Saudi water: The struggle to fast-track reforms

30 November 2007
In a rush to rehabilitate its dilapidated water infrastructure, concerns are growing about the speed of Riyadh’s reform plan and the public sector’s ability to manage the changes.

The private sector has always been central to Riyadh’s plans to overhaul its water network. At present, the water supply system to the main cities is inefficient, supply struggles to keep up with demand and much water is lost through leakages from the network.

According to the Water & Electricity Ministry, up to 35 per cent of the kingdom’s water goes unaccounted for. Unless it invests billions in new infrastructure, Saudi Arabia will struggle to meet the demands of its fast-growing population and ever-increasing industrialisation. In addition, the wastewater system needs to be completely rehabilitated.

Ambitious targets

To achieve such huge changes, Riyadh aims to use private sector companies and has set ambitious targets and timescales for delivery, which it is now having difficulty meeting. Although the government has made assurances that everything is running according to plan, the private-sector view differs. Concerns are mounting over the limited timescales and quality of staff that will be in charge of the new state companies that are being set up to supervise the changes.

The Water & Electricity Ministry has made Riyadh and the kingdom’s second-largest city, the Red Sea port of Jeddah, priority targets for the water reform programme. In July, the ministry launched a tender process to appoint a private company to run Jeddah’s water network, and a separate tender for the city’s wastewater plants and networks. The ministry originally set 27 November as the date for companies to submit bids for the water network contract, but this schedule has had to be drastically revised. The contract to run the capital’s water network was also expected to have been awarded by now, but so far no announcements have been made.

“They have been talking about privatising the water sector for a long time,” says a Riyadh-based consultant. “Now they are moving too fast and trying to make things happen in a very short timescale. There are simply too many projects on the water and waste-water side.”

The government maintains that the project itself is not delayed, just the award process. “There was no delay in the Riyadh project - it is [just] the time taken to process and finalise the bidder selection through competitive bidding,” says Loay bin Ahmed al-Musallam, Deputy Minister for Planning & Development. “A successful bidder for the Riyadh public private partnership (PPP) has been selected and the contract will be signed as soon as the royal decree for establishing the National Water Company (NWC) is obtained.”

A delay at the start of a project does not bode well and other contracts are experiencing the same delays. “The ministry was planning up to four management contracts for Riyadh, Jeddah, Medina and Dammam,” says another consultant at one of the companies competing in the tender process.

“The delays to Jeddah and Riyadh will have a knock-on effect. The bid submission date for Jeddah has now been put back to the beginning of January next year, and they are expected to award it by the end of the first quarter.”

But again, the government insists all projects are on time. “The Jeddah city PPP for water services is progressing as scheduled and the bids from the seven qualified firms are expected to be received during the first week of January 2008,” says Al-Musallam.

On the wastewater side, there have been similar delays. “The prequalification stage [for competing companies in the tender] should have started by now, so this will also be delayed,” says the consultant.

Direct dealings

But perhaps the most critical point affecting the success of the programme is the development and staffing of the new business units and state companies. These will supervise reform and will have direct dealings with the private companies involved.

NWC will be the state-run company that supervises the future management contracts and wastewater plans in the capital, Jeddah, Dammam and Medina. At a conference promoting the launch of the Jeddah water and wastewater projects in July, the ministry announced that the establishment of the NWC was imminent. Four months later, it is still to be set up by royal decree.

According to the deputy minister, the main issue affecting progress has been the capitalisation of the company, which is now set at SR22bn ($5.9bn).

“These PPPs are the first of their kind in Saudi Arabia and setting up the NWC required transferring the existing assets of utilities in different cities,” says Al-Musallam.

According to the ministry, the NWC is needed because the ministry is not designed to deal with PPP contracts. The aim is to make NWC more flexible on the contractual terms of the new contracts, and better at dispute resolution and financing.

The NWC headquarters will be in Riyadh. Subsidiary branches and units will be set up in other cities.

Most of the staff for the new company will come from the ministry and will have to adapt to new management methods in a short space of time. The Water & Electricity Ministry has appointed consultant Ernst & Young to advise on the NWC, focusing on the human resources aspect of the water reforms. But finding qualified staff for the new company has been a challenge. “Since it is a government organisation, the availability of qualified personnel is an issue,” says Al-Musallam. “It [NWC] faces many challenges in attracting and retaining the required qualified personnel.”

Some in the private sector doubt the government will be able to meet the challenge. “All bidders have requested they have some influence on assessing the staff for the city business units,” says the Riyadh-based consultant. “The ministry is providing most of the staff, but there is a huge gap in qualified people. It really all depends on how fast they can be trained. The NWC will mainly be the strategic arm, but it is the people in those business units that companies will deal with on a daily basis. The company that gets the management contract will have to meet performance indicators, so it will be a big challenge. The problem we all face is finding key local managers.”

With population growth of about 3 per cent a year, Riyadh has little choice but to rebuild a water sector that has a history of underinvestment. With average rainfall of 70 millimetres a year, the country is listed under the “absolute water scarcity” category and will not be able to meet its needs in 2025.

But the government is under pressure to deliver and risks alienating the private companies it aims to rely on. The success of its water reform programme depends on the future relationship between its local managers and the private sector.

Key fact

Investments totalling $100bn will be made in water infrastructure and the reform programme.

Water reform

A Water Ministry was first set up in July 2001 to oversee reform of the kingdom’s water sector. Two years later, responsibility for the electricity sector was combined into the same ministry. The Water & Electricity Ministry is now in overall charge of the country’s reform programme, its water and wastewater networks and plants.

Under the state’s reform strategy for the water sector, National Water Company will be set up with plans for the long-term unbundling of the company into separate commercial firms. Public private partnerships will be used to bring in the private sector in the running of the water networks and wastewater plants.

At first, these will be five-to-seven-year management contracts with targets to improve efficiency in water losses, customer services and the introduction of a metering system. In the future, more complex agreements aimed at full privatisation will be introduced, based on revenue-based concessions for the water and wastewater sector.

State-run Saline Water Conversion Corporation, set up in 1974, will continue to have responsibility for all desalinated water in
the kingdom. Water & Electricity Company, which was set up in May 2003, will buy power and water from the growing number of independent water and power projects in the kingdom and sell it on to industrial and residential consumers.

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications