Wastewater market takes off

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A wastewater market is developing rapidly and attracting European private water companies to the region.

There is a growing trend towards involving the private sector in water distribution and wastewater projects as GCC governments come to terms with the enormous levels of investment required in the sector over the next decade and the pressure that population growth is putting on existing systems.

The regional pioneer is Kuwait, which was the first country in the Gulf to use the private sector on a large scale to build its 375,000m3/d Sulaibiya wastewater treatment and reclamation plant in 2002. Developer Utilities Development Company (UDC) subsequently announced that it had received notification to extend plant capacity to 500,000m3/d (see GWI, December 2005, p15).

The first wave of wastewater projects to make use of private sector expertise included As Samra (2003), Ajman (2003) and Fujairah (2005).

The Ajman project was pioneering as it was the first to take full retail risk – consumers are responsible for the payment of charges. An enforcement mechanism was built into the contract to protect the project developer – Ajman Sewerage (Private) Company – against non-payment.

However, the revenue collection challenges experienced by the developer may mean that the model is not replicated elsewhere. Under the project structure, consumers must pay an upfront charge to be connected to the sewerage system, followed by a monthly service charge.

According to the latest figures seen by GWI, around 70% of consumers have paid the connection charge. “We have had strong support from customer payments,” according to one project source, “but we can’t deny that people have generally wanted to pay once they are connected”.

The problem is the 30% of consumers who have decided not to pay at all. Non-payers were to have had their electricity services disconnected by the Federal Electricity & Water Authority (FEWA) – a good idea in theory, although the practice has proved rather different.

The Ajman project is currently undergoing a restructuring (see p.13) which will decouple the requirement to collect charges from the construction phase – consumers will instead be allowed to pay later.

Like Ajman, Fujairah is based on a concession structure, although risk is allocated differently. There is a connection charge to fund construction and a service charge although there is no retail risk as the government is responsible for consumer billing. It then pays the connection and service charge to project developer Tanqia FZC.

“There are pros and cons to both approaches,” says Raj Kulasingam, partner with law firm Denton Wilde Sapte, which worked on both transactions. “There is less risk for the operator at Fujairah but the model can only work if the government is willing [to collect revenues]. The Ajman government was not prepared to do this at the time,” he comments. “From the [Ajman] government’s view, the [Ajman] model is much cleaner”.

New opportunities
A new set of water distribution and wastewater projects are following the examples of Sulaibiya, Ajman, and Fujairah and although the models are slightly different, they all involve the private sector in some shape or form.

The most radical development to date has been in Abu Dhabi, which is proposing to privatise its sewerage networks and treatment plants. An ADWEA subsidiary – the Abu Dhabi Sewerage Services Company (ADSSC) – has taken over the ownership and operation of all municipal WwTPs in the emirate. It is also responsible for the operation & maintenance of the networks. Both functions had previously been the responsibility of the Sewerage Projects Committee (Abu Dhabi) and the Sanitary
Drainage Department (Al Ain).

With an excellent record of attracting private sector capital, Abu Dhabi favours a model which has been tried and tested on its IWPP programme. Under this approach, it is proposing to sell its treatment plants to a project company which would also be responsible for their expansion and operation. For the emirate’s IWPPs, ADWEA has taken a 60% shareholding in the project company and invited a private partner to hold the remaining 40%. Funds for investment are then raised on a project finance basis.

ADSSC’s Mafraq WwTP currently serves an 850,000 population equivalent (p.e.) while a treatment plant in Al Ain serves a p.e. of between 300,000 and 400,000. Both facilities require significant extension, according to one Al Ain-based consultant.

“The structure has served Abu Dhabi well in the IWPP sector,” says Kulasingam. “In effect it is a BOO model which would be very easy to finance since it is based on a government backed payment stream.”

The big difference between Abu Dhabi and Ajman is that the Abu Dhabi government has the resources to support such an agreement. Wastewater tariffs are not cost reflective but the government is in a position to make up the shortfall. “There is no sense in taking retail risk in a situation like this”, says Kulasingam, “which is why the [BOO] model suits Abu Dhabi.

“If the government wants to move to implement cost reflective tariffs for other [environmental] reasons, they can do so at their own pace.”

ADSSC has hired Australian engineering company Cardno to advise it on the privatisation programme and is aiming to have a private sector investor in place within a year.

Operational skills
While the BOO model might suit Abu Dhabi, it is not appropriate in all cases. However, where governments are unable to benefit from the private sector’s access to capital, they are anxious to reap the rewards of the operational efficiencies it can deliver. “There is a general realisation that [government run] public works departments have been heavily overstaffed and inefficient,” says one consultant, “and there is a definite trend towards changing this”.

Of the agencies seeking to harness the management and operational skills of the private sector, the Oman Wastewater Services Company (OWSC) is the most advanced in its negotiations. It is due to announce a preferred bidder in the next few weeks for a five-year contract to provide management support services on the Muscat wastewater project. All of the big three French water companies have submitted bids. They are also likely to feature in Abu Dhabi and Saudi Arabia, which is set to tender a PPP contract for the provision of water and wastewater services in Riyadh (see table).

It shows how seriously the Europeans now take the market. “There is a definite positive trend in this market”, acknowledges Saur’s Charles Dupont. “We have a strong interest in the O&M and performance-based contracts and we are also hoping to bid in Abu Dhabi.”

Suez is also following the market closely, although its involvement to date has been through Degrémont, which claimed its first wastewater treatment project in the Gulf in December when it was awarded a $260 million DBO contract by the Qatar Public Works Authority.