One step backwards may be two steps forward for Saudi privatisation programme

Published November 12th, 2009

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Insight from Christopher Gasson, GWI publisher

It is becoming increasingly apparent that the privatisation of Saudi Arabia’s Saline Water Conversion Corporation will not go ahead as planned next year. Although there has been no official announcement, and the consultants are continuing to work on the project, the enthusiasm for breaking up and selling off the largest desalting company in the world has evaporated.

The failure of the Sumitomo consortium to finance the Ras Azzour project earlier this year opened the door to a return to public finance. It seems that the combination of the strength of the Kingdom’s balance sheet, the relative weakness of the banking sector, and the alleged low prices currently available in the EPC (engineering, procurement, and construction) market has struck a chord with those who have always been opposed the privatisation of the Kingdom’s bulk water supplier. There seems to be a growing consensus in Saudi Arabia that it will be cheaper and easier to keep SWCC on the public balance sheet, rather than separate out the main production companies and sell them off.

Although this may appear to be a disappointment for the investors and developers who were looking to buy into the Saudi privatisation programme, the move may in fact benefit the cause of private water in the Kingdom in the long run.
Although the production assets are unlikely to be sold off in the near future, SWCC will be rationalised and commercialised. It will start paying Aramco (the state oil company) for the fuel it uses (currently this is supplied for free), and will receive payment for the water it supplies to the National Water Company, the municipal water distribution company (which currently does not pay for desalted water).

Some subsidies will remain, but this opens the way for establishing an upstream price for water in the Kingdom. Once there is an upstream price for water, it becomes possible to make proper investment decisions all the way downstream. In the case of the Saudi water sector, upstream of water is oil. If there is a price on that, then you can build desalination plants which give the most water for the least oil, and if a price is then put on the bulk water sold for municipal distribution, it is possible to run a network which maximises the efficiency with which that water is delivered.

Of course one should not expect there to be an immediate and massive increase in the price SWCC pays for the oil it consumes, but once the principle is established, there is scope for moving towards the true market price. Aramco may be planning this already. It has recently started expressing concerns about the efficiency of oil use in the Saudi power and water sector. It is a secretive company, and prone to springing surprises. From the privatisation point of view, it is much better that these surprises come out before long-term contracts for the sale of the SWCC assets are signed. If would be very messy to reprice the upstream costs after privatisation.