Public-private partnerships can help keep Middle East water flowing with effective management practices and help governments conserve water, recoup costs

The water needs of Middle Eastern countries are growing at a significant rate, while the cost of providing this valuable resource is increasing while nonrenewable groundwater reserves are shrinking. As a result, Middle Eastern governments are increasingly turning to public-private partnerships (PPPs) to manage their water resources – everything from water production, transmission and distribution to wastewater collection and treatment.

The challenges facing the water sector in the region are significant. Water is scarce; in fact, the amount of available renewable water per person in the Middle East and North African (MENA) countries is one-fifth of what it is in the rest of the world, and 80 per cent of the countries fall below the international water scarcity threshold of 1,000 cubic metres (m3) per person per year. In addition, water coverage is limited. Potable water network coverage reaches an average of 75 per cent of the population in MENA countries.

Little water, big demand
Despite this scarcity, many MENA countries have some of the highest consumption rates per capita in the world – rates that are growing, even with intermittent supply and non universal distribution. Excluding agriculture, consumption per person in the United Arab Emirates (UAE), for example, is among the highest in the world, standing at around 570 litres per person a day – more than three times the world average.

"High consumption rates are mainly driven by aggressive agricultural policies, which sometimes account for more than 90 per cent of a country's water usage," says Ibrahim El-Husseini, vice president of Booz Allen Hamilton, a global strategy and technology consulting firm. "This is further accentuated by high technical and commercial losses in the water systems, also referred to as UFW for unaccounted for water, reaching in some places as high as 40-50 per cent."

These high consumption rates have led to the rapid depletion of groundwater resources, as water is sucked from natural aquifers more quickly than it can be replenished. "Non renewable reserves that took hundreds or thousands of years to accumulate would be depleted in a couple of decades at current exploitation rates," explains Dr Walid Fayad, principal, Booz Allen's Global Energy and Utilities Practice.

"Because natural aquifers are being significantly stretched," adds Fayad, "there is an increasing reliance on desalinated water, which costs up to three times as much as groundwater. In most of the Gulf Cooperation Council (GCC) states, it accounts for more than 50 per cent of domestic water use." The reliance on desalinated water comes with a heavy price tag. Between 2005 and 2015, MENA countries are expected to spend US$24bn in desalination costs, with Saudi Arabia and UAE together spending nearly US$13bn.

MENA countries face a final supply-side challenge: the fact that in MENA countries, at best, only 30 per cent of water consumed is collected and treated. In MENA countries, wastewater coverage averages only 48 per cent. "Aside from the environmental challenges raised, this also means that precious litres of water that could be reintroduced into the system, e.g., for agricultural use, are instead discarded after one use," says Dr Fayad.

Unrecovered costs
These supply-side challenges have not yet generated significant demand-side measures, such as increased water tariffs. In fact, in most GCC countries, water tariffs are much lower than they are around the world. Water costs in some MENA countries are up to three times higher than average costs in Europe, but the average MENA tariff-to-real cost ratio is 15 per cent, compared to nearly 100 per cent in Europe.

"Tariffs for an average consumption (as a percentage of GDP per capita) can reach as low as 0.03 per cent – a tenth of what is charged in developed countries," says Booz Allen's Ahmed Youssef. "And to make matters worse, actual cost recovery is even lower because of low revenue collection rates – less than 50 per cent in many MENA countries."

All told, cost recovery in MENA countries rarely exceeds 20 per cent, explaining why many of the region's water sectors remain heavily subsidised and in the hands of government entities, with limited private sector participation and the absence of clear regulatory regimes.

Private sector support
To address the problems of limited supply, high demand, and inadequate cost recovery, governments in the Middle East and around the world are increasingly turning to the private sector for support in developing and delivering water and wastewater services. Private corporations are brought in to provide new technologies, increase efficiency, and help governments ensure continuous, universal access to quality water. Just as importantly, private companies are used because they can often provide the capital needed to bring aging infrastructure in line with modern standards.
"The private sector should be excited about the trend toward privatisation," says El-Husseini. "MENA governments are expected to spend more than US$100bn in the water sector in the next five years, with Saudi Arabia, Egypt, and the UAE together spending US$57bn." The bulk of the spending will pay for water delivery, while some 12 per cent is expected to be used for wastewater collection and treatment.

Experiences around the world have shown that private sector partnerships can bring significant improvements to the water sector, says El-Husseini. Morocco, Jordan, the UAE, Oman, and Saudi Arabia are all undertaking privatisation projects and are showing early indications of success. However, he cautions, "Projects succeed only if they are properly conceived and implemented. Privatisation must be supported by a holistic reform approach, one that involves carefully reviewing current water sector policies and institutions and selecting an appropriate partnership strategy."

Choosing the right approach
The first question governments have to decide when pursuing privatisation is how to unbundle their water assets and present them to the marketplace. "Governments generally divide their water sector either by geography or by value chain," says Dr Fayad. Saudi Arabia, for example, has divided its water sector into geographic regions, where water directorates are responsible for water and wastewater services in an integrated way. Private sector participation will be sought at the level of these regions. In contrast, in Abu Dhabi and Tunisia, the water and wastewater sectors are separated and managed by different financially independent entities at the national level.

The second question governments must decide is how extensively to privatise water/wastewater management. A private ent-ity may do as little as operate a single facility or may do as much as own facilities and take full operational and commercial responsibility for water/wastewater service delivery. A recent Word Bank report summarised the various types of public-private partnership arran-gements that are available:

• Service contracts, which provide a cost-effective way of meeting special technical needs at a utility that is already well managed and commercially viable. Their use is no substitute for full-scale reform, however, and they often have limited benefits when used in a system plagued by inefficient management and poor cost recovery.
  
• Management contracts, under which a private operator is responsible for operating a system in exchange for a fee. Management contracts can help rapidly enhance a utility's technical capacity and its efficiency in performing specific tasks. They can also help prepare a utility for greater private involvement.
  
• Leasing contracts, under which assets are leased to a private operator who recoups the cost of the lease from end users. Leases are an efficient way to pass on commercial risk and are most appropriate where there is the potential for large gains in operating efficiency but a limited need for new investments.
  
• Concessions, under which a private oper-ator is responsible for running an entire
  system, including planning and financing investment, usually for the duration of a 20-30 year contract. Concessions serve as a route to full-fledged private participation and are attractive in situations where large investments are needed to expand coverage or improve the quality of services.
  
• Build-operate-transfer (BOT) and build-own-operate (BOO) arrangements resemble concessions but are normally used for greenfield projects such as water or wastewater treatment plants.

However, private sector participation should not be a goal by itself. Governments that decide to embark on this journey should not adopt a cookie cutter approach by emulating others' experiences. Rather, they should carefully consider the most appropriate approach to suit their specific situation and requirements.

Moreover, when setting up a PPP arrangement, governments establish standards – often called key performance indicators, or KPIs – governing private entities' work. "Governments must set reasonable, measurable targets that align with their objectives and that evolve over time as the sector matures," says Youssef. "Early on, KPIs may be as simple as requiring that a company meet a community's basic water needs. Over time, the KPIs should evolve and require the company to develop and put in place best-in-class procedures for water management."

A roadmap to private sector participation
Private sector participation can drive change in a region's water sector, but it must be part of a broader reform if long-term viability of the water sector is to be secured. "This does not necessarily mean that governments should try to implement all required reform initiatives at once," says Youssef. "Rather, they should implement reforms systematically, over time, when the sector needs them and when it's ready to receive change."

To do so, governments need a clear, well thought out roadmap that manages the complexity of the transformation effort and ensures that all initiatives serve a common objective and generate desired outcomes. This roadmap must address several key questions:

• What is the state of the existing utility?
  
• How compatible is the regulatory regime with private sector participation?
  
• How committed – or opposed – to private sector participation are key stakeholders?
  
• What are the main risks that must be mana-ged to ensure that private sector participation can succeed?

Governments should explore private sector participation approaches with clear objectives in mind, be they increasing efficiency, improving service, ensuring continuous and universal access to quality water, attracting private investors capital or enhancing the transpar-ency of cost and operational performance.

"Governments also need to cultivate an attractive investment environment for the private sector," says Youssef. "They need to ensure that it's easy to do business in their country by relaxing taxation requirements, providing financial assurances to investors and offering private operators additional financial incentives related to strong performance, among other things."

Understanding the current environment
None of this can be done without undertaking a comprehensive assessment of the water sector to better understand the key levers affecting the sector's long-term sustainability and performance. The assessment must include current and proposed coverage, water quality and environment, characteristics of service, inventory of assets, performance standards, human resources, tariffs and financial performance.

"Understanding the current state of utility is key to identifying areas for possible efficiency gains and developing realistic performance standards, asset rehabilitation plans, and service enhancement programmes – some or all of which may need to be specified as KPIs in partnership contracts," says Youssef. "Having a comprehensive understanding of the current state will also help in discussions with key stakeholders, such as Ministry of Finance representatives, regarding the possible need for continued government subsidies."

Managing demand
On the demand side, programmes to drive water conservation should be pursued, such as launching awareness campaigns and adopting new conservation technologies. "For example, Saudi Arabia is one of the leading countries in developing awareness programmes and distributing conservation kits to urban centres," says Dr Fayad.

Although some countries are addressing conservation in urban areas, few – Saudi Arabia included – have effectively tackled the huge demand created by the agricultural sector, traditionally an enormous and sensitive problem to manage. In addition, redesigning tariffs to better manage demand and improve cost recovery is still a taboo subject, carrying significant political and social risks. Such a redesign would generally involve moving from a simple volume-based system to one that assigns different rates to different customers (i.e., a hotel would pay a different rate than a residence), to one that is based on the end use of the water.

In the latter case, for example, a government could reduce water rates for industry as a way of encouraging growth in that sector. Generally, the more sophisticated the tariff structure, the better a government is able to manage demand and fully recoup costs.

"Successful implementation of tariff restructuring often combines several key ingredients," says El-Husseini. "Namely, a thorough assessment of consumers' ability and willingness to pay for services, the timing of tariff changes in tandem with significant and visible improvements in service, and a communications campaign that explains the rationale for and benefits of tariff changes and disassociates tariff increases from private sector participation."

Managing supply
On the supply side, the use of various water sources (e.g., groundwater, surface water, desalinated water, and treated and reused water) needs to be carefully balanced. A clear policy that addresses the sensitive tradeoffs between total costs, subsidies, security of supply and long-term national interest must be developed and implemented.

In addition, governments need to ensure that their supply practices meet international environmental standards and standards governing water quality, including those for treated water.

Developing a new framework
Ultimately, governments pursuing private-public partnerships must reform their entire institutional setting and reorganise their existing institutions. In many of the new frameworks, the government focuses on planning and policy setting and hands over operation of physical assets to the private sector and responsibility for tariff setting and regulation development to an independent regulator.

The transition to a new framework can't happen overnight. "Introducing private sector participation into the water sector is a journey, not a single event," says El-Husseini. "And its success is contingent on how well governments prepare for it."

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