1. Istanbul, Turkey November 8, 2006 OECD Conference Public-Private-Partnership for Infrastructure Financing PPP in the MENA Water Sector Challenges and Opportunities

2. 1 The MENA region is one of the driest regions in the world, with most countries falling below the water scarcity level Renewable Water Resources (2005) (m 3 /capita/year) 198 213 271 333 440 496 752 886 1,150 1,426 2,022 2,892 3,292 156 145 0 78 91 104 116 Kuwait UAE KSA Libya Qatar Bahrain Jordan Yemen Palestine Israel Oman Algeria Tunisia Egypt Morocco Lebanon Syria Iran Iraq Turkey Water scarcity 1,000 m 3 /person

3. 2 However, some of the MENA region countries have relatively high water consumption rates Cyprus Germany Venezuela Armenia Saudi Arabia Indonesia Chile Jordan China Senegal Lebanon Georgia Mexico Oman Sweden Austria Switzerla nd England & Wales Finland Netherlands Norway Japan Qatar United States Australia UAE Canada 0 100 200 300 400 500 600 700 800 900 010,00020,00030,00040,000 Argentina Morocco Yemen Consumption per Capita (l/capita/day) GDP Per-Capita Adjusted by Purchasing Power Parity (USD) Inefficient distribution Environmental concerns Tight supply Lifestyle drivers Urban Water Consumption and GDP per Capita

4. 3 The water sectors in the region are facing a number of serious challenges across the whole value chain Fast depletion of non- renewable reserves Ineffective supply management policies and plans (e.g., desalination vs. ground and surface water, reuse water) Issues with quality of water supplied Environmental challenges in desalination and ground water reserves Water distribution coverage rates well below international average High level of unaccounted for water compared to international best practices High water delivery costs Lack of effective demand management (consumer awareness of water scarcity; conservation policies and plans) Limited collection network coverage Very low capacity for wastewater treatment Operational efficiency issues Lack of service continuity Long response time Tariffs below cost recovery level High rate of un- metered water and technical problems with meters Very low revenue collection rates Sourcing Treatment Transmissio n & Distribution Customer Service Usage Sewage Collection & Treatment

5. 4 Water and especially wastewater coverage is limited Network Coverage (2005) MENA Average 75% MENA Average 48% Wastewater Potable Water

6. 5 Unit costs are relatively high and tariffs cover less than 20% of delivery cost Saudi Arabia Oman Bahrain Iraq Jordan Lebanon Algeria Morocco Libya Tunisia Egypt Syria Iran Water Delivery Cost ($ per m 3 ) Cost Recovery (Tariff/Cost) Tariff to Cost Ratio vs. Water Delivery Cost Denmark UK Netherlands (1) Finland Sweden Australia Europe Average 0 0.2 0.4 0.6 0.8 1 1.2 00.511.52

7. 6 Water and Wastewater Staffing Efficiency (Number of Staff per 1000 Water and Wastewater Connections) Delivery is burdened by low productivity in the water sector 19.9 19.7 Best Practice Average = 2.5-3 MENA Countries

8. 7 MENA governments plan to spend around USD 100 billion by 2015 to meet the growing demand Expected Investments by 2015 in MENA Water and Wastewater Sectors (USD Billion) 24.5 18.7 13.2 8.2 4.6 5.7 3.9 3.4 2.8 2.3 2.5 1.91.3 1.4 1.1 0.8 0.7 0.3 0.2 5% 22% 6% 12% 5% 31% 10% 7% 10% 9% 21% 8% 6%19% 95% 78% 94% 88% 95% 69% 90% 93% 90% 91% 79% 92% 94% 81% WaterWastewater

9. 8 While PPP is likely to be one of the main enablers of future sector development, it should be supported by a holistic reform approach Sector Reform and Privatization Approach Review role of existing institutions and restructure/reorganize as required, and establish new institutions to support PPP and reform initiatives Select and implement suitable PPP approach Review water sector policies Redefine Institutional Setting Introduce private sector to increase efficiency, improve service and ensure continuous and universal access to quality water Review policies related to water usage and resources, tariffs, water quality and environment, and investment climate

10. 9 MENA countries should explore different PPP approaches and tailor them to the water sector maturity and local environment PPP Participation vs. Sector Maturity Key Considerations Service contracts are at best a cost-effective way to meet special technical needs, but their benefits are limited Management contracts are a good first step, and are most likely to be useful where the main objective is to rapidly enhance a utilitys technical capacity and its efficiency in performing specific tasks, or to prepare for greater private involvement Leases are an efficient way to pass on commercial risk and are most appropriate where there is scope for big gains in operating efficiency but only limited need or scope for new investments Concessions have advantages in that they pass full responsibility for operations and investment to the private sector and so bring to bear incentives for efficiency in all the utilitys activities Build-operate-transfer (BOT) or variations resemble concessions for providing bulk services but are normally used for greenfield projects, such as a water or wastewater treatment plant Service contracts are at best a cost-effective way to meet special technical needs, but their benefits are limited Management contracts are a good first step, and are most likely to be useful where the main objective is to rapidly enhance a utilitys technical capacity and its efficiency in performing specific tasks, or to prepare for greater private involvement Leases are an efficient way to pass on commercial risk and are most appropriate where there is scope for big gains in operating efficiency but only limited need or scope for new investments Concessions have advantages in that they pass full responsibility for operations and investment to the private sector and so bring to bear incentives for efficiency in all the utilitys activities Build-operate-transfer (BOT) or variations resemble concessions for providing bulk services but are normally used for greenfield projects, such as a water or wastewater treatment plant Responsibility of Private Sector Asset ownership with operational and commercial responsibility No asset ownership; with operational responsibilities Low cost recovery Full cost recovery Water Sector Maturity Service Contract Management Contract Lease Concession / BOT Divestiture / BOO

11. 10 PPP initiatives should be driven by clear objectives and targets and monitored by a set of evolving KPIs PPP – Key Performance Indicators KPIs Success Factors Easily measurable (uncontested measures) Reasonable targets (balance cost and benefit) Aligned with government objectives Evolving with sector maturity Limited in number Easily measurable (uncontested measures) Reasonable targets (balance cost and benefit) Aligned with government objectives Evolving with sector maturity Limited in number Sector Maturity Meet Basic Needs Develop Best- In-Class Water Operations Focus of KPIs Fix Infrastructure Unaccounted for water Water / wastewater network coverage Customer service Revenue collection Wastewater treatment rate Asset utilization Productivity levels Water re-use ILLUSTRATIVE

12. 11 In parallel, governments should develop comprehensive water resources and usage policies … Water Resources Policies/Initiatives Balancing desalination and groundwater resources (balancing cost, national interest and availability) Driving other water resources including treated water, surface water, etc. Monitoring legal usage of water resources (mainly for ground water) Balancing desalination and groundwater resources (balancing cost, national interest and availability) Driving other water resources including treated water, surface water, etc. Monitoring legal usage of water resources (mainly for ground water) Policies/Initiatives Focus Water Usage Policies/Initiatives Water conservation technologies for urban, agriculture and industrial usage Coordinated awareness campaigns among various ministries (e.g., industry, agriculture, etc) Technical standards for high water consuming equipment/machines Water conservation technologies for urban, agriculture and industrial usage Coordinated awareness campaigns among various ministries (e.g., industry, agriculture, etc) Technical standards for high water consuming equipment/machines

13. 12 Key Success Factors Decoupling of tariff increase from privatization initiatives Alignment of redesigned tariffs with affordability indicators Phasing of tariff increases with noticeable service improvements Setting effective control systems for illegal water use Decoupling of tariff increase from privatization initiatives Alignment of redesigned tariffs with affordability indicators Phasing of tariff increases with noticeable service improvements Setting effective control systems for illegal water use … and should carefully manage tariff changes and their impact on the privatization process Tariff Changes – Approach and Requirements Tariff Differentiation Degree of Cost Recovery Current State Increase cost recovery Approach full cost recovery Manage demand Full cost Recovery Low Cost Recovery Volume Based End Use Based Customer Based ILLUSTRATIVE

14. 13 MENA governments should also review their institutional setting, focusing involvement more on policy as opposed to operations Setting Long-term Water Sector Policy Government/ Ministry Government/ Ministry Independent Regulator Private Operator (PSP) Policy Setting Regulation WRM Planning Operations Water Sector – Change in Institutional Roles Developing and Implementing PPP Schemes Setting Tariffs Planning and Managing Demand Planning Long-term Infrastructure Requirements Promoting Water Conservation Allocating Inter-regional Water Resources Monitoring Economic Performance Settling Disputes Enforcing Quality Standards Coordinating Operations Developing, Operating and Maintaining Water Systems ILLUSTRATIVE National Utility Company Government/ Ministry Government/ Ministry CurrentTarget Setting

15. 14 As they restructure and create new institutions, governments should effectively plan for employee transition PPP – Employee Transition Challenges and Strategies Challenges May require some lay-offs Induce uncertainty that may impact efficiency Face push-back from political figures Create lack of motivation May require some lay-offs Induce uncertainty that may impact efficiency Face push-back from political figures Create lack of motivation Strategies Training of employees Effective redeployment plan Time to prepare/perform Effective change management Assurances/guarantees Training of employees Effective redeployment plan Time to prepare/perform Effective change management Assurances/guarantees

16. 15 Finally, governments should think through the best approach to adopt when restructuring the water sector Alternative Approaches for Restructuring Restructuring/ Value Creation A A C C B B Private Sector Controls Public Water Utility Today High Low High Public Utility Controls High Risk Approach Evaluation Criteria Higher price for privatized assets Acceptance of stakeholders Number of potential investors Staying independent form strategic investors Improved exit options Speed of transformation / privatization Access to management / technical expertise Higher price for privatized assets Acceptance of stakeholders Number of potential investors Staying independent form strategic investors Improved exit options Speed of transformation / privatization Access to management / technical expertise Privatized Utlitiy Degree of Privatization

17. 16 UAE – Abu Dhabis experience Sourcing Treatment Transmission & Distribution Customer Service Usage Sewage Collection & Treatment Select and implement suitable PPP approach Review water sector policies Redefine Institutional Setting ADWEA introduces private sector participation in water and power through IWPPs ADWEA is responsible for implementing policy towards the water sector, including its privatization Abu Dhabi Government establishes an independent regulator (the Regulation and Supervision Bureau) to regulate all companies operating in the water and electricity sectors ADWEA creates Transco a state-owned company responsible for transmission of water and electricity ADWEA establishes ADDC & AADC state-owned companies responsible for water and electricity distribution ADWEA established TAQA as holder of its shares in IWPPS ADWEA seeks an 8-year operation and maintenance contract in ADDC & AADC ADWEA and ERWDA organizes Water and Energy Conservation Campaign

18. 17 Saudi Arabias experience Sourcing Treatment Transmission & Distribution Customer Service Usage Sewage Collection & Treatment Select and implement suitable PPP approach Review water sector policies Redefine Institutional Setting SEC approves 4 IWPPs (3 are already awarded) SEC approves set up of National Water Company (NWC) MOWE launches national water conservation campaign MOWE seeks Management Contracts for main cities SWCC develops privatization strategy SWCC launches restructuring and unbundling of Desalination and Transmission MOWE seeks BOT for Jeddah and Riyadh wastewater treatment MOWE undertaking national water resources study MOWE develops strategic transformation plan MOWE launches restructuring of sector into regional utilities

19. 18 Omans experience Sourcing Treatment Transmission & Distribution Customer Service Usage Sewage Collection & Treatment Select and implement suitable PPP approach Review water sector policies Redefine Institutional Setting MHEW introduces private sector participation in billing and collection – contracts awarded to two companies MNE forms two state-owned companies OWSC and SSDSC, which operate as a concession, to develop sewage network and STPs in Muscat and Salalah MNE is developing a water and wastewater sector privatization strategy MNE approves Barka and Sohar IWPPs and is in the process of privatizing Ghubra MNE seeks to redefine the water and wastewater sector structure and institutional setting and to introduce new legal and regulatory requirements MNE seeks to review the concession agreement awarded and to involve the private sector in the state owned companies MNE seeks to draft a water sector law

20. 19 Istanbul, Turkey November 8, 2006 OECD Conference Public-Private-Partnership for Infrastructure Financing PPP in the MENA Water Sector Challenges and Opportunities