the international market. Though the offering was expected in late 2016, reports quoting lead arrangers revealed that the issuance was to be delayed, due to “time constraints and requests from investors for more time to evaluate the proposed [bond] offering”.
Keen to clarify the issue, Padmanathan explains that, contrary to reports, the bond has not been delayed. He elaborates: “We did an appetite check last year, and while we were doing that, we received such good feedback that we toyed with the idea of making the offering right away. Maybe that’s where the confusion came from.”
Padmanathan says that even while it was entertaining the idea, ACWA Power received advice to wait because, with the year coming to a close, companies had already filled their order books and made their commitments.
“We thought that we might as well wait,” he continues. “And it’s a regulated bond offering, which means accounts needed to get audited and certified. We had to go through the year-end audit process, which we have done. We now have a fresh, audited set of accounts that are ready, so we will be looking at going forward [with the bond] during the course of this month.”
Once the bond goes through, he says that “virtually all of the money will be deployed in the kingdom as investments”.
In the meantime, ACWA Power’s Saudi team will be kept busy with a host of projects, including the $233m Shuaibah expansion, a 150,000m3/day reverse-osmosis, water desalination plant that is currently at the development stage.
“At any given time, we have projects in planning, in tender, and in construction, as well as projects that are either operating or going into operations,” Padmanathan concludes. “So we’ve got a full pipeline, especially in [the kingdom]. In Saudi, there is no end of projects – no end.”