Istanbul, TurkeyNovember 8, 2006

OECD ConferencePublic-Private-Partnership for Infrastructure Financing

PPP in the MENA Water SectorChallenges and Opportunities

2

The MENA region is one of the driest regions in the world, with most countries falling below the water scarcity level

Renewable Water Resources (2005) (m3/capita/year)

198213271333

440496

752886

1,1501,426

2,0222,892

3,292

156145

07891104116

KuwaitUAEKSA

LibyaQatar

BahrainJordanYemen

PalestineIsraelOman

AlgeriaTunisia

EgyptMoroccoLebanon

SyriaIranIraq

Turkey

Water scarcity1,000 m3/person

3

However, some of the MENA region countries have relatively high water consumption rates

Cyprus Germany

VenezuelaArmenia

Saudi Arabia

Indonesia

Chile

Jordan

China

Senegal

Lebanon GeorgiaMexico

Oman

Sweden

AustriaSwitzerland

England & Wales

Finland

Netherlands

Norway

JapanQatar

United States

Australia

UAE

Canada

0

100

200

300

400

500

600

700

800

900

0 10,000 20,000 30,000 40,000

Argentina

Morocco

Yemen

Co

nsu

mp

tion

pe

r C

ap

ita (

l/ca

pita

/da

y)

GDP Per-Capita Adjusted by Purchasing Power Parity (USD)

Inefficient distribution

Environmental concerns

Tightsupply

Lifestyle drivers

Urban Water Consumption and GDP per Capita

4

The water sectors in the region are facing a number of serious challenges across the whole value chain

Fast depletion of non-renewable reserves

Ineffective supply management policies and plans (e.g., desalination vs. ground and surface water, reuse water)

Issues with quality of water supplied

Environmental challenges in desalination and ground water reserves

Water distribution coverage rates well below international average

High level of unaccounted for water compared to international best practices

High water delivery costs

Lack of effective demand management (consumer awareness of water scarcity; conservation policies and plans)

Limited collection network coverage

Very low capacity for wastewater treatment

Operational efficiency issues

Lack of service continuity

Long response time

Tariffs below cost recovery level

High rate of un-metered water and technical problems with meters

Very low revenue collection rates

SourcingSourcing TreatmentTreatment Transmission & Distribution

Transmission & Distribution Customer ServiceCustomer Service UsageUsage Sewage Collection

& TreatmentSewage Collection

& Treatment

5

Water and especially wastewater coverage is limited

Network Coverage (2005)

2%5%

15%

16%20%

35%

35%40%

40%

50%

55%60%

60%

60%65%

70%

70%75%

85%

IraqYemenOman

IranLibya

LebanonPalestine

SyriaKSA

EgyptTunisia

QatarUAE

JordanKuwait

MoroccoBahrainTurkeyAlgeria

65%

70%

79%

80%80%

80%

80%

85%90%

90%

93%

96%98%

100%

20%

65%

60%

40%

30%Iraq

YemenLibyaSyria

TunisiaOmanQatar

LebanonUAE

KuwaitEgypt

AlgeriaKSA

PalestineMorocco

TurkeyIran

JordanBahrain

MENAAverage

75%

MENA Average

48%

WastewaterPotable Water

6

Unit costs are relatively high and tariffs cover less than 20% of delivery cost

Saudi Arabia

Oman

BahrainIraq

Jordan

Lebanon

AlgeriaMorocco

Libya

Tunisia

Egypt

Syria

Iran

Water Delivery Cost($ per m3)

Co

st

Re

co

ve

ry(T

ari

ff/C

os

t)Tariff to Cost Ratio vs. Water Delivery Cost

DenmarkUK

Netherlands(1)

Finland

Sweden

Australia

Europe Average

0

0.2

0.4

0.6

0.8

1

1.2

0 0.5 1 1.5 2

7

7.67.0 7.0

6.45.7 5.6 5.3 4.9 4.6 4.4 4.3

3.5

1.9 1.8 1.8 1.7 1.7 1.4 1.4 1.4 1.0

9.9

11.6

De

lhi

Nig

eri

a

Ba

ng

lad

esh

Riy

ad

h

Sri

La

nka

Ca

sab

lan

ca

Tu

nis

ia

Ka

rach

i

Sh

an

gh

ai

Sa

n F

ran

cisc

o

Jaka

rta

Da

kar

Bu

rsa

Ma

nill

a

Ho

no

lulu

Ho

Ch

i Min

City

Arg

en

tina

Hu

nte

r W

ate

r A

us.

Be

lgiu

m

We

ste

rn A

ust

ralia

Jap

an

Ku

ala

La

mp

ur

Se

ou

l

Sco

tlan

d

UK

Water and Wastewater Staffing Efficiency(Number of Staff per 1000 Water and Wastewater Connections)

Delivery is burdened by low productivity in the water sector

19.9 19.7

Best Practice Average = 2.5-3

MENA Countries

8

MENA governments plan to spend around USD 100 billion by 2015 to meet the growing demand

KSAEgy

ptUAE

Iran

Kuwai

t

Turke

y

Libya

Algeria Ira

q

Mor

occo

Israe

l

Qatar

Oman

Syria

Bahra

in

Tunisi

a

Leba

non

Jord

an

Palesti

ne

Yemen

Expected Investments by 2015 in MENA Water and Wastewater Sectors(USD Billion)

24.5

18.7

13.2

8.24.6 5.7

3.9 3.4 2.8 2.3 2.5 1.9 1.3 1.4 1.1 0.8 0.8 0.7 0.3 0.2

5%

22%

6%

12%

5% 31%10% 7%

10% 9% 21% 8% 6% 19%

95%

78%94%

88%95% 69% 90% 93% 90% 91% 79% 92% 94% 81%

Water Wastewater

9

While PPP is likely to be one of the main enablers of future sector development, it should be supported by a holistic reform approach

Sector Reform and Privatization Approach

Review role of existing institutions and restructure/reorganize as required, and establish new institutions to support PPP and reform

initiatives

Select and implement suitable PPP

approach

Select and implement suitable PPP

approach

Review water sector policies

Review water sector policies

Redefine Institutional Setting

Redefine Institutional Setting

Introduce private sector to increase efficiency, improve service and ensure continuous and universal access to quality water

Review policies related to water usage and resources, tariffs, water quality and environment, and investment climate

10

MENA countries should explore different PPP approaches and tailor them to the water sector maturity and local environment

PPP Participation vs. Sector Maturity Key ConsiderationsKey Considerations

Service contracts are at best a cost-effective way to meet special technical needs, but their benefits are limited

Management contracts are a good first step, and are most likely to be useful where the main objective is to rapidly enhance a utility’s technical capacity and its efficiency in performing specific tasks, or to prepare for greater private involvement

Leases are an efficient way to pass on commercial risk and are most appropriate where there is scope for big gains in operating efficiency but only limited need or scope for new investments

Concessions have advantages in that they pass full responsibility for operations and investment to the private sector and so bring to bear incentives for efficiency in all the utility’s activities

Build-operate-transfer (BOT) or variations resemble concessions for providing bulk services but are normally used for greenfield projects, such as a water or wastewater treatment plant

Service contracts are at best a cost-effective way to meet special technical needs, but their benefits are limited

Management contracts are a good first step, and are most likely to be useful where the main objective is to rapidly enhance a utility’s technical capacity and its efficiency in performing specific tasks, or to prepare for greater private involvement

Leases are an efficient way to pass on commercial risk and are most appropriate where there is scope for big gains in operating efficiency but only limited need or scope for new investments

Concessions have advantages in that they pass full responsibility for operations and investment to the private sector and so bring to bear incentives for efficiency in all the utility’s activities

Build-operate-transfer (BOT) or variations resemble concessions for providing bulk services but are normally used for greenfield projects, such as a water or wastewater treatment plant

Responsibility of Private Sector

Asset ownership with operational and commercial

responsibility

No asset ownership;

with operational

responsibilities

Low cost recovery

Full cost recovery

Water Sector

Maturity

Service Contract

Management Contract

Lease

Concession / BOT

Divestiture / BOO

11

PPP initiatives should be driven by clear objectives and targets and monitored by a set of evolving KPIs

PPP – Key Performance Indicators

KPIs Success FactorsKPIs Success Factors

Easily measurable (uncontested measures)

Reasonable targets (balance cost and benefit)

Aligned with government objectives

Evolving with sector maturity

Limited in number

Easily measurable (uncontested measures)

Reasonable targets (balance cost and benefit)

Aligned with government objectives

Evolving with sector maturity

Limited in number

Sector Maturity

Meet Basic Needs

Develop Best-In-Class Water

Operations

Focus of KPIs

Fix Infrastructure• Unaccounted for water• Water / wastewater

network coverage

• Customer service• Revenue collection• Wastewater treatment

rate

• Asset utilization• Productivity levels• Water re-use

ILLUSTRATIVE

12

In parallel, governments should develop comprehensive water resources and usage policies …

Water Resources Policies/InitiativesWater Resources Policies/Initiatives

Balancing desalination and groundwater resources (balancing cost, national interest and availability)

Driving other water resources including treated water, surface water, etc.

Monitoring legal usage of water resources (mainly for ground water)

Balancing desalination and groundwater resources (balancing cost, national interest and availability)

Driving other water resources including treated water, surface water, etc.

Monitoring legal usage of water resources (mainly for ground water)

Policies/Initiatives Focus

Water Usage Policies/InitiativesWater Usage Policies/Initiatives

Water conservation technologies for urban, agriculture and industrial usage

Coordinated awareness campaigns among various ministries (e.g., industry, agriculture, etc)

Technical standards for high water consuming equipment/machines

Water conservation technologies for urban, agriculture and industrial usage

Coordinated awareness campaigns among various ministries (e.g., industry, agriculture, etc)

Technical standards for high water consuming equipment/machines

13

Key Success FactorsKey Success Factors

Decoupling of tariff increase from privatization initiatives

Alignment of redesigned tariffs with affordability indicators

Phasing of tariff increases with noticeable service improvements

Setting effective control systems for illegal water use

Decoupling of tariff increase from privatization initiatives

Alignment of redesigned tariffs with affordability indicators

Phasing of tariff increases with noticeable service improvements

Setting effective control systems for illegal water use

… and should carefully manage tariff changes and their impact on the privatization process

Tariff Changes – Approach and Requirements

Tar

iff

Dif

fere

nti

atio

n

Degree of Cost Recovery

Current State

Increase cost

recovery

Approach full cost recovery

Manage demand

Full cost Recovery

Low Cost Recovery

Volume Based

End Use Based

Customer Based

ILLUSTRATIVE

14

MENA governments should also review their institutional setting, focusing involvement more on policy as opposed to operations

Setting Long-term Water Sector PolicySetting Long-term Water Sector Policy

Government/ Ministry

Government/ Ministry

Independent Regulator

Independent Regulator

Private Operator(PSP)

Private Operator(PSP)

Pol

icy

Set

ting

Reg

ulat

ion

WR

M P

lann

ing

Ope

ratio

ns

Water Sector – Change in Institutional Roles

Developing and Implementing PPP SchemesDeveloping and Implementing PPP Schemes

Setting TariffsSetting Tariffs

Planning and Managing DemandPlanning and Managing Demand

Planning Long-term Infrastructure RequirementsPlanning Long-term Infrastructure Requirements

Promoting Water ConservationPromoting Water Conservation

Allocating Inter-regional Water ResourcesAllocating Inter-regional Water Resources

Monitoring Economic PerformanceMonitoring Economic Performance

Settling DisputesSettling Disputes

Enforcing Quality StandardsEnforcing Quality Standards

Coordinating OperationsCoordinating Operations

Developing, Operating and Maintaining Water SystemsDeveloping, Operating and Maintaining Water Systems

ILLUSTRATIVE

National Utility Company

National Utility Company

Government/ Ministry

Government/ Ministry

Current Target Setting

15

As they restructure and create new institutions, governments should effectively plan for employee transition

PPP – Employee Transition Challenges and Strategies

ChallengesChallenges

May require some lay-offs

Induce uncertainty that may impact efficiency

Face push-back from political figures

Create lack of motivation

May require some lay-offs

Induce uncertainty that may impact efficiency

Face push-back from political figures

Create lack of motivation

StrategiesStrategies

Training of employees

Effective redeployment plan

Time to prepare/perform

Effective change management

Assurances/guarantees

Training of employees

Effective redeployment plan

Time to prepare/perform

Effective change management

Assurances/guarantees

16

Finally, governments should think through the best approach to adopt when restructuring the water sector

Alternative Approaches for Restructuring

Restructuring/Value Creation

AA

CC

BB

Privat

e Sec

tor

Controls

Public Water Utility Today

Public Water Utility Today

High

Low

Low High

Public U

tility

Controls

High R

isk

Approac

h

Evaluation CriteriaEvaluation Criteria

Higher price for privatized assets

Acceptance of stakeholders

Number of potential investors

Staying independent form strategic investors

Improved exit options

Speed of transformation / privatization

Access to management / technical expertise

Higher price for privatized assets

Acceptance of stakeholders

Number of potential investors

Staying independent form strategic investors

Improved exit options

Speed of transformation / privatization

Access to management / technical expertise

Privatized Utlitiy

Degree of Privatization

17

UAE – Abu Dhabi’s experience

SourcingSourcing TreatmentTreatment Transmission & Distribution

Transmission & Distribution Customer ServiceCustomer Service UsageUsage Sewage Collection

& TreatmentSewage Collection

& Treatment

Select and implement

suitable PPP approach

Select and implement

suitable PPP approach

Review water sector

policies

Review water sector

policies

Redefine Institutional

Setting

Redefine Institutional

Setting

•ADWEA introduces private sector participation in water and power through IWPPs

•ADWEA is responsible for implementing policy towards the water sector, including its privatization

•Abu Dhabi Government establishes an independent regulator (the Regulation and Supervision Bureau) to regulate all companies operating in the water and electricity sectors

•ADWEA creates Transco a state-owned company responsible for transmission of water and electricity

•ADWEA establishes ADDC & AADC state-owned companies responsible for water and electricity distribution

•ADWEA established TAQA as holder of its shares in IWPPS

•ADWEA seeks an 8-year operation and maintenance contract in ADDC & AADC

•ADWEA and ERWDA organizes Water and Energy Conservation Campaign

18

Saudi Arabia’s experience

SourcingSourcing TreatmentTreatment Transmission & Distribution

Transmission & Distribution Customer ServiceCustomer Service UsageUsage Sewage Collection

& TreatmentSewage Collection

& Treatment

Select and implement

suitable PPP approach

Select and implement

suitable PPP approach

Review water sector

policies

Review water sector

policies

Redefine Institutional

Setting

Redefine Institutional

Setting

•SEC approves 4 IWPPs (3 are already awarded)

•SEC approves set up of National Water Company (NWC)

•MOWE launches national water conservation campaign

•MOWE seeks Management Contracts for main cities

•SWCC develops privatization strategy

•SWCC launches restructuring and unbundling of Desalination and Transmission

•MOWE seeks BOT for Jeddah and Riyadh wastewater treatment

•MOWE undertaking national water resources study

•MOWE develops strategic transformation plan

•MOWE launches restructuring of sector into regional utilities

19

Oman’s experience

SourcingSourcing TreatmentTreatment Transmission & Distribution

Transmission & Distribution Customer ServiceCustomer Service UsageUsage Sewage Collection

& TreatmentSewage Collection

& Treatment

Select and implement

suitable PPP approach

Select and implement

suitable PPP approach

Review water sector

policies

Review water sector

policies

Redefine Institutional

Setting

Redefine Institutional

Setting

•MHEW introduces private sector participation in billing and collection – contracts awarded to two companies

•MNE forms two state-owned companies OWSC and SSDSC, which operate as a concession, to develop sewage network and STPs in Muscat and Salalah

•MNE is developing a water and wastewater sector privatization strategy

•MNE approves Barka and Sohar IWPPs and is in the process of privatizing Ghubra

•MNE seeks to redefine the water and wastewater sector structure and institutional setting and to introduce new legal and regulatory requirements

•MNE seeks to review the concession agreement awarded and to involve the private sector in the state owned companies

•MNE seeks to draft a water sector law

20

Istanbul, TurkeyNovember 8, 2006

OECD ConferencePublic-Private-Partnership for Infrastructure Financing

PPP in the MENA Water SectorChallenges and Opportunities