Water is a natural resource. Philosophers might wish to debate that its seminal position as a sustainer of life makes access to it a human right but its scarcity makes it an economic, political and strategic resource.
Wars have been — and probably will be again — fought over it. The vast bulk of water on the planet is undrinkable — it being saline or frozen. Only three quarters of one percent is liquid and accessible.
As a result of the combination of scarcity and accessibility, water is now a commodity to be sold to consumers. However the water they use is not the raw water from the source, but cleaned, perhaps desalinated and always transported by pipe or tanker or bottle to an accessible delivery point. Water is free; the processing and delivery, together with the supporting infrastructure, is where the costs arise.
Some 35 operational desalination plants in the Kingdom manufacture almost all the industrial and domestic water consumed including drinking water. The overwhelming percentage of groundwater from aquifers is used for agriculture. This is partly due to the fact that boreholes are relatively inexpensive to drill and, especially in the urban areas of Jeddah, largely due to the fact that the aquifers are polluted with wastewater or are becoming increasingly saline from the ingress of seawater into the porous coral substrate.
Blessed with cheap fuel, hard cash and the wisdom to co-opt the latest in desalination technology, Saudi Arabia meets its needs for fresh water for domestic and industrial purposes. Keeping up with demand, given the expansion of economic cities and a population increasing at four percent per annum, is a constant challenge.
Nonetheless, even with the massive investment in desalination the Kingdom has among the lowest water tariffs in the world. Investment in water and sanitation, including desalination, is funded from the central government’s budget. The Seventh and Eighth Development Plans’ allocations for water including irrigation over a time scale of 10 years topped SR34.9 billion ($9.2 billion) and SR41.6 billion ($11.1 billion) respectively. In effect, that is equivalent to about 0.7 percent of GDP and more than SR320 per capita per annum.
According to the US Department of Commerce, the need for investments in water and sanitation in Saudi Arabia over the next 20 years is $93 billion, or almost $5 billion per year.
If the government’s stated policy of privatization of capital and distribution contracts for the water is to proceed, then investors will expect a decent return on their investment.
Evidence that this is happening, although details of the deal are not available, is the contract signed last week between Veolia Water (until 2002, Vivendi), through its subsidiary Veolia Water AMI, and the Ministry of Water and Electricity (MOWE) for water production and distribution and wastewater collection in Riyadh.
Currently two companies dominate 70 percent of the international privatized water business, Veolia and Suez.
This is the first time the Kingdom has awarded a contract for water services to a private operator. Moreover, it is also one of the most important contracts Veolia has ever signed in terms of the number of people served (4.5 million inhabitants) and in the length of the drinking water network (10,000kms), as well as wastewater (4,500kms).
Under the six-year contract, Veolia Water will provide its services to the National Water Company on the basis of an incentive system linked to the performance and savings achieved. The contract will yield estimated cumulative revenue of SR225 million ($60 million).
It is unclear whether the contract is one by which the company can lease national assets and avoid capital investments in the infrastructure in terms of expanding, rehabilitating or maintaining (which seems most likely) or whether it is a full privatization with the expectation that Veolia will invest in distribution and collection systems.
Either way, water will definitely not be free and judging by the performance of privatized systems elsewhere in the world, it will rise in price quite significantly.
The Kingdom uses a “rising block” structure of water tariffs; the more you use, the more you are charged. Currently it is very cheap, not well-metered and excessive use of water a common practice.
Average water tariffs range from $0.06 to $0.10 per cubic meter, which are among the lowest in the world. The majority of consumers fall into the first two blocks where water charges are extremely low. Customers with a water use of less than 100 cubic meters per month pay hardly anything for water. In other countries where increasing-block tariffs are used, the lifeline consumption benefiting from a lower tariff level is typically set at 20 cubic meters per month or fewer.
The average amount billed is currently SR1.07 ($0.28) per m. MOWE estimates that the true cost of supplying water at SR18 ($4.80) per m., including capital costs, but excluding the cost of subsidized feedstock for SWCC’s desalination plants.
There is no recovery of the cost of wastewater collection and treatment. Yet.
Water delivery by tanker to residential areas not connected to the public mains is still a very common feature of cities in the Kingdom. Citizens in the low-income brackets where water is tankered are in effect penalized as the cost of tankered water — as much as SR6 ($1.50) per cubic meter, or about 20 times more than water supplied through the network. The combination of low tariffs for those connected and low coverage forces nonserved citizens to pay up to 40 times more for water than connected households.
In the regions of the Kingdom, probably none of the branches of MOWE have sufficient revenues from the sale of water to recover costs, despite the fact that they receive desalinated water for free. The Riyadh branch had revenues of SR370 million in 2004, but expenses of SR570 million. On average, regional utilities recover less than 5 percent of their operation and maintenance cost.
What is increasingly apparent is that water prices must and will rise in the foreseeable future. Bad for the consumer, though that particular dark cloud probably has a silver lining for the Kingdom as a whole; public awareness of water as a valuable and diminishing resource that should not be wasted.