US embassy cable - 04MANAMA496

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