Paying the price

14 June 2002

The long-suffering inhabitants of Algiers have had enough. In early June, residents of the capital's water blackspots took to the streets, setting alight government buildings in protest against Algeria's worsening water shortage. Few would dare deny the validity of their complaints. For more than 20 days there has been no running water in some districts of the city. Households have requisitioned receptacles of all shapes and sizes to store the precious resource and fractious crowds lining up behind emergency water carriers have become a frequent sight.

The statistics amply illustrate the plight of the city's 3 million population. Rainfall this year has totalled 180 millimetres so far, well below the average 800 millimetres. The dams supplying the capital are replenishing at one-third their usual rate and the authorities have been forced to drill 200 metres down into the water table rather that the usual 40 metres, risking serious overexploitation of groundwater resources.

The boiling discontent in Algeria has brought to the fore the potential political crisis facing governments across the Middle East. The need for water is at a premium throughout the region as countries rich and poor battle to conserve and boost supplies to nourish their growing populations and sustain the means for economic growth.

The problem is by no means new. For decades there have been dire predictions of a looming water catastrophe in the region and billions of dollars have already been pumped into enhancing water infrastructure and facilities. However, with consumers and state-owned utilities feeling few financial incentives to increase efficiency, cost recovery of investments has been minimal and services have continued to deteriorate.

The dilemma centres on the issue of price. With water considered a natural right for all, the concept of charging anything but a nominal sum for water provision is an anathema for most governments. In the mid 1990s, for example, the long-run marginal cost of supplying a cubic metre of water to urban areas in Algeria, Egypt and Morocco was $0.52, $0.25 and $0.50 respectively, but consumers in those areas were only charged $0.12, $0.03 and $0.30.

Unrealistically low tariffs encourage consumers to waste water and the collection of payments can become uneconomic for the water authorities. The result? A vicious circle of declining reinvestment in the water infrastructure and a consequent deterioration in operations and services.

As the physical and institutional corrosion has spread, there is a growing realisation that a new solution is urgently needed. A minimum $15,000 million of capital investment is required in the region's water sector by 2015, delegates were told at the Fourth International Symposium on Water held in Cannes on 3-7 June, and governments are increasingly turning to the private sector for the answers.

Private companies have brought new variables to the equation. Technical and contracting expertise, technological and commercial innovation and recourse to private finance are just some of the new ingredients. However, such expertise comes at a price. Driven by a hunger for profits, private companies are naturally cautious of where they are prepared to operate and on what terms. Regional governments have found that the onus has fallen on them to establish a benign regulatory environment and sufficient incentives to attract the private operators.

In the area of water network management, it is the big cities that are most likely to attract private sector participation due to their pre-existing water networks, smaller distances, and comparatively wealthy populations. In Morocco, consumers are already reaping the benefits. In Casablanca, Lydec, a subsidiary of France's Ondeo, has solved the city's seasonal flooding problem and has dramatically reduced the wait for reconnections. Flood protection is also high on the agenda for the kingdom's newest private operator, Vivendi, which won the network management concession for Tangiers and Tetouan at the end of 2001. The concessionaire plans to invest some $438 million in water and wastewater projects, with the majority taking place in the first 10 years of the 25-year concession.

In Amman too, services are improving as the four-year management contract for the water and wastewater networks won in 1999 by a consortium of Suez Lyonnaise des Eaux and Montgomery Watson-Arabtech Jardaneh takes effect. More importantly, other governments should note that the consumers seem willing to pay. 'Since water provision and quality in the capital has grown better, consumers are less inclined to complain if the charges go up,' says one local resident. 'At least now we can see where our payments are going and can enjoy the benefits that paying the charges brings.'

But not everyone is so sanguine about the rising price of water. Among the poorer strata of Middle East societies even a small increase can make the cost of water prohibitive. Once private equity is involved in the equation, then the proportion of those unable to pay for the water is likely to rise as the drive for greater profitability pushes the price up.

To counter this, governments seek to cushion the impact of the real cost of water through subsidies. With private generation, the government is able to buy the water directly from the generator, injecting the subsidy high up the supply chain. In Abu Dhabi for example, water from the emirate's first independent water and power plant (IWPP), Taweelah-A2, is supplied at AED 11.68 ($3.18) a 1,000 gallons while non-national consumers pay only AED 5.00 ($1.36) for the same volume, and locals still receive their water for free. With substantial government revenues, Gulf states are under less pressure to reduce the high level of subsidies. For the poorer countries paying the subsidy directly to the private network managers, pricing remains a crucial issue. Too high and the weight of the subsidy places an enormous burden on the authorities, as well as reducing the incentive for efficiency by the private operator. Too low, however, and the project will be unattractive to private companies.

'The key is to encourage equity investment in performance rather than tariff,' says Hugh Goldsmith of the Water Division at the European Investment Bank. 'Companies should be encouraged to compete for projects on innovation rather than price.' A commitment by private operators to a universal service obligation is another way of ensuring that private involvement in the distribution networks does not prioritise profit making over wider water provision.

The issue at the heart of sustainable water supply is the need to dismantle existing regressive subsidies. With prices under private involvement bearing a closer reflection of the true value of water, opportunities arise for cross-subsidisation. The rich can effectively fund the water consumption of the poor. While feasible and desirable in theory, there are in reality few governments who are willing to step into this political minefield.

The same reluctance to upset the status quo prevents the authorities from pushing through measures to cut down on unnecessary, water-intensive farming techniques. Agriculture accounts for as much as 87 per cent of water use in some countries, yet the returns do not match the exploitation of the precious resource. As examples elsewhere in the world have indicated, increasing the tariff on water for irrigation leads swiftly to a rise in water-efficient crops and irrigation methods.

It is this aversion to change that is the main driver behind private participation in the first place. The economic and intellectual arguments for raising tariffs are overwhelming: with fewer subsidies, consumers become customers. Knowing the proper value of water they limit their use and cut back on waste, and in return for the tariff they pay they demand quality and efficiency from the suppliers. However, few governments have shown much willingness to implement a market-orientated approach to water resources themselves.

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