Saudi Arabia undoubtedly faces a major challenge on the water front, but what it has done in terms of reforms, privatization of the sector, regulatory measures and creation of live-wire institutions during the last two years to deal with this problem deserves kudos. What is planned for future is still more impressive. The taste of what is cooking can be made out from the mutli-billion riyal schemes of desalination finalized during the first two months of 2007 - SR 7 billion desalination project in Shuqaiq signed last month, which followed finalization of a SR 13 billion Marafiq project in Jubail in January, among others.
These projects represent something which has not yet been tried elsewhere in the world and are indeed of mammoth size. More similar projects are ahead too. But that is not the complete story. The Ministry of Water and Electricity (MOWE) has revamped the basic structure of the supply and demand management of water resources. This is no exaggeration and, believe it or not, MOWE seems to be developing a new global formula of water sector development, which will become a pattern for other countries to follow, obviously with adaptations to suit local needs.
Before we go into the details of this new formula, let us not think that water shortage is something that hits only Saudi Arabia or other desert-dominated countries. The problem is global in nature. Besides, the problem is most acute not only in Saudi Arabia but also in several countries with large surface water resources at their disposal and the list includes China, India, Pakistan, apart from most of the other Arab countries. Experts say that these countries are characterized by absolute water scarcity in as much as they "will not be able to meet their water needs by 2025". And most of these countries have done precious little homework so far to deal with an emerging crisis of massive proportions, which is fast approaching them.
One finds Saudi Arabia alone making an innovative experiment, among all the countries worst hit. There is no reason why the experiment should not succeed, as it looks today.
We already have the Saline Water Conversion Corporation (SWCC), which currently runs the world's largest network of desalination units producing both drinking water and electricity. The authorities have decided to privatize this corporation.
SWCC is on track to be corporatized as a holding company with separate production and transmission subsidiaries.
Meanwhile, SWCC and the Saudi Electricity Company (SEC) came together in 2003 to set up a limited liability company called the Water and Electricity Company (WEC), which is entrusted with the work of offtake of power and water produced by the Independent Water and Power Plants (IWPP). IWPPs are essentially projects developed by the private sector on the basis of BOO schemes.
To an objective onlooker, what strikes most is the fact that the government has realized that it cannot fight the water battle alone.
MOWE, with the blessings of the Supreme Economic Council (SEC), has initiated a realistic privatization policy and a bold development program.
Privatization has taken various forms in different countries. In the model adopted in U.K., privatization would imply 100 percent dilution of public sector ownership. In an alternative privatization model adopted by France, the assets remain publicly owned but operations are outsourced to bring about efficiency and peak performance.
In essence, it is the French model featuring public-private partnership (PPP), which has caught the imagination of the Saudi policymakers.
The essential features of the Public Private Partnership (PPP) are:
An agreement between public and private sector parties on the provision of public infrastructure and services.
PPP is a variation of privatization in which elements of services previously run by public sector are provided by partnership between government and private sector companies (including top international companies specializing in this field).
Private partners will provide outcome guarantee and obliged to utilize the existing manpower under government authority.
Payment for the services according to identified and improved performance based on share the gain & pain policy.
Global trends in water privatization are outlined below:
The consensus is in favor of having cooperation between private sector and the state in managing water as per French model
This model is normally termed as PPP and there are three major types of PPP in order of risk transfer to private operator
O & M / Management contract
Lease contract
Concession contract
An additional structure BOT exists for bringing in private investment, usually in construction of specific new water or wastewater treatment plants.
According to official sources, there are plans to introduce further reforms in future. The core elements of the future program include a new institutional and regulatory framework and revised tariff structure. A restructuring of the sector will also include water demand management initiatives, including a reduction in non-revenue water, and the introduction of metering throughout the Kingdom. The reforms will also include serious attempts to attract significant private capital for investments for capacity extensions, and other infrastructure improvements, in order to reduce the burden on the national budget.
The further reform strategy for water distribution and wastewater has four key elements:
Formation of the NWC and longterm unbundling of the sector (corporatization and commercialization)
Public Private Partnerships (first simple and then proceeding to more complex and comprehensive models)
Government investment to improve sector performance and to make the sector more attractive for the private sector
Regulation (first based on contracts, later introduction of classic economic regulation).
The government has adopted a challenging vision "to build a worldclass water utility". To achieve its goals, MOWE has chosen a gradual approach: Transition stage: sign 5 years Management Contract to boost sector performance, improve the efficiency of water demand management issues like O&M, leakage, metering, customer services, etc.
In parallel prepare the sector for more complex PPP contracts (concession) and full privatization.
MOWE has taken several initiatives during last 24 months for reforming / restructuring water sector omprising:
Full operational audit of Riyadh, Jeddah, Madinah, Dammam / Al Khobar
UFW study for Riyadh, Jeddah, Madinah, Dammam / Al Khobar
Organization Redesign, HR and Change Management Project
BPR & ERP study
Assessment of customer services
Feasibility study for Riyadh City wastewater treatment plant on BOO basis.
The government machinery by its very nature is not flexible enough to administer PPP type of contracts, negotiations and operations. It is apparently out of this realization that MOWE has decided to set up the National Water Company (NWC). To begin with, the new body will be a government owned statutory body registered as a joint stock company. In the long run, as it evolves, NWC may be made a holding company without operating functions.
These reforms are part and parcel of a new strategy to revive and revamp the water sector. Dr. Walid A. Abderrahman, Professor, Water Resources Management, KFUPM, who is also the Senior Consultant, ACWA Power Development, told SAUDI COMMERCE in an interview that the whole reform process in the water sector stems from the Integrated Water Resources Management (IWRM) devised by MOWE as its main tool to achieve sustainability of water resources within the framework of economic development in the Kingdom.
Dr. Abderrahman, who is a world renowned expert on water management, said: "IWRM is a process which promotes the coordinated development and management of water, land and related resources in order to maximize the resultant economic and social welfare in an equitable manner without compromising the sustainability of vital ecosystem".He added that corrective demand management measures for domestic purposes in urban and rural areas have also been implemented.
Over 30 million retrofits free of cost that covered about 85% of the population were distributed.
Daily savings of about 30% of domestic use or about 524,000 m3 (equal to the production of 4 desalination plants) have been achieved.
This is in addition to awareness program in the media. Dr. Abderrahman said that MOWE has made a signal contribution to Saudi water sector by preparing a Strategic Transformation Plan for the sector with the cooperation of the World Bank and the international companies.
The Ministry has carried out studies in cooperation with these agencies to get exhaustive data on urban supply of, and demand for, water.
Giving an overview of the water sector restructuring process, he drew attention to the major thrust of MOWE activities on the water front: MOWE has started implementing more than 25 projects during the last 18 months for reforming/ restructuring water sector like, conducting full operational audit, assessing customer services, organization structure redesign, UFW study etc.
One feels that an outstanding feature of the new strategy is that, in addition to desalination, due emphasis is given to boost wastewater treatment and recycling. New projects, foreign technology and private sector involvment in this field is certainly welcome.
But new projects alone will not be adequate in themselves. Today large quantities of recycled water produced in modern treatment plants in Al Ahsa in Eastern Province and other centres, believe it or not, remains unused and dumped into the sea currently. This is sheer waste of national resources.
Therefore, utilization of treated water needs to be seriously looked into.
Necessary legislation, a process of persuading farmers and a network of pipes and other infrastructure for proper distribution can no longer be overlooked.
The new STP, one hopes, will set these things right as part of the Saudi bid to meet the emerging water challenge.
Privatization Drive in Water Sector in Full Swing
In preparation to issue the first water & wastewater sector PPP contract in the Kingdom of Saudi Arabia to manage/operate/ maintain water & wastewater sector in Riyadh city, the Ministry of Water & Electricity has started the prequalification process of international companies.
The project scope of work will include managing / operating / maintaining / improving underground water production plants, water & wastewater networks, managing & improving customer services, revenue collection, leakage reduction, training & qualifying of current employees and improving the sector's performance.
It is expected that the RFP will be send to qualified companies this month. The proposals will be received in April and the completion of contractual procedures is expected by the end of this year.
In addition, H.E. Minister of Water Electricity Abdullah Al Hussayen has signed several consultancy contracts to privatize water & wastewater sector in Riyadh city with number of international consultancy firms to assist in establishing the National Water Company & Riyadh City Business Unit, qualifying international bidders, transferring the employees of water & wastewater sector in Riyadh city to the National Water Company, and preparing the PPP contract.
Moreover, the Ministry of Water & Electricity signed in December 2006 the consultancy contracts to privatize water & wastewater sector in Jeddah city to establish Jeddah City Business Unit as well as preparing the PPP contracts (the first contract: to manage, operate, maintain wells & purification plants as well as water & wastewater networks in Jeddah city; the second contract: for wastewater treatment plants in Jeddah city on boo/concession basis) as follows: The first contract of strategic consultancy has been signed with CRA International Ltd in Association with Hyder Consulting as a technical adviser and Ernst & Young (E&Y) Consulting as a financial adviser for the amount of SR 15.9 million to lead the transition process of issuing Jeddah city PPP contract, preparing assets transfer plan from the General Water Directorate of Makkah Region, review the current financial regulations and propose the suitable amendments in accordance with the sector's privatization requirements as well as preparing the RFQ documents for the international bidders for Jeddah city PPP contract, and prepare the scope of work for Jeddah city water & wastewater O&M PPP contract, including definition & validation of the KPIs.
The second contract has been signed with Prima Law Consultations Office in Association with Freshfields Bruckhaus Deringer for the amount of SR 4.7 million to provide legal consultancy services. The scope of work includes reviewing the current legal regulations, legal due diligence, propose and draft the necessary legal amendments, assist the Ministry in drafting the PPP contract to manage Jeddah city water & wastewater operations and complete the legal procedures to establish Jeddah City Business Unit.
The third contract has been signed with Ernst & Young (E&Y) Consulting for the amount of SR 5.1 million to provide HR consultancy services. The scope of work includes providing consultancy services in HR development & change management that aims to prepare & qualify the employees for privatization phase.
The forth contract has been signed with RAYA Technology Company for the amount of about SR 6 million to provide ERP consultancy services.
By Dr. P.K. Pillai
Saudi Commerce and Economic Review 2007
