In conversation with Hassan Choudhry

The Umm Al Hayman wastewater mega-project in Kuwait proved the strength of a PPP project. Since the launch, have you seen a shift in the mindset of the authorities toward PPP projects? What are your views? 

Since this is the first mega infrastructure project under the PPP law no. 116 of 2014 for the State of Kuwait, besides Shamal Az-Zour which was established under the old law, I think the overall essence of the market in Kuwait toward PPP projects is welcoming. There is a general understanding that public and private partnerships can bring significant overall efficiencies and economic benefits to the State of Kuwait. With the deficit in the budgets, the capex budget is also getting squeezed. On the contrary, new infrastructure projects such as power, water and wastewater plants are facing high demand and are of utmost importance, owing to the increasing population and growth plans. 

Therefore, implementation of PPP projects is the way forward. In doing so, the most important aspect to consider for building local and international investors’ and lenders’ confidence is the timely execution of the PPP projects, especially from the tender stage and contract award signing of the PPP agreements through to financial close. Thereafter, the timely and within budget execution of the PPP projects and close collaboration between the public and private investors will resolve any challenge along the way. 

You see, there is always a learning curve whenever a new economic law is applied in any country. Kuwait is going through that phase right now, including the bureaucratic challenges. Some other countries within the region have moved quite ahead within the PPP industry. But with the current pipeline of PPP projects that are to be executed in the State of Kuwait, I am sure that Kuwait will be competing and at par with such economies soon. 

Furthermore, compared to the rest of the region, the PPP law in Kuwait offers a uniqueness when it comes to the real essence of PPP projects. In Kuwait, the project company has to be listed on the Kuwait Stock Exchange (Boursa Kuwait) and 50 percent of its shares have to be distributed to the nationals at par value upon completion of the project. So, in that context, there is a positive sentiment for PPP projects, but overcoming bureaucratic challenges and educating the overall benefits of PPP may take some time. However, when that happens, Kuwait is going to really benefit from it. 

Our report finds that sunk costs and delayed projects present a challenge for businesses involved in mega-projects. In your opinion, is there a way to predict sunk costs for mega-projects? If yes, how to plan for a catastrophe?

Kuwait’s infrastructure sector has recently opened up to the world through its PPP law no. 116 of 2014. For any investor who is willing to invest in Kuwait, there is always that extra investment that they have to make before entering a new market. But whether that investment will convert into a project is always a question mark for an investor. It depends on many factors, right from creating the overall investment structure, learnings from the existing projects, the overall risk assessment and, above all, how the bid is compiled. With such mega infrastructure projects, there are always risks. 

Therefore, how much of those costs can be recovered is a matter of strategy and how one structures the bid, given the close competition with the other bidders. Due to the long-term nature of these projects, it is a matter of choice for the investors to see how such costs may be recovered, keeping the investment time-horizon in perspective as well as the other opportunities that it may offer.

With regard to project delays, I would say that the best part of the PPP model is that there is very little room to delay the projects as these are heavily project financed and pose more repayment obligations toward the lenders. When you build your financial models, you do build contingencies — be it in terms of time or cost. Can you measure them accurately? Is there a formula? How much can you predict? These are some of the questions that can only be answered with experience. Take the example of the COVID-19 crisis, which was declared a Global Pandemic by the World Health Organization (WHO) and resulted in a force majeure. Nobody could have measured it; nobody could have realized it. There are always certain provisions in the contract through which you can recover both costs and time, and that is how you try to minimize the associated risks. Also, during the bidding stage, there is always room for further negotiation in terms of the contract’s clauses. That is where you could play a key role. 

So, you do have some period and open clauses where you can negotiate with your client to cover some extra costs. Additionally, working closely with the client is key. In the Umm Al Hayman project, we all committed to invest our time on working with different groups within the client, so we could educate and/or work with them and create value at the same time. The bigger picture is always to create value at the end of the day. 

Sometimes, people get stuck with small costs and lose the bigger benefits. So, you have to see the bigger picture and always create opportunities and value. Simply put, in PPP projects, there has to be some sort of partnership, and decision making has to be done on a timely basis. And when it comes to PPP, sometimes not making a decision is worse than making a bad decision.

Therefore, it is in the best interest of all key stakeholders to assist each other as partners and make the projects successful.

With inflation peaking globally, the cost of running a large project has increased significantly, owing to the increased cost of labor, parts and technology. In line with this, how do you plan for inflation and other geopolitical shifts? 

Managing inflation is fundamental in pricing for the PPP projects, given their long-term nature. There are usually two broad phases in these projects: one is during the construction phase and the other during the operational phase. The inflationary impact during the operational phase is usually covered under the contractual mechanisms in which the pricing is adjusted on a regular basis to cater to the inflationary changes, not only to cover the cost of running the plant but also to ensure guaranteed returns to the shareholders.

The inflationary impact during the construction phase can also be managed through different schemes, and the most common way is to have a fixed EPC cost. Depending on the nature of the PPP project and the time required to complete the construction phase, such inflationary changes are usually included in the pricing model of the EPC. 

There are always mechanisms in the PPP contracts to deal with unforeseen circumstances as they are sometimes beyond anyone‘s control, especially due to the action or inaction of government entities causing a government risk event, and/or due to force majeure events. These clauses protect the interest of the project to either claim for extra time and/or costs. However, under such circumstances, it is fundamental to work together and find solutions to mitigate any such effects and/or minimize their impact on the project. For example, during the COVID-19 pandemic, most of the businesses dealt with limited or delayed availability of contractor services, goods and disrupted supply chains, including challenges around the mobilization of workforce, travel restrictions and obtaining timely permits from various governmental institutes, among others. 

In terms of supply chain, that is where your procurement strategy plays a key role because you have to find alternative means of getting the equipment and material to the site. Based on the respective contractual clauses, you need to find your way around such challenges. With regard to government-related restrictions, you have to engage with your client closely by informing and educating them about their effects and how you can work together to overcome them. 

With COP27 concluding in Egypt, the focus on renewables is back in the Gulf region. Do you see an increased focus on renewable energy in Kuwait? 

Our project is actually an initiative toward sustainability by the Government of Kuwait. The Umm Al Hayman Project is one of the world’s largest wastewater treatment projects, treating sewage wastewater from the southern part of Kuwait to provide agricultural and various other industries with highly treated wastewater (treated sewage effluent — ‘TSE’). The dimensions of the project, which is being carried out by WTE Wassertechnik GmbH (WTE), as a one-stop solution, are enormous. The wastewater treatment plant has an initial capacity of 500,000 m3 per day, with the option to expand to 700,000 m3 per day at the client’s discretion. It is designed for 1.7 million people and is part of a 450-kilometer-long network of wastewater and TSE pipelines, pumping stations and vast reservoirs.

We are not only going to produce clean water which will go back to the ecosystem, we are also going to produce sludge which will later be turned into a fertilizer. With this whole initiative, there is a huge demand in the two agricultural areas of Kuwait to make them more progressive. The plant, which will also receive its own 300 kV substation, will produce its own biogas in the course of the purification process, which will cover a huge part of its energy requirements by itself, i.e. based on design conditions, approximately 40% of the plant’s electricity demand can be covered by its green power house. Overall, this project is the true definition of ESG in Kuwait.

You see, infrastructure projects are substantially financed by consortiums of international and local lenders. And as part of international lending, Green Financing is becoming increasingly important. They have strict ESG compliance requirements which will naturally follow and ensure the implementation of greener infrastructure projects. So, from a future perspective, any big future project that is being financed by an international bank will have a lot of compliance requirements in terms of ESG reporting, etc. Since many banks have a strict risk management criterion on ESG, deciding which projects to finance and which not to is becoming important. And if they do not finance such projects, where does one go? So, naturally these projects will come to a point where they will have to be more compliant with the sustainability requirements. It will be a slow process for the region, in particular. However, we are seeing positive signs, especially with the adoption of green friendly technologies.

On the sidelines of COP27, Kuwait has promised to become carbon neutral by 2050. How can WTE help in achieving this vision? What innovations is WTE bringing to the space of renewable energy?

As a management representative of the Project Company, I can say that one of the reasons why WTE was a successful bidder for this project was its innovation. WTE was able to demonstrate to the State of Kuwait the innovations and projects that they have implemented on a larger extent globally, especially in Europe which has the highest standards in terms of reducing carbon emissions. Therefore, it was the obvious choice to bring them on board. 

Their idea to treat the sludge resulting from the wastewater treatment within an anaerobic digestion plant in order to produce green energy from biogas utilization in combined heat and power plants was ingenious. From a technology perspective, there are many different ideas that are being developed in this project. For example, WTE will provide its in-house developed software called WARIOS for a computerized maintenance management system that will allow engineers to know the history of the plant’s assets and to plan, organize and execute preventive maintenance and servicing measures, making the maintenance process of the Plant that spans over 1.5 km2 more convenient and faster. WTE is building it in a way which will facilitate smooth operation and maintenance, and ensure sustainability for the next 25 years and beyond. With such technologies, WTE is bringing in new innovations into the country. There are a lot of lessons here for the Government to learn from and utilize in the future prospects.