Saudi Arabia’s National Water Company (NWC) in May awarded a water management contract for the cities of Mecca and Taif to France’s Saur in partnership with the local Zamil Operations & Maintenance Company. It was the latest in a series of deals signed with private-sector companies intended to improve the quality of services in the kingdom.

Management is about keeping those leakages down to a reasonable level and knowing when to replace the asset

Bob Smith, Metito Berlinwasser

The Ministry of Water and Electricity first unveiled plans to introduce competition into the country’s water sector in 2007. The process was formally started in early-2008 with the tendering of a contract to manage Riyadh’s water networks. The objectives of the contract included reducing water leakage by half, ensuring continuous water supply and connecting up more homes to the wastewater network. The tendering was started shortly before the kingdom’s NWC was formed and took over the process.

Coordinated response

At the time Deputy Water & Electricity Minister Loay al-Musallam said it would initially focus on five large cities – Riyadh, Jeddah, Mecca, Medina and Damman. Once the kingdom had a greater understanding of what could be achieved, it would be implemented in other parts of the country.

The five cities together account for 65 per cent of water consumed in the kingdom. At the time the initiative was launched, water supply in the kingdom was unreliable. Jeddah, for example, received water just once every 10 days.

In an effort to cast the net as wide as possible … NWC may have lost the interest of some international firms

As the first GCC country to embark on such a scheme, Saudi Arabia’s decision to roll out the contracts on a city-by-city basis is not surprising. The contracts are large and as an essential infrastructure service, a certain degree of trepidation was to be expected.

But as a country with an ageing water infrastructure, with leakages estimated at 35 per cent of total water supply, a broad and coordinated response was needed. The introduction of management contracts was deemed the best way of running and improving the system.

By introducing the performance-based water management contracts, the kingdom has set out a framework to encourage private companies to meet government’s targets. The first task in the Riyadh contract was to monitor the level of water loss and calculate the occurrence of non-revenue water (NRW).

NRW is defined as the volume of water not billed to customers as a share of the total water produced. The lost water can be real, due to leaks, or apparent because of unauthorised consumption or metering inaccuracies. NRW also includes authorised unbilled consumption, such as water used for firefighting or by mosques.

The calculation of this value is an important stage as estimates of the amount of water that is not billed to customers is often wide of actual figures. For instance, some official figures for Jeddah have stated that 103 per cent of water in the system has been billed to the customer.

A level of loss is always to be expected, but as Bob Smith, development manager at UAE/German joint venture Metito Berlinwasser, says: “Management is about keeping those leakages down to a reasonable level and knowing when to replace the asset.”

Water management

This is especially important in the Middle East, as water is more costly to produce in the region than in most other parts of the world. While water produced through non-desalination methods costs about $0.30 a cubic metre (for production and transmission), desalinated water costs about $2 a cubic metre. The issue is further enhanced as water usage per capita is significantly higher in the Middle East than in the rest of the world.

NWR figures range across the region but are well above comparable figures for elsewhere in the world. In Bahrain, 20-23 per cent of water is lost in leakage and its NRW figure is 25-30 per cent once the non-physical losses are accounted for. The government aims to bring this figure down to roughly 15 per cent. The UAE has low water-loss figures, largely because most of the infrastructure was put in place within the past decade.

Countries in the Middle East tend to manage water resources on a reactive basis, meaning that when a leak is noticed it is fixed as opposed to using proactive techniques of sub-surface leak detection. By introducing expertise from international water companies, management contracts offer the opportunity for governments to incorporate best practices from other countries.

There is considerable flexibility when establishing management contracts. A government can structure the management contract as it sees fit, in terms of scope and level of risk allocated to the manager, and bidders will ultimately price their bids accordingly.

But according to some industry experts, Saudi Arabia decided to offer a low-risk management contract to the market, presumably in the hope that the tender would draw as large a group of bidders as possible.

The first and second contracts tendered – for Riyadh and Jeddah respectively – drew a healthy level of interest. France’s Veolia Water won the $60m contract for Riyadh, while French competitor Suez Environnement took the $70m Jeddah water management contract.

However, the third contract, which covered Mecca and Taif, did not draw the same number of bidders. The Saur/Zomco bid was selected over only one other joint submission from Malaysia’s Ranhill, India’s Jamshedpur Utilities & Services Company (Jusco), and Saudi Arabia’s Al-Amal Group, despite 11 groups having been prequalified for the project.

The drop-off in the number of bidders may be the result of several of factors. Firstly, running a management programme in Mecca as opposed to the larger metropolitan cities of Jeddah and Riyadh may have deterred some bidders.

Profit margins

The limited interest may also be a result of the structure of the contract. The low-risk nature of the contract may appeal to smaller risk-averse and typically local companies. But large international players may have been put off by this as it implies reduced potential profits.

This is important as those cities earmarked for management contracts are growing at a fast pace. Therefore, a large water management firm could be expected to want to absorb the risk in anticipation of securing a good margin.

According to an industry source, Suez Environnement and Veolia Water were keen to bid for the contracts in Riyadh and Jeddah to ensure they would not be excluded from future deals that may offer up more potential.

Either explanation does not bode well for the upcoming tender in Medina, another holy city that may similarly deter bidders and one with the same management contract model.

A request for proposals for Medina will be issued in September with bids due to be submitted in November. The contract award is scheduled for January 2011.

After Medina, the next contract to be tendered will be for Dammam and Khobar. The deadline for bids is planned for August 2011 and an award is due in October that year.

In an effort to cast the net as wide as possible and avoid deterring smaller players, NWC may have lost the interest of some international companies. These are the players with the greatest to offer in terms of expertise and best practice. 

Conversely, had Saudi Arabia opted to move forward with operations and maintenance contracts instead, the scheme could have seen few bidders, as there is a limited supply of companies able to carry out the work on this scale and assume the level of risk. Fewer bidders may also have driven up bid prices.

Oman has also begun tendering water management contracts. A total of five bids were received in April – all from large international players. Technical bids have been opened, which will be followed by the opening of financial bids.

According to sources close to the tender, the Saudi Arabia experience was drawn upon when putting together the contracts for Oman. Aspects relating to scoring of the candidate’s bids and risk allocation were adjusted with the intention of attracting international players.

Contract renewal

Some industry experts have indicated that Jordan may be next to tender water management contracts. Also, Abu Dhabi signed its operations and maintenance (O&M) contracts four years ago, which are now coming up for renewal. The emirate may well decide to follow a different process with the next round.

However, Saudi Arabia and Oman have their own unique water management needs. Elsewhere in the Middle East, contracts may continue to be issued on an O&M basis as this lends itself to a project-by-project awarding system that makes the chosen contractor accountable for the success of the project.

Management contracts, however, offer the possibility of carrying out a cohesive upgrade of an entire water network and bringing in expertise. As they typically run for a duration of 5-7 years, they give governments time to decide on future policy, while the current assets are being monitored and improved upon.

Saudi Arabia’s experience will be watched closely by other counties in the region. If the water services in the largest cities in the kingdom are significantly improved by the water management contracts, other countries can be expected to follow suit. But should they do so, the trick will be to structure the agreements in such a way that makes them attractive to both international and local firms alike.