It may have taken longer than envisaged, but Saudi Arabia’s National Water Company (NWC) is expected to begin operating this month. It is a manifestation of Riyadh’s commitment to the process of privatising the kingdom’s water infrastructure.

Water and wastewater networks in the country’s largest cities will be sold off, as will wastewater treatment and desalination plants owned by the Saline Water Conversion Corporation (SWCC).

The privatisation is unprecedented in scale in the region and, although it has been subject to delays, the government remains committed.

“Saudi Arabia is a vast country,” says Omar al-Ghamdi, president of the local Water & Electricity Company (WEC). “With huge demand for power and water, with consequent shortages, the government is keen to expedite the implementation programme to meet these demands.”

As NWC assumes responsibility for the country’s water and wastewater assets, it will also play a key role in each privatisation.

“NWC will provide all services related to the underground water sector, drinking water distribution and collection, treatment and disposal of sewage water on a sound commercial basis,” says Loay al-Musallam, deputy minister for planning and development at the Water & Electricity Ministry. “All rights and properties of the state in these sectors will be transferred to the company in a phased manner. NWC will replace the present water directorates across the kingdom.”

Improving quality

NWC will also become the government partner for private investors, who are being called on to increase water and wastewater capacity and improve the quality of service across the sectors.

Several different models are being used for the private schemes, from joint government financings to fully private projects. This
will eventually allow Riyadh to increase waters tariffs and make the ailing sector economically viable.

The privatisation of the kingdom’s water distribution infrastructure is most advanced, possibly because it is the simplest. Private companies will enter into public-private partnerships (PPPs) with NWC for the management of water and wastewater networks across the country.

Riyadh and Jeddah were the first two cities to be awarded contracts in the privatisation process, and the results are already visible. France’s Veolia will manage Riyadh’s networks and a second French company, Suez, together with the local Acwa Power Development, will take over water and wastewater distribution and collection in Jeddah.

Medina and Dammam are next on the list, with the government planning to issue tenders within six months.

The role of NWC is most clearly defined in this area. In the short term, it will set up business units for each major city and enter into PPPs for the operation and maintenance of water distribution networks.

“NWC’s activities will start from Riyadh, the largest consumer of water in the kingdom,” says Al-Musallam. “Within the next three months, the company will move to take over water and wastewater operation in Jeddah. Then it will take over the operation of Dammam, Medina and Mecca in a phased manner. These five cities account for 65 per cent of water consumption in the country.”

Long-term concessions

The government expects that once the man-agement contracts run out, in six or seven years’ time, they will be replaced with long-
term concessions. Alternatively, individual city business units could be sold off to the private sector.

“However, spinning off the city business units will depend on the readiness of the units, in terms of operational efficiency and performance achieved during the management contracts,” explains Al-Musallam.

According to industry sources, it will not be possible to privatise the business units until they are profitable.

But the government cannot ask consumers to pay more for their water until the quality of the service on offer improves. In general, tariff increases are extremely unpopular and difficult to enforce.

Although the management contracts cover wastewater collection, they do not include treatment. Wastewater treatment plants are being sold off in a separate process, with Riyadh leading the way and Jeddah set to follow.

The aim of this activity is to encourage private sector companies to upgrade or even rebuild the waste-water treatment plants as part of their deals.

The ministry plans to invite expressions of interest in April once it has received approval for the implementation plan from the Supreme Economic Council. “The implementation plan consists of a road map of the privatisation programme for wastewater treatment plants in four major cities,” says Al-Musallam.

Riyadh’s wastewater treatment plants will be offered to private investors as two separate packages under a 25-year concession contract. The first includes projects at Manfouha and Al-Hayer.

It will cover the operation and maintenance of existing plants at Manfouha until they are decommissioned in 2015, the sale of a phase 1 plant with a capacity of 88 million gallons a day (g/d) to be built at Al-Hayer, and the construction of a phase 2, 88 million-g/d plant on a build-own-operate basis at the same site.

Under the second package, an investor will buy an existing 22 million-g/d plant at Al-Kharj, as well as a second 22 million-g/d plant currently under construction. The private developer will then build a new 22 million-g/d plant, also on a build-own-operate basis.

Two project companies will be set up to manage the schemes. NWC will take a 40 per cent stake in each company, with the private developer holding the difference. The new structure will help boost investment in the wastewater sector, where the government estimates $23bn will be needed over the next 20 years.

However, treated effluent re-use in the kingdom is marginal and accounts for only 6 per cent of drinking water supply. Instead, the country relies on desalination to meet water demand. Saudi Arabia is home to 24.5 per cent of the world’s desalination capacity. Water production and transportation costs are also the highest in the world.

Private sector participation in water prod-uction has already been introduced through the independent water and power project (IWPP) model. Plants are under construction or planned at Jubail, Yanbu, Shoaiba, Shuqaiq and Ras al-Zour.

WEC is the primary offtaker of the power and water produced from the plants, and sells the electricity to Saudi Electricity Company and the water to SWCC.

Restructuring

As part of the privatisation programme, SWCC will be restructured into a holding company. Existing water and desalination plants will be bundled with a licence for greenfield projects into subsidiary companies based on the IWPP model.

Once it has received approval for the privatisation strategy from the Supreme Economic Council, the corporation’s assets at Yanbu will be the first to go.

“According to the plan, the transformation of SWCC and the first transaction are expected to be finalised within 18 months of initiation,” says Fehied al-Shareef, governor of SWCC. “Other transactions will follow in a phased approach over a period of five-seven years. The start of the process is anticipated shortly.”

The process could also have repercussions for WEC. Under one of the proposals, the company would buy water from SWCC, making it the country’s sole offtaker and streamlining the sector.

“As per one of the proposals submitted to the Supreme Economic Council, WEC may be designated as offtaker of SWCC privatised plants and may dispatch to NWC,” says Al-Ghamdi. “I believe this would be the best structure.”

There is no doubt that once the privatisation process is complete, the kingdom’s water and wastewater sectors will be in better shape. But the rehabilitation should not end there. In a country with one of the lowest water tariffs in the world, the process will only be completed when the government revises its prices. “Privatisation will produce additional supply in the short term, but it needs to be coupled with long-term planning and demand management,” says an industry source.

The need for higher tariffs is understood in the industry, but the issue is politically sensitive. “Once the consumer tariff is increased, the subsidies will be minimal, revenues will increase, and the need for government credit support will be reduced or eliminated,” says Al-Ghamdi.

Riyadh is already working on introducing a change, but is likely to meet significant resistance. A tariff review committee has submitted its recommendations to the ministry and suggested revised tariff option scenarios with different cost-recovery levels.

“Considering the social responsibility of the government and the sensitivity of the vital need for water, the new tariff has to minimise the burden on the consumer while attaining a certain cost recovery for the commercial viability of NWC,” says Al-Musallam. “100 per cent cost recovery is not envisaged in the first five years, and the government subsidy will continue.”

Key Facts

3 per cent a year - Population growth

6 per cent a year - Water demand growth

748 million g/d - Desalination capacity

451 million g/d - Wastewater capacity

g/d=gallons a day. Source: MEED