Istanbul, Turkey

1
OECD Conference Public-Private-Partnership for
Infrastructure Financing
PPP in the MENA Water Sector Challenges and
Opportunities
Istanbul, Turkey November 8, 2006
2
The MENA region is one of the driest regions in
the world, with most countries falling below the
water scarcity level
Renewable Water Resources (2005) (m3/capita/year)
Water scarcity 1,000 m3/person
3
However, some of the MENA region countries have
relatively high water consumption rates
Urban Water Consumption and GDP per Capita
900
800
Canada
Inefficient distribution
Lifestyle drivers
700
600
United States
UAE
Armenia
Venezuela
Australia
500
Consumption per Capita (l/capita/day)
400
Mexico
Japan
Qatar
Georgia
Lebanon
Sweden
Argentina
300
Chile
England Wales
Norway
Saudi Arabia
Austria
Cyprus
Germany
Switzerland
200
Finland
Jordan
Environmental concerns
Morocco
Oman
100
Netherlands
China
Indonesia
Tight supply
Yemen
Senegal
0
0
10,000
20,000
30,000
40,000
GDP Per-Capita Adjusted by Purchasing Power
Parity (USD)
4
The water sectors in the region are facing a
number of serious challenges across the whole
value chain
Sourcing
Treatment
Transmission Distribution
Customer Service
Usage
Sewage Collection Treatment

• Fast depletion of non-renewable reserves
• Ineffective supply management policies and plans
  (e.g., desalination vs. ground and surface water,
  reuse water)

• Issues with quality of water supplied
• Environmental challenges in desalination and
  ground water reserves

• Water distribution coverage rates well below
  international average
• High level of unaccounted for water compared to
  international best practices
• High water delivery costs

• Lack of effective demand management (consumer
  awareness of water scarcity conservation
  policies and plans)

• Limited collection network coverage
• Very low capacity for wastewater treatment
• Operational efficiency issues

• Lack of service continuity
• Long response time
• Tariffs below cost recovery level
• High rate of un-metered water and technical
  problems with meters
• Very low revenue collection rates

5
Water and especially wastewater coverage is
limited
Network Coverage (2005)
Potable Water
Wastewater
MENA Average 75
MENA Average 48
6
Unit costs are relatively high and tariffs cover
less than 20 of delivery cost
Tariff to Cost Ratio vs. Water Delivery Cost
1.2
Oman
Denmark
UK
1
Europe Average
Finland
Sweden
Netherlands(1)
0.8
Australia
Cost Recovery (Tariff/Cost)
0.6
0.4
Lebanon
0.2
Saudi Arabia
Tunisia
Bahrain
Morocco
Jordan
Iran
Egypt
Iraq
Algeria
Syria
0
Libya
0
0.5
1
1.5
2
Water Delivery Cost ( per m3)
7
Delivery is burdened by low productivity in the
water sector
Water and Wastewater Staffing Efficiency(Number
of Staff per 1000 Water and Wastewater
Connections)
19.9
19.7
MENA Countries
Best Practice Average 2.5-3
8
MENA governments plan to spend around USD 100
billion by 2015 to meet the growing demand
Expected Investments by 2015 in MENA Water and
Wastewater Sectors (USD Billion)
24.5
5
18.7
22
13.2
6
8.2
95
4.6
78
12
5.7
94
3.9
3.4
2.8
2.3
31
2.5
1.9
1.3
5
1.4
10
1.1
7
0.8
0.8
0.7
88
10
21
0.3
0.2
9
69
8
6
19
95
90
93
90
91
79
92
94
81
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While PPP is likely to be one of the main
enablers of future sector development, it should
be supported by a holistic reform approach
Sector Reform and Privatization Approach
Select and implement suitable PPP approach
Introduce private sector to increase efficiency,
improve service and ensure continuous and
universal access to quality water
Review water sector policies
Review policies related to water usage and
resources, tariffs, water quality and
environment, and investment climate
Redefine Institutional Setting
Review role of existing institutions and
restructure/reorganize as required, and establish
new institutions to support PPP and reform
initiatives
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MENA countries should explore different PPP
approaches and tailor them to the water sector
maturity and local environment
PPP Participation vs. Sector Maturity
Key Considerations

• Service contracts are at best a cost-effective
  way to meet special technical needs, but their
  benefits are limited
• Management contracts are a good first step, and
  are most likely to be useful where the main
  objective is to rapidly enhance a utilitys
  technical capacity and its efficiency in
  performing specific tasks, or to prepare for
  greater private involvement
• Leases are an efficient way to pass on commercial
  risk and are most appropriate where there is
  scope for big gains in operating efficiency but
  only limited need or scope for new investments
• Concessions have advantages in that they pass
  full responsibility for operations and investment
  to the private sector and so bring to bear
  incentives for efficiency in all the utilitys
  activities
• Build-operate-transfer (BOT) or variations
  resemble concessions for providing bulk services
  but are normally used for greenfield projects,
  such as a water or wastewater treatment plant

Full cost recovery
Divestiture / BOO
Concession / BOT
Lease
Water Sector Maturity
Management Contract
Service Contract
Low cost recovery
Responsibility of Private Sector
Asset ownership with operational and commercial
responsibility
No asset ownership with operational
responsibilities
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PPP initiatives should be driven by clear
objectives and targets and monitored by a set of
evolving KPIs
PPP Key Performance Indicators
ILLUSTRATIVE
KPIs Success Factors

• Asset utilization
• Productivity levels
• Water re-use

Develop Best-In-Class Water Operations

• Easily measurable (uncontested measures)
• Reasonable targets (balance cost and benefit)
• Aligned with government objectives
• Evolving with sector maturity
• Limited in number

• Customer service
• Revenue collection
• Wastewater treatment rate

Focus of KPIs

• Unaccounted for water
• Water / wastewater network coverage

Fix Infrastructure
Meet Basic Needs
Sector Maturity
12
In parallel, governments should develop
comprehensive water resources and usage policies
Policies/Initiatives Focus
Water Resources Policies/Initiatives
Water Usage Policies/Initiatives

• Balancing desalination and groundwater resources
  (balancing cost, national interest and
  availability)
• Driving other water resources including treated
  water, surface water, etc.
• Monitoring legal usage of water resources (mainly
  for ground water)

• Water conservation technologies for urban,
  agriculture and industrial usage
• Coordinated awareness campaigns among various
  ministries (e.g., industry, agriculture, etc)
• Technical standards for high water consuming
  equipment/machines

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and should carefully manage tariff changes and
their impact on the privatization process
Tariff Changes Approach and Requirements
ILLUSTRATIVE
Key Success Factors
Manage demand

• Decoupling of tariff increase from privatization
  initiatives
• Alignment of redesigned tariffs with
  affordability indicators
• Phasing of tariff increases with noticeable
  service improvements
• Setting effective control systems for illegal
  water use

End Use Based
Approach full cost recovery
Customer Based
Tariff Differentiation
Current State
Increase cost recovery
Volume Based
Full cost Recovery
Low Cost Recovery
Degree of Cost Recovery
14
MENA governments should also review their
institutional setting, focusing involvement more
on policy as opposed to operations
Water Sector Change in Institutional Roles
ILLUSTRATIVE
Current
Target Setting
National Utility Company
Government/ Ministry
Government/ Ministry
Independent Regulator
Private Operator(PSP)
Setting Long-term Water Sector Policy
Developing and Implementing PPP Schemes
Setting Tariffs
Planning and Managing Demand
Planning Long-term Infrastructure Requirements
Promoting Water Conservation
Allocating Inter-regional Water Resources
Monitoring Economic Performance
Settling Disputes
Enforcing Quality Standards
Coordinating Operations
Developing, Operating and Maintaining Water
Systems
15
As they restructure and create new institutions,
governments should effectively plan for employee
transition
PPP Employee Transition Challenges and
Strategies
Challenges
Strategies

• May require some lay-offs
• Induce uncertainty that may impact efficiency
• Face push-back from political figures
• Create lack of motivation

• Training of employees
• Effective redeployment plan
• Time to prepare/perform
• Effective change management
• Assurances/guarantees

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Finally, governments should think through the
best approach to adopt when restructuring the
water sector
Alternative Approaches for Restructuring
Evaluation Criteria
High

• Higher price for privatized assets
• Acceptance of stakeholders
• Number of potential investors
• Staying independent form strategic investors
• Improved exit options
• Speed of transformation / privatization
• Access to management / technical expertise

Privatized Utlitiy
Private Sector Controls
High RiskApproach
A
Degree of Privatization
B
Public Water Utility Today
Public UtilityControls
C
Low
Low
High
Restructuring/Value Creation
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UAE Abu Dhabis experience
Select and implement suitable PPP approach

• ADWEA introduces private sector participation in
  water and power through IWPPs

• ADWEA seeks an 8-year operation and maintenance
  contract in ADDC AADC

Review water sector policies

• ADWEA is responsible for implementing policy
  towards the water sector, including its
  privatization

• ADWEA and ERWDA organizes Water and Energy
  Conservation Campaign

Redefine Institutional Setting

• Abu Dhabi Government establishes an independent
  regulator (the Regulation and Supervision Bureau)
  to regulate all companies operating in the water
  and electricity sectors

• ADWEA creates Transco a state-owned company
  responsible for transmission of water and
  electricity

• ADWEA established TAQA as holder of its shares in
  IWPPS

• ADWEA establishes ADDC AADC state-owned
  companies responsible for water and electricity
  distribution

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Saudi Arabias experience
Select and implement suitable PPP approach

• SEC approves 4 IWPPs (3 are already awarded)

• MOWE seeks Management Contracts for main cities

• MOWE seeks BOT for Jeddah and Riyadh wastewater
  treatment

• SWCC develops privatization strategy

Review water sector policies

• MOWE develops strategic transformation plan

• MOWE undertaking national water resources study

• MOWE launches national water conservation
  campaign

Redefine Institutional Setting

• SEC approves set up of National Water Company
  (NWC)

• SWCC launches restructuring and unbundling of
  Desalination and Transmission

• MOWE launches restructuring of sector into
  regional utilities

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Omans experience

• MNE seeks to review the concession agreement
  awarded and to involve the private sector in the
  state owned companies

• MHEW introduces private sector participation in
  billing and collection contracts awarded to two
  companies

Select and implement suitable PPP approach

• MNE approves Barka and Sohar IWPPs and is in the
  process of privatizing Ghubra

Review water sector policies

• MNE is developing a water and wastewater sector
  privatization strategy

• MNE seeks to draft a water sector law

Redefine Institutional Setting

• MNE forms two state-owned companies OWSC and
  SSDSC, which operate as a concession, to develop
  sewage network and STPs in Muscat and Salalah

• MNE seeks to redefine the water and wastewater
  sector structure and institutional setting and to
  introduce new legal and regulatory requirements

20
OECD Conference Public-Private-Partnership for
Infrastructure Financing
PPP in the MENA Water Sector Challenges and
Opportunities
Istanbul, Turkey November 8, 2006