Innovation and the private sector

Kirsty Tuxford

The Mediterranean basin is an arid region where climate change threatens the future reliability of rainfall. Countries need to innovate, not just with engineering solutions like desalination, but financially, finding novel ways to pay for such systems.

Countries bordering the Mediterranean are in the forefront of the search for sustainable solutions for better water management.

Not only are many of these countries threatened by climatic that are likely to reduce their seasonal water flows, but they are also bearing the brunt of the economic slowdown, which restricts their financing options. These pressures mean that there is an urgent need to innovate as never before, both in the adoption of new technologies and in the financial and commercial management of water.

Cyprus is just one among several Mediterranean states that faces steep rises in consumer prices for its water in 2011. To overcome its perennial water supply problems, the island increasingly depends on expensive desalination plants to meet demand. The latest plant at Larnaca, for example, cost almost €34 million to build, an investment that is not being fully recovered by the existing tariff regime. Drastic measures will have to be applied, and the government has been considering either imposing a higher flat rate charge for drinking water or varying the pricing by district, although agricultural water may still be subsidised. Whatever policies are adopted, households are likely to face increases in their bills amounting to more than 200 percent over the next four years.

The Mediterranean climate suffers long months of drought and very short periods of often-stormy rain that can cause devastating floods, the main flow of which cannot be stored. “The effects of global warming will increase these trends,” comments Walter Mazzitti, president of the Euro-Mediterranean Water Information System (EMWIS). “The models predict a 25 percent reduction of summer rainfalls in the Mediterranean basin. In addition, freshwater is very irregularly distributed on the territory and prone to great inter-annual fluctuations.”

To keep the rising demand for water under control, countries will have to implement measures such as water savings campaigns, greater efficiency in irrigation and a reduction in leakages in their supply networks. And to secure supplies, more and more countries are building desalination plants and reusing treated wastewater although Mazzitti warns: “The environmental impact of the desalination plants must be studied in detail, in particular the cumulative impact on the Mediterranean Sea.”

The Global Water Partnership (GWP) reports that most governments are sharply reducing their recurrent subsidies for water, which means that new financing mechanisms must be found to pay for the increasing number of desalination plants. Alan Hall, senior advisor to GWP, says: “With the credit crisis, most countries have debt problems and therefore raising more debt is not so easy. What tends to happen is that if the government is subsidising the service, then it doesn’t have the funds to provide the capital investment. So sometimes the government can subsidise the operation and maintenance cost, but it certainly can’t subsidise the investment costs.”

Professor Michael Scoullos, the GWP’s chairman for the Mediterranean makes the point that private sector involvement can bring financing and management expertise that might not exist in the public sector. Different models of public-private partnership (PPP) include contracts that either grant ownership of a desalination or wastewater plant to the private sector with the government purchasing the water, or alternatively assign the plant to the public sector, with the private sector managing the day-to-day operations.

A further option is build-operate-transfer (BOT) contracts, which give the operator the concession for a defined period before the plant is transferred to the government. Gérard Payen, president of the International Federation of Private Water Operators (Aquafed), explains: “A BOT has three costs: the cost of construction, the cost of operation and the cost of financing. If the BOT contract is well structured, usually there’s a margin [for profit] on each of these three components.”

Among the Mediterranean countries making PPPs work for them is Algeria, where French utility company Suez has a management contract with the national water utility SEAAL. The deal has resulted in increased rates of revenue collection. Also, in Lebanon, French-owned Ondéo-Liban has a similar management contract with the Tripoli Water Authority. Morocco has led the way in outsourcing water supply, with long-term contracts in Casablanca, Rabat and Tangiers awarded in the 1990s to consortia managed by leading French water companies. Private companies are even investing in water for irrigation and a study is underway into the feasibility of seawater desalination to boost agricultural output.

“In Jordan and Morocco, PPP projects have resulted in decreases in government expenditures and improvements in the water utility performance, reductions in unaccounted-for water, higher water revenues and lower operating costs,” says Scoullos. But he notes that governments need to strengthen their negotiating skills when hammering out contracts with the private sector, and adds: “For the Mediterranean, the real cost of water services, if charged, will be extremely expensive for consumers.” Aquafed’s Payen argues: “The basic challenge is to set up a sustainable framework for payments from users and payments from taxpayers. If those ultimate sources of funding are strong enough, and developed in a sustainable way, the government can deliver satisfactory services to all. BOTs and public lending are ways to spread the burden over many years.”

Even Egypt, which still applies some of the lowest water tariffs in the developing world, and where water and wastewater services have always been highly subsidised, is now finding ways to recover costs by working with the private sector. In 2009, Egyptian company Orascom and Spain’s Aqualia signed a BOT contract for the wastewater treatment plant of New Cairo. The government has five additional similar projects in the pipeline for the coming 12-24 months and expects more to come. Future developments of projects with the private sector and potential extension to the network and service provision parts of the industry will largely depend on the legislative framework under development and on the financial sustainability of the proposed projects.

In considering the essential priorities of bringing water to people in densely populated urban areas, EMWIS’s Mazzitti says: “Tariffs are a very sensitive issue from a social perspective and we should avoid simplistic approaches, as the added value of the use of water must be considered. The important issue is to consider the cost recovery schema for the overall water cycle in order to have a clear picture of all the costs and to match them with the necessary financial resources: taxpayer money, tariffs and fees, and international financial aid.”

Arguments for increased private sector involvement in the provision of water seem to be winning the day. Adequate water services cannot be provided without enormous increases in investment, and the private sector has the edge in mobilising capital. Mazzitti sums up the current challenge facing the Mediterranean region’s water authorities: “Sufficient and sustainable financing is a prerequisite of a functioning water sector, which ensures the sustainability of public water services – which itself is necessary for human and economic development, social stability and peace.”

About the author:

Kirsty Tuxford is a freelance researcher and writer on infrastructure and development issues


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