Saudi Arabia spends as privatisation nears

 

Senior sources at the body told GWI they are re-examining procurement procedures in a bid to get more contractors involved in the new generation of wastewater treatment plants – which will feature combined-heat-and-power energy recovery for the first time.

 

Crucially, NWC has also taken the first step towards reforming its tariff structure, with the identification of high-value industrial customers who could be charged a higher rate – a key move for cost recovery and the financial sustainability of its potable water division.

 

The latest version of the privatisation strategy at NWC – which currently owns and operates the vast majority of municipal water and wastewater assets in the Kingdom – involves the public body overseeing a number of independent public-private water operators and wastewater concession business units, as well as wholly owned central units providing technical support.

 

While the exact structure of the water and wastewater business units will be decided over the course of the coming months, NWC has been spending hard on its assets as it seeks to build up a sustainable business ready for private investment, with the wastewater network receiving the bulk of the new money.

 

In total, NWC has spent SAR4.3 billion ($1.2 billion) on 66 new wastewater projects in 2011. It plans to spend another SAR3.5 billion ($933 million) on a further 31 projects next year.

 

The projects cover treatment works, transmission, and housing connections. Chief among them is the completion of the wastewater system in Jeddah, where some 3.8 million people had previously relied on septic tanks and subsequent tanker transportation to dispose of sewage in the nearby Musk Lake.

 

Over the course of the project, the Musk Lake has been drained [an achievement that won the Reuse Project of the Year title at this year’s Global Water Awards], hundreds of kilometres of piping and tunneling have been installed, and work has started on one of the world’s largest lifting stations at Jeddah Airport to transport sewage from gravity-driven tunnels to the surface for treatment.

 

The first seven homes have already been connected to the system. 8,000 connections are set to be online by the New Year, with this figure reaching 52,000 by the end of 2012 and 132,000 in total by 2015, according to NWC. The total cost of the project is estimated at SAR7.5 billion ($2.0 billion), an average spend of about $15,000 per household connection.

 

While the NWC wastewater capital budget is heavily invested into network and transmission spending, there are also significant plans for spending on new wastewater treatment capacity.

 

In a new technical development for the Kingdom, future wastewater treatment plants will be installed with biogas power generating facilities. The first of these treatment plants – the 200,000m3/d Kharj phase 3 project – was provisionally awarded to the local Al Arrab contractor in November, and other projects at Manfouha and Jeddah Airport are likely to follow soon, all procured directly through engineering, procurement and contracting (EPC) contracts (see table, top right).

 

Procuring NWC’s recent projects has been a tricky business, with some contractors voicing concern that they had not received enough information on how to proceed. NWC chief executive Loay Al- Musallam told GWI that procurement had been improved, but that contractors need to recognise that the new plants require a new set of more advanced technical skills, and might not be suitable for all bidders.

 

“If you compare the standard government processes and the NWC processes you will see a lot of progress,” he said. “Our methodology focuses very much on the technical process, and some of these projects are being bid without any consideration for the quality. We are coming up with measures to fix the situation.

 

“On Airport 2 [the 500,000m3/d megaplant set to be built in Jeddah] there’s going to be a much tighter design phase so people have a better idea what NWC wants to buy. It will be a transparent process. It won’t be a buddy system, it won’t be about who you know. On Airport 2, the contractor will submit a better proposal, and we in turn will have a better RFP.”

 

All the wastewater development at NWC is underpinned by its growing business of selling treated sewage effluent (TSE) produced at WWTPs to industrial customers for use in district cooling, cement mixing, or for similar purposes that require lowergrade water.

 

However, the problem of cost recovery still faces the potable water supply business. Political pressure against raising Saudi Arabia’s extremely low consumer tariff rates means that NWC struggles to cover even its operating costs for water supply – making it heavily reliant on government subsidy to cover both capital and day-to-day operating costs.

 

NWC business development director Ibrahim Shirazi said the company is in a very good position in terms of turning wastewater treatment into a revenue generator, and now needs to find a way to do the same with the potable water supply.

 

He said NWC is now in negotiations in an effort to levy higher tariffs on “highvalue” customers in the industrial and government sectors, a move which might be easier to implement than a general domestic tariff rise.

 

“As far as TSE is concerned, we have really succeeded in achieving our targets for 2011, and we are stretching our targets for 2012,” he said. “The new aspect for us is the high-value customers for potable water. On a financial front, this is a big issue for us and has big implications.”

 

Al-Musallam said that “eight or nine” high-value customers had already been identified in Riyadh, which amongst them are supplied about 65,000m3/d of potable water. “Without compromising on the supply to domestic customers, we need to maximise income from potable water,” he added.

 

The moves toward financial sustainability come at a time when NWC is poised to take its first formal step towards privatisating its water and wastewater assets and operations – a process that has so far been restricted to management contracts in three key cities.

 

The latest incarnation of the privatisation scheme envisions regional bodies directly controlled by NWC that own potable water assets; and a number of independent regional water O&M companies and wastewater business units, in which NWC would take a share.

 

The process has been in planning for some time internally, but will take a serious step forward at the start of 2012 when NWC puts out a tender for advisors on the formation of the first of the wastewater businesses – in Riyadh.

 

The wastewater business unit will involve the creation of a special purpose vehicle with one or more partners that would actually take ownership of wastewater assets, as well as NWC’s existing agreements to sell TSE. They would then carry out a full-service concession for a set period, covering collection of wastewater, treatment, and the sale or disposal of treated effluent.

 

In the potable water business, the plan is to create regional water O&M companies which would hold contracts directly with NWC, but could also bid for contracts outside the Kingdom. There are four ‘clusters’ in mind for O&M contracts: Central (Riyadh), east (Dammam/Al-Khobar), north-west (Medina, Yanbu, Tabuk) and south-west (Jeddah, Mecca). Depending on feedback, however, this number could be reduced to three, in order to make the contracts more appealing to the private sector. Original plans had NWC as the majority shareholder in the O&M companies, but this has not yet been set in stone, Shirazi said.

 

Overall, Al-Musallam told GWI he feels the spending on wastewater, the improvement in procurement procedures and the realisation of TSE revenues has put the company in a strong position to push through its reorganisation in the coming years.

 

“Three years ago I thought this was Mission Impossible,” he said. “There was a huge list of challenges, but they have been tackled one by one. The people of Jeddah know this can happen.”