A thirst for change

25 January 2002

The steady trickle of economic reform in the kingdom has gained new momentum of late, allaying fears that the process was starting to stagnate. In mid January the power regulator was appointed, ending a wait of about eight months. Days later, Crown Prince Abdullah re-energised the foreign investment programme with a speech calling for investors to be 'given all guarantees and incentives' to invest in all sectors. Even the gas initiative, which is enmeshed in the fine detail of hard negotiation, is said by foreign oil executives to enjoy greater political support from the top than ever before.

Now the focus has turned to the water sector, with official confirmation that the full establishment of the new Water Ministry is imminent. 'The new ministry is already agreed, the next step is to set it up. Within two months, the whole set-up will be moved to a new ministry building and a new minister will be appointed,' Agriculture & Water Minister Abdullah bin Muammar told MEED at the Agriculture & Investment Forum of Jizan Area and Tihama Plains in Riyadh on 15 January.

The evident sense of urgency is welcome. With authority in the water sector spread between four ministries, seven regional water networks and a number of other bodies, no central strategic plan has been developed to meet the kingdom's needs. New desalination capacity is in high demand. So are new water and wastewater networks for the kingdom's swiftly rising population and ballooning cities. All new developments have been put on hold until the creation of the ministry.

'What we want to do is take the scattered authorities that are now responsible for the water sector and bring them together to make a new system covering all needs,' said Muammar. 'When it is set up, it will consider a new masterplan for the sector including the participation of the private sector and new tariffs for water consumption.'

The Water Ministry will be formed by hiving off sections of existing ministries and amalgamating them under the leadership of the new minister. The process is highly complex, involving the transfer of a large number of personnel and assets and their reintegration as a smoothly running team. Muammar said that this has delayed the actual establishment of the ministry since it was announced last summer.

'When the new ministry is set up, it will be the biggest after Defence & Aviation,' says another senior Agriculture & Water Ministry source. 'Water provision is the most important aspect of government in the kingdom. It is now very disorganised with lots of different bodies. I guess there is some competition between ministries and bodies because they don't want to lose their assets and employees to a new ministry.'

They will also lose a slice of their budgets. 'There was no separate budget allocation for the new ministry because the finance minister has taken the budget from the ministries now responsible for the water sector. It will be reassigned along with employees and assets,' said Muammar. 'The budget and plan have already been adopted and there is not a problem with the other agencies on this issue, or with asking them to part with some authority.'

Integration is the watchword. 'The new sector will be very centralised,' says the ministry source. 'It will also be more cost efficient. My own estimate is that we will make savings of about 20 per cent on the water network side within two years of the ministry being set up.' Further savings are expected through the participation of the private sector in desalinated water production and the imposition of higher tariffs on consumers.

Both are sensitive subjects with the public. Consumers dislike the prospect of higher tariffs and are somewhat wary of allowing water supply to slip from government hands. But as with the power sector, the public purse is becoming inadequate to finance expansion after expansion far into the future. The Saline Water Conversion Corporation estimates the cost of meeting desalination demand at about $2,700 million each year until 2020. Successful projects elsewhere in the Gulf have helped to cultivate a growing understanding of private power and water projects. The public is becoming more aware that private plants can operate at a much cheaper rate.

But customers will pay more for their water anyway. 'Tariffs are now under study by the Supreme Economic Council,' says the ministry source. 'At the moment we have a tariff of 10 halalas for the first 50 cubic metres you consume. That will be raised to 30-50 halalas. It seems like a large increase and we know from experience that consumers will complain, but the tariff will still be small compared with the cost of production.'

The government learned a salutary lesson when power tariffs were raised in summer 2000. As the hot summer weather forced people to increase their use of air conditioning, electricity bills soared, leading to a consumer backlash and a government retreat. Future increases are likely to be staged in a less sudden and acute manner, with tariffs moved upwards steadily but slowly.

The imposition of higher tariffs will help stem the flow of water wastage, now rife in the kingdom. It will also accelerate the drive to set up independent water and power projects (IWPPs). A number have already been proposed. The Saudi Arabian General Investment Authority has awarded investment licences for about 20 projects. 'There are offers from companies from the US, the UK, Japan, France, South Korea and Saudi companies as well who wish to participate,' said Muammar. 'Some of these companies have already proved they are capable of working in the Gulf. Now they are waiting for the opportunity here. The Supreme Economic Council is aware of the situation and is even now considering the offers. There are complete studies and offers under review, but there are no decisions yet.'

Most of the major international and local players are understood to be on the list, but none of them are expected to pursue their projects until there is a more solid idea of what they can expect from the government. 'It will be for the new ministry to decide how a deregulated market will work,' says the ministry source. 'Probably, there will be a regulator like in the power sector. The ministry will be the offtaker from IWPPs.'

Some projects are more advanced than others. Japan's Sumitomo Corporation is pursuing a major desalination and power co-generation plant in Jubail that would come under the authority of the new Power & Water Utilities Company for Jubail & Yanbu (Marafiq). There is also the matter of the desalination plants planned for the gas initiative. 'There will be three new desalination plants of 700,000 cubic metres a day (155 million gallons a day) each as part of the gas initiative,' said Muammar. 'However, these are running independent of the Water Ministry because they are to be finalised before the ministry is set up.'

Foreign participation is set to be limited to desalination and wastewater projects. Water transmission was on the negative list of activities barred to foreign investment and is likely to stay there.

The immediate issue of production and distribution capacity shortages must be addressed. Progress in the gas initiative and with individual private projects is welcome, but cannot be viewed as either inevitable or imminent. Muammar says that plans for the government to add new capacity itself can only be considered properly by the new ministry.

The creation of the new ministry is only the beginning of a series of vital changes in the water sector. The challenge of providing the kingdom with an ample supply of fresh water is becoming harder by the day. Capacity additions and the development of a long-term plan to meet future needs can only be developed under the aegis of a central strategic decision making body. And that is why the formation of this new ministry should be greeted with a cautious welcome as the first step on a long, long road.

Exchange rate: SR 1=halalas 100; $1=SR 3.75

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