Booz Allen Hamilton: Public-private partnerships keep Middle East water flowing

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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 and everything related to water distribution.

The amount of available renewable water per person in Middle East and North African (MENA) countries is one-fifth of what it is in the rest of the world, and 80% of the countries fall below the international water scarcity threshold of 1,000 cubic meters (m3) per person per year. In addition, water coverage is limited. Potable water network coverage reaches an average of 75% of the population in MENA countries.

However, many MENA countries have some of the highest consumption rates per capita in the world.  Consumption per person in the United Arab Emirates (UAE), for example, is among the highest in the world, standing at around 570 liters 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% 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%.”

These high consumption rates have led to the rapid depletion of groundwater resources. “Nonrenewable 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 in 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% of domestic water use.” Between 2005 and 2015, MENA countries are expected to spend US$24 billion in desalination costs, with Saudi Arabia and UAE together spending nearly US$13 billion.

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

These supply-side challenges have not yet generated significant demand-side measures, such as increased water tariffs.  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%, compared with nearly 100% in Europe.

“Tariffs for an average consumption (as a percentage of GDP per capita) can reach as low as 0.03% — 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% in many MENA countries.”

Because of all this 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.  Private companies are also used because they can often provide the capital needed to bring aging infrastructures in line with modern standards.

“The private sector should be excited about the trend toward privatization,” says El-Husseini. “MENA governments are expected to spend more than US$100 billion in the water sector in the next five years, with Saudi Arabia, Egypt, and the UAE together spending US$57 billion.”

Experiences 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 privatization projects and are showing early indications of success. However, he cautions, “projects succeed only if they are properly conceived and implemented. Privatization 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.”

Governments have to decide, when pursuing privatization, how to un-bundle 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.

Possible Forms of Private Sector Participation

Governments must also decide the form of private sector participation in water/wastewater. A private entity 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.

However, private sector participation should not be a goal by itself.  Rather, they should carefully consider the most appropriate approach to suit their specific situation and requirements.

When setting up a PPP arrangement, governments should 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.”

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.”

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.

“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 state of the utility is key to identifying areas for possible efficiency gains and developing realistic performance standards, asset rehabilitation plans, and service enhancement programs—some or all of which may need to be specified as KPIs in partnership contracts.  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.”

On the demand side, programs 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 programs and distributing conservation kits to urban centers,” says Dr. Fayad.

In addition, redesigning tariffs to better manage demand and improve cost recovery is still a taboo subject carrying significant political and social risks. Generally though, 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.”

Ultimately, governments pursuing private-public partnerships must reform their entire institutional setting and reorganize their existing institutions. In many 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.”