PRIVATE SECTOR PARTICIPATION AND REGULATORY REFORM IN WATER SUPPLY: THE MIDDLE

EAST AND NORTH AFRICAN (MEDA) EXPERIENCE

1.1 INTRODUCTION

Water is indispensable to the sustenance of human life and reduction of poverty. About 1.6 million
deaths per year is caused by the use of unsafe water, Since about 18% of the worlds population lack
access to clean water. The rapid expansion of cities and urban centers coupled with the rural urban
migration problem has created difficulties in solving the water supply problem and meeting the
millennium development’s MDG water supply goals by 2015.

In the Mediterranean region (MEDA) which include the middle east and north Africa, the combination of
desertification, foreign dependence for water supply, misallocation of water resources, climate change,
severely affects the ability of these countries to solve their water supply problems. The paper
introduces the importance of water to Mediterranean countries (MEDA), reviews the possible private
sector involvement options and recommends a survey to be conducted before scarce water resources
are allocated in the second part. The third part reviews the increasing trend of privates sector
participation in water supply and distribution. The institutional frame work on selected Mediterranean
countries are examines in part five. Part six reviews the performance of the institution in the water
supply sectors and also looks at monitoring tools in Mediterranean countries.

2 .0 THE ISSUE OF WATER IN MEDA COUNTRIES

2.1 WATER SCARCITY AND FOREIGN DEPENDENCY

Mediterranean region (MEDA) has the reputation for been the most severely hit by aridity and
desertification, coupled with scarce water resources. A country is defined as water stressed if the total
renewable fresh water supply lies between 1000M 3/person/year to 1700M3/person/year. While a
country is water scarce if it has less than 1000M 3/ person/year. With such low renewable water
resources, some countries face over withdrawal problems. Egypt, Jordan and Malta withdraw
respectively 117%, 114% and 100% of their renewable water resources. Much of political tensions of the
region are also due to water scarcity and foreign water dependence. It is particularly the case for Egypt,
Jordan, the Syrian Arab Republic and Palestine, with respective foreign dependency ratios of 97%, 23%,
80% and 18%. Majority (about eight) of the MEDA countries are water stressed while about two (2) are
in water scarce situations. Foreign dependency for water supply is also a big problem a good example is
Egypt which depends on the Nile for its water supply. The Nile flows from Ethiopia. Egypt, Jordan Syria
and Palestine have a foreign dependency rate of 97% ,23% ,80% and 18%

2.2 THE MISALLOCATION OF WATER RESOURCES

Majority of water resources in the MEDA countries go to agriculture. This sector in fact accounts for
about 65% of water resource allocations in this region. Since water can be seen as an economic good
and capital which contributes to the gross domestic product(GDP) of a country. It efficient allocation is
important. It was found that even though 65% of all water allocations in MEDA countries go to
agriculture, the returns on this water investment is very small. It would therefore be better to allocate
more water for industrial use as this will yield better economic returns.

2.3 THE CONSEQUENCE OF POPULATION GROWTH ON WATER SUPPLY IN THE REGION

Asides from misallocation of water resources, rapid population growth is also a big problem. Based on
United Nations estimates (UN), an expected increase of 63.8% over 25years in MEDA regions will occur.
In 2030 there will be 239 million people living in this region , While 70% of all these will be in urban
centers

2.4 THE IMPACT OF CLIMATE CHANGE ON WATER RESOURCES

Water resource availability is inextricable linked to climate and climate change as such there is a high
probability that climate change will affect quantities of water available for use . Also high foreign
dependence as in the case of Egypt which depend on the Nile that flows from Ethiopia, compound the
problem. Several studies have shown that there will be an increase in temperatures in countries in the
region from about 0.2oc/decade to 0.5oc/decade. Also there would be a severe decrease in rainfall by
2050.

3.0 PRIVATE SECTOR PARTICIPATION IN WATER SUPPLY AND SANITATION

3.1 POSSIBLE FORMS OF PRIVATE SECTOR PARTICIPATION

There are seven major types of private sector involvement are as outlined below

Service Contract: in which private sector participation is limited to technical and administrative tasks
such as repairs , meter reading , payment collection e.t.c. No commercial risk concerning water
collection and supply is bourn by the private operator. This contract is very flexible and easy to modify
even when the regulatory frame work is weak. The service period usually does not exceed one or two
years.

Management Contract: In which operation and management services are the duties of the private
operator while the water user legally remains the client of the public entity. The duration of the contract
is usually between three to five years, and the private operator is paid based on the volume of water
sold. The private operator also bears no commercial risk in the supply of water.

Lease Contract: In which the private operator provide water supply services, but pay for fixed assets
usually constructed by the government. The user is the client of the private company. The private
company is not involved in the constructions and expansion of water projects, and this contract type
usually lasts for between ten to twelve years.

Build Operate and Transfer: Where the private sector is in charge of designing, financing and building a
given project , operates and maintains it for a given concession period and transfers ownerships back to
the government after the given period of time has elapsed. This type of contract is much more used in
the construction of water production and desalination plants and sale of bulk water to the public
provider, and less for distribution network construction with the advantage that this contract type those
not increase sovereign debt.

Concession Contract: Similar to the lease contract but here the private sector finances the construction,
expansion and rehabilitation of water projects. The user is a direct client of the private operator and
this contract type usually last from between 25 to 30 years. At the end of the concession period
ownership is transferred to the government.

Joint Venture Contract: In which the state and a private operator jointly own the water company with
the private sector usually owning the majority share but some times the state may have the majority or
‘golden share’. The state shares responsibility and benefits with the private operator but this type of
contract may be unstable even though it look adept to the politically sensitive case of water supply.

Full Divestiture: In which assets are entirely sold to the private operator , who will be in charge of the
expansion , operation , management and rehabilitation. He bears all the risks . However the state acts as
an oversight to prevent reckless practice like crazy billing through regulatory agencies.

3.2 THE SCOPE OF WATER SECTOR PROVISION IN THE WORLD

On an international scale private sector involvement in the water supply is extremely small ( only about
5% to 10 % of the worlds population receive water supply from private operators). However 25% of
urban dwellers get their water supply from private operator examples include countries like the United
kingdom and the United States. In fact in countries like Chile and the United Kingdom water supply is
fully in the hands of private companies. In Europe about 45% of water is supplied by private operator,
about 15% is supplied in the United States by private Operators. Only in developing countries and the
MEDA region do we have low private sector participation. Where private supply schemes exist they do
so side by side with public water supply schemes .

However there has been a good increase in the provision of water by private operators in developing
countries from about 0% to 5% in the low income economies , 1% to10% in middle income economies
and 2% to 35% in high income economies.

3.3 IS PRIVATE PROVISION OF WATER BETTER THAN PUBLIC DELIVERY?

The argument of the advantage of public versus private sector control of water supply and vice versa still
remains ambiguous and vague. The points of interest in the arguments are the issues of efficiency and
corruption. Three risks exist faced are, under pricing of public inputs, overpricing private output to the
public, and subvention of the private sector by the public. According to the paper Public ownership of
water supply could reduce corruption. As for efficiency private sector ownership would be seen as
increasing the efficiency of supply and distribution as private firms are perceived to be much more
efficient. Others argue that efficiency depend on a combination of ownership and other factors like
competition and regulation. In fact it was postulated that competition and regulation were more
important than privatization (ownership) in improving performance.

Thus when the market is fully competitive private ownership will increase efficiency . This cannot be said
for a monopoly. The water supply sector is a naturally monopolistic market and cannot be easily turned
into a competition since it is highly capital intensive and the number of competitor are small. Because of
the incomplete nature of water contracts private sector must be combined with adequate institutional
frame work.

3.4 EMPIRICAL STUDIES ON THE EFFECT OF PRIVATE SECTOR PARTICIPATION IN WATER SERVICES

Surveys and studies carried out show that there is no significant difference in efficiency between
privately owned firms and publicly owned enterprises especially in a monopoly. For example in the
review of 52 journals on impact of ownership 32 concluded that private ownership was superior to
public ownership in terms of efficiency while in another 16 studies carried out, 6 conceded to the
superiority of private ownership while 5 conceded to the superiority of public ownership, while 5 were
neutral. Essentially all the studies conclude that ownership has very little effect on the efficiency of a
firm in a monopolistic market. The reason perhaps for this result could be the lack of consideration for
the importance of institutional frame works.

4.0 THE SCOPE OF PRIVATE WATER PROVISION IN THE MEDA REGION

4.1 A CROSS-COUNTRY COMPARISON

Private sector participation started essentially in the MEDA region in 1992. The region is grouped by the
level of participation of the private sector in water supply and the number of people served by private
operators as follows

a. Countries that are active in private sector participation as regards water supply like Morocco,
Jordan , and Algeria. In fact 40% of the Jordanian population get their water from private
operators . Private operators have been present in Morocco since 1997, Jordan and Algeria in
1999.
b. Countries with low private sector investment but with hopes of increased private sector
participation as time progresses example are Egypt, Lebanon ,and Turkey.
c. Countries with quasi existence or No existence of private sector participation

4.2 DETAILED OUTLOOK OF PRIVATE INVOLVEMENT IN WATER SERVICES

Many options for private participation in water services like the full divestiture and the public private
sector participation exist.

Morocco is the most active with award of concession contracts spanning from a 20 to 25 years
concession period. Jordan only awarded management contract for a 5 year period as the state take on
the major responsibilities of water supply and distribution. Algeria in 2001 signed a concession contract
for the construction of a desalination plant after previous experience with management contracts
followed by a 2005 outsourcing contact of water supply to the Suez ( A contract worth 120 million Euros,
that should run for 5 years. Its objective is the upgrading and modernization of water and waste water
utilities) with the hope of increasing private sector responsibility and a possible modification to a
concession contract.

Even with the political turmoil a management contract was awarded in 1999 for water supply to the
Gaza, Tripoli and baalback. Private sector participation is limited in turkey and Egypt but should increase
in the coming years.

5.0 WATER INSTITUTIONAL FRAMEWORK IN MEDA COUNTRIES

5.1 SUCCESSFUL PUBLIC MANAGEMENT IN TUNISIA

In turkey the main problems are of low water resources in terms of quality and location, coupled with
the problem of irregular rainfall. Low water quality increased the cost of treatment while the location
meant more spending on conveyance infrastructure. Water and sanitation are managed by two public
entities which are

a. S.O.N.E.D.E Societe Nationale d’exploitation et de distribution des eaux, since 1968 is

responsible for water supply and distribution (From construction, operation to maintenance of
infrastructure). It employs about 69000 people and supplies water to 8 million people and is
overseen by ministry of agriculture.
b. O.N.D.S Office National de l’assainssent, in charge of sewage management. Established in 1974
for sewage collection, and treatment disposal, it is overseen by ministry of environment. A
B.O.T was awarded in 2006.

The Director Generale des grands travaux hydraulics responsible for dam, irrigation infrastructure
and water supply and sanitation in areas not covered by S.O.N.E.D.E. The performance of these
agencies have been impressive. Unaccounted water decreased from 30-21, 21-18.4% in 1987, 1997,
and 2004 respectively. 100% of urban residents are connected to water. Bill collection rate is 99.9%
and urban areas have unusually continuous supply.

5.2 PROMISING REGULATORY REFORM IN ALGERIA

Algeria has the lowest renewable water resources of North Africa (373.2 m3 renewable freshwater per
capita per year). This problem is aggravated by the poor condition of the water pipes network. Up to
40% of the water carried is lost In some cities such as Algiers due to poor facilities. The technical losses
are around 32%, the other part of 8% is lost due to illegal consumption. Also the issue of poor
management of the national water supply agency and the low tariff collection rate, has worsened the
situation. About 293 million Euros is owed the Algerian water cooperation because of irregular
payments by customers and illegal connections. As a result there is severe water shortages in Algeria.

Algeria began institutional reform in 2001 and due to severe drought the process has been moving at
exceptional speed. Four public agencies now handle water distribution and supply viz
 a. The “Agence nationale des barrages” (ANB), the National Agency for Dams, this constructs dams
to harness water resources all over Algeria.
b. The Agence Nationale de Realisation et de Gestation des Infrastructures Hydrauliques
pour l’Irrigation et le Drainage (AGID) is in charge of irrigation and drainage.
c. The “Office National d'Assainissement” (ONA) (National Bureau for Wastewater) was
also established in 2001 to cater for the management of wastewater . An important task of the
ONA is to develop a policy of re-utilization of treated waste.
d. The “Algerienne des Eaux” (ADE), the National Water Supply Agency, was created in
2001 to supply water to 26 public water operators in the most urban areas of the country. The
agency is also in charge of 5 regional agencies: one for each basin.

There are plans to combine these four agencies into a single entity in the nearest future.

In 2005 Algeria passed an ambitious water law. This new code emphasizes private sector participation
such that public companies can now outsource tasks under a concession contract. Part of the new water
law however makes provision for a regulatory agency to over see the issue of tariffs. Lastly the code
gives the government more power to regulate water quality and protect areas with vulnerable
ecosystems. It specifies penalties for breaking environmental regulations and creates "water police" to
enforce them.

5.3 RECENT REFORMS IN EGYPT

95% of its water comes from the River Nile and Egypt has to share this resource with nine other states
living upstream the River. Moreover, Egypt is the country which has the largest consumption of the
reserve. Municipal water supply and sanitary services are carried out by a set of agencies under the
Ministry of Housing, Urbanization and New Communities(MHUNC). Another agency is responsible for
building drinking water purification plants, distribution systems, sewage collection systems, and
municipal wastewater treatment plants allover Egypt.

For Cairo, Alexandria, and the Suez canal area ,the responsibility is respectively on the General
Organization for Sanitary Drainage in Cairo (GOSDC), and the General Organization for Greater Cairo
Water Supply (GOGCWS), the Alexandria General Organization for Sanitary Drainage (AGOSD), the
Alexandria Water General Authority (AWGA), the Suez Canal Authority. In 2004 the Government merged
all these agencies into one entity. Still the government is the main financier of water supply in Egypt.
This is done through

• Sovereign sources and general-tax system

• Agricultural user-fees

• Municipal and industrial user-fees.

How ever the revenue generated has always fallen short of that required to supply water to the
municipality.
5.4 DECENTRALIZATION AND CONCESSION CONTRACTS IN MOROCCO

In Morocco, the amount of renewable freshwater available is very low in fact below the scarcity
standard ( about 964.4 m3 per capita) with studies showing that there would be a continuous decrease.
Many of the water distribution facilities are in a state of disrepair as such up to 40% of the water
entering the system is lost to leakage . In rural areas, where 42% of the population lives , only 56% have
access to water supply and even worse is that waste water infrastructure are far worse in terms of
efficiency than water supply infrastructure. Some major cities have no wastewater treatment systems at
all. Contrary to the case in Moroccan state where there is high level of centralization there is high level
of decentralization and specialization in water administration. The agencies responsible here are

a. The Directorate General of Hydraulics which plans and develops water resources.
b. The nine Regional Authorities for Agricultural Development (RAADs) who develop, maintain
water distribution networks, collect water charges, and provide farm inputs and extension
services.
c. The National Office of Potable Water (ONEP) created in 1972 acquires and distributes water
on a retail basis to households and industries and on a bulk supply basis to
municipal/provincial governments.

A tariff system in which a block by block rate is set is used. The definition of the block system is set
nationally for both private and public supplier. However, the price of the volume of water within each
block is set locally. Morocco is the only country of the MEDA region which has introduced concession
contracts in water supply. The result after a few years has being highly satisfying .

5.5 DECENTRALIZATION AND CONCESSION CONTRACTS IN MOROCCO

Jordan has among the lowest water supply in the world on a per capita basis (165.1 m3/inhab/year).
And water resources are decreasing at an alarming rate. Due to the extreme water scarcity situation in
Jordan water resources especially ground waters are being exploited at an unsustainable rate. In
addition, surface and ground water quality in some areas are deteriorating.

Despite scarcity, water use is not efficient: system losses can reach reaches 47% . Agriculture uses more
than 60% of water resources, while it contributes only 2.8% to GDP . Connection rates to the municipal
network are high, at more than 90%, but water supply is intermittent.

The four institutions responsible for water supply in Jordan are : the Ministry of Water and Irrigation
(MWI), the Water Authority of Jordan (WAJ), the Programme Management Unit (PMU) and the Jordan
Valley Authority (JVA).
The Ministry of Water and Irrigation is responsible for the formulation of national water strategies and
policies, the monitoring of the water sector, planning and management, and procurement of financial
resources.

The Water Authority of Jordan (WAJ) and the Programme Management Unit (PMU) carriy out regulatory
tasks.

The WAJ established in 1983 is fully responsible for public water supply and wastewater services as well
as for water resources planning and monitoring, construction, operations and maintenance.

The Project Management Unit (PMU) is responsible for regulating water supply and wastewater utilities
under private management. It operates under the supervisory control of an Executive Management
Board, which is headed by the Minister.

The Jordan Valley Authority (JVA) is responsible for the development utilization of water resources in
the Jordan Valley for irrigated farming and other purposes. JVA is also responsible for the dams and
reservoirs in the country.

Due to the increase of the water demand, the Ministry of Water and Irrigation (MWI), the Government
decided in 1999 to contract out the operation and management of water and wastewater services in
certain regions. The contract term was initially 5 years but was extended until December 2006. While
service provision is still not satisfactory, private sector participation in Amman resulted in significant
improvements in water supply: tariffs did not particularly increase but there was decrease in the work
force.

6.0 WATER SUPPLY INSTITUTIONAL SCORECARD

6.1 DETERMINANTS OF THE SCORECARD

The water supply institutional score card aim at reviewing the problems of the water supply sector and
the institutional frame works. It is based on 5 specific issues which are ,the state of water resources, the
management of access to water, the private sector participation in water supply, the regulatory
framework and the water pricing policy.

On the issues of the state of water resources and the management of access to water the scorecard
describe problems of water resources and access. It can be seen that , water scarcity, over withdrawal
practices and foreign dependency can increase water supply problem. Success in managing access to
water is usually determined by the percentage of population with safe access to water . While this
information is useful, it cannot give a complete outlook of the situation. In order to evaluate better the
quality of water management in the country, two other variables are considered: the continuity of water
supply and an estimate of unaccounted for water. The third issue is the involvement of the private
sector in water supply. Introducing private sector participation and establishing a reasonable level of
competition between public and private water sector in a well defined regulatory environment can
improve management efficiency.

The fourth issue is the regulatory framework issue as earlier, stated without an adapted institutional
framework, delegating water services to private operators does not necessarily improve efficiency. Thus,
the design of regulatory system is the most essential step in the process of reforming the water sector.
The pricing policy of water is the last component of the scorecard. Since, it is necessary to recover cost
through a sustainable mix of tariff and taxation. Tariff needs to be set at a level viable enough to keep
running operations.

7.0 Policy recommendations

7.1 Tunisia

Tunisia

Even though Overall, the national Tunisian water and sanitation operators are very efficient in
comparison with other MEDA countries. some improvements could be made in decentralizing the
management and corporatizing local water utilities. Other potentially productive reforms concern water
tariffs:, Differences of prices among users should be reduced; the high level of cross subsidies does not
seem sustainable in the long term and should be scraped.

More private sector participation, could also be introduced in order to increase management efficiency
and to reduce the fiscal burden of the state. All these reforms would allow decreasing the cost of water
services.

Algeria

There should be Corporatization of public operators. Improvements should be made in water tariffs
metering and collection.

Egypt

There should be corporatization of local water operators which would help monitoring cost and would
ensure a productive competition among water providers. Tariffs presently are not set at a viable level
and need to be increased in order to guarantee the financial sustainability of the water policy in the long
term. If the government seeks to increase private sector participation, it should reform its tariff system
and provide a real financial and legal independence to the water regulatory/monitoring agency.

Morocco

The reforms in Morocco should serve as a model for other MEDA countries as it has and is still recording
outstanding success in water supply and distribution.

The overall situation of water scarcity in Jordan is very alarming. Private sector participation in Amman
has led to some improvements, but a broad institutional reform of the water sector is necessary. The
organization of water authorities and their respective responsibilities should be rearranged with a clear
separation between political, strategic, regulatory and operational

roles. Political interferences in regulatory/monitoring activities should be reduced. The water supply and
distribution agencies should be decentralized. There should also be a direct effort to reduce internal
dispute in order not to scare away foreign investors. Tariffs need to be adjusted to reflect the current
economic realities and to cover water production cost.

About water charges, it is imperative to reduce differences of tariffs among users; the extremely high
level of subsidies of water for agriculture is economically inefficient and counter productive. All these
organizational and pricing reform would contribute improving service provision and reducing
intermittent water supply.

8.0

CONCLUSION

The MEDA area is the water scarcest region in the world as 8 out of its 11 countries have less than
1000m3 of renewable fresh water per person. Also faced with the problem of water supply are the
urban areas. Studies show that public private partnership does not per se improve efficiency except
there is a well defined regulatory frame work. Thus water sector reforms are essential and the
governments of the MEDA countries are aware and are working towards these reforms.