Talking about water, a precious and rare natural resource in Saudi Arabia must ultimately bring up the issue of investing in water projects and the options, risks and services associated with that. The challenges and obstacles facing the Kingdom are many when it comes when considering the opportunities for water investments, but it must find the right combination and decide soon because as many experts predict the next world war is going to be over water.
“The challenges associated with water scarcity are becoming an emerging risk of strategic importance to businesses and their financial backers around the world,” said Dr. Nahed Taher, managing partner at Compass Consulting and an economic expert on water investment.
She believes that the biggest financial challenges facing the development of water services in Saudi Arabia stem from questions of financial viability and the maturity of water projects, which could potentially rise from growing concerns over water scarcity in the Kingdom. Moreover, financial institutions, businesses and investment professionals in the Kingdom have a special role to play.
“Their resources, in terms of capital, capacity and expertise, are unique vis-a-vis the civil society, government, intergovernmental structures,” said Dr. Taher to Arab News.
The risk elements in financing water projects, Dr. Taher said should be clearly identified with the main aim founded on the need to learn and expand on the issues that arise from dealing with water scarcity and identify opportunities for the financial sector to contribute to sustainable development through active engagement in mitigating water related risks.
Dr. Taher explained that major risk premiums in the Kingdom should be calculated for the following major issues: Low water tariffs averaging SR0.15 per cm3 while it costs almost SR2.4 per cm3 which requires government guarantees for revenue streams; loss of an anticipated revenue base due to canceled or delayed growth and expansion in a region due to quality, quantity, or stakeholder considerations; local community and stakeholders concerns; financial losses due to disruption of operations; and increased financial investments due to required water treatment for water use.
There are several options for financing water projects through state control, privatization or joint ventures. “I believe privatization in its traditional means through BOT or BOOT mechanisms with total ownership to the private sector is not the solution to efficient water supply,” said Dr. Taher. “Water is considered a strategic commodity, which requires continuous government ownership,” she added. Nevertheless, she finds that some financing methods such as the Private Public Partnership (P3) financing scheme can be the right approach toward providing sufficient supply of water.
“It combines the private sector efficiency in operation while holds the public sector ownership. Whereas the private sector never owns the project, but only rents it from the government for long period of time (between 25-30 years) and operate the service,” she explained. This approach provides public goals with private means. “The introduction of various forms of P3 in water finance led to 43 countries awarding 203 water projects for a total investment of $40 billion during the period 1990-2001. The reason is that P3 scheme is transparent in identifying number risks that the private sector should mitigate. In addition, this P3 scheme will also save at least 15 percent of cost according to international experience, even in developing counties. Nevertheless, the estimated required funds for water projects in the Kingdom, exceeds $60 billion by 2010. Moreover, it all requires long-term debt for financing,” said Dr. Taher.
This brings up the issue of funding and its source. “Saudi banks lack sufficient funds to finance mega or infrastructure projects in the Kingdom,” asserted Dr. Taher. She pointed out that the incremental increase in corporate bank loans averaged at $4 billion yearly across all types of corporate finance, while the required funds for water projects on its own stands at $10 billion per annum at least. Most of Saudi banks liabilities are short-term one while the required loans (bank assets) for these projects are long-term.
“This,” she said, “indicates a serious mismatch problem between assets and liabilities in the banking system. Therefore the required funds should come from the capital market through investment funds or long-term securities issued and traded in the market. Investment attractiveness in water supply infrastructure has been largely correlated to project scale and degree of acceptance,” explained Dr. Taher.
Besides funding sources, there are environmental factors that have to be taken into consideration when investing in water. The Equator Principle states that the World Bank and others would only lend based on strict environmental conditions.
“The Equator Principle added a new important dimension to the financing of water projects,” said Dr. Taher. “It will help Saudi banks to adopt a common set of guidelines for managing social and environmental issues arising from their project finance activities in water-related projects.”
In effect, this means that Saudi banks should carry out their own rigorous due diligence investigations of any water project, rather than relying on that of project sponsors or other financial institutions. Sustainable water investments, in particular, have experienced sharp growth in recent years in the globe.
“The new World Bank standards of reducing water and energy consumption enhances to the efficiency targets of water projects and added sustainability standards to financing these projects,” said Dr. Taher.
Furthermore, Dr. Taher said that financing water services will help the Kingdom to meet Sustainable Development and in the Millennium Development Goals related to water, by people having access to sufficient and safe amount of water for family use.
Despite the need and the incentives for investing in water projects whether by the private or the public sector, there remain many problems that have to be addressed in order to encourage and attract such investments.
“There are many structural problems facing the returns or revenue streams of water projects. Of these, non-profitable services — such as water supply in the Kingdom — are highly subsidized by the government,” said Dr. Taher. This makes government guarantees essential to investors on the grounds of maximum transparency and regulation between the public and private sectors.
Increasing the water tariff seems now to be inevitable. Dr. Taher feels that the best and most responsible way to mitigate the water-project related risks is to seek a clear, objective and financially driven tariff structure that also incorporates proper incentives to lower capital and operating costs.
“Achieving this fine balance requires all parties to ensure that the risk and reward profiles of all cost inputs be realistic and reliable, to ensure that the marginally higher tariff indeed reflects market prices to the consumer and market returns to the investors,” said Dr. Taher.
She also points out that monitoring and managing water use by reducing water leakage is a second challenge that reaches 20 percent of total consumption on average in the Kingdom, due to lack of maintenance in water pipes and other sources. This leakage is projected to cost Saudi Arabia around SR1.3 billion in the coming ten years, which should be saved for capacity expansion or to be spent on other utilities in the Kingdom.
On water desalination Dr. Taher said that increasing capacity was a crucial issue, with a current daily water deficit of around 1.5 million cubic meters in the Kingdom. Therefore, increasing investments in water projects is essential to avoid water crisis in the near future. Since Saudi banks do not have the necessary funding for water projects as Dr. Taher said, it is inevitable that foreign investors will be allowed to enter, but can they be persuaded and what are the consequences of that?
“The disadvantage of foreign investors in water projects is the risk of losing local ownership of our local strategic social/economic/political assets. Also, higher rate of return requested by foreigners as international investors to cover high risk premiums by investing in developing countries such as the Kingdom increases the cost of such projects remarkably,” answered Dr. Taher.
She warns of total foreign direct investment without partnership with local investors resulting in not transferring the knowledge or know-how in developing such infrastructure services in the Kingdom However, there are advantages too in foreign investment. “Foreign partnership if structured correctly can help Saudi Arabia meet this challenge by bringing financial capital, new technology, and human expertise to its water-sector investments in addition to the injection of foreign liquidity into the Saudi economy,” said Dr. Taher.
Water is an integral part of the agriculture sector, itself a critical and controversial economic topic in Saudi Arabia considering the nature of the land and the costs associated with developing it. “The Kingdom’s agriculture previous policy has sucked precious aquifers dry,” criticized Dr. Taher. “The main constraint facing water resources and irrigation development plan is the high capital cost and the low return from using water in agricultural production. Exporting wheat from the Kingdom turns Saudi Arabia to an exporter of water from a desert land,” she said.
According to Dr. Taher, agriculture consumes over 80 percent of the Kingdom’s water. “Agricultural promotion as an economic policy was designed two decades ago, as part of its overall strategy to diversify the economic base away from oil. However, environmental constraints and budget cuts tend to undermine Saudi Arabia’s strategy of self-sufficiency. Sources of water face the threat of depletion, while subsidies to wheat producers decrease steadily in the face of increasing budgetary constraints,” said Dr. Taher.
Today the situation is different. “Nowadays, managing the oil wealth coming to the Kingdom properly and maximize the utility of these exceptional revenues, I believe agriculture sector should be minimized in the Kingdom with resources going to it should shift towards much more high value added and lucrative productive economic sectors,” recommends Dr. Taher.
