PUSHING WATER UPHILL - - SAUDI WATER SECTOR CHALLENGES

UNCLAS SECTION 01 OF 02 DHAHRAN 000150 SIPDIS PLEASE PASS TO NEA/ARP JOSHUA HARRIS E.O. 12958: N/A TAGS: ECON SENV ENRG PGOV SA SUBJECT: PUSHING WATER UPHILL - - SAUDI WATER SECTOR CHALLENGES REF: 08 JEDDAH 184 DHAHRAN 00000150 001.2 OF 002 ¶1. (U) SUMMARY. Saudi Arabia's per capita fresh water consumption is nearly double that of the European Union average. These high consumption rates stem from low water tariffs, leaking water distribution infrastructure, and agricultural subsidies. Water sector reforms have begun, though a long-awaited water regulatory authority has not yet been identified by the SAG. Between 20% - 40% of Saudi Arabia's old desalination facilities will need to be replaced or refurbished within 10 years. END SUMMARY. Water and electricity conference -------------- ¶2. (U) On June 8 & 9, CG, PolOff, and the Commercial Officer attended the Fifth Saudi International Water, Electricity and Power Generation Conference and Exhibition in Dammam. Representatives from the government and private sector spoke at the conference covering water and electricity privatization efforts, regulatory reform, new technological advancements, and broader demand and supply trends in the Kingdom. In the Gulf region, water and electricity are often inextricably linked due to the energy-intensive desalination process and the tendency for those facilities to be co-located with power plants. (Note: Water and electricity issues both fall under one ministry, the Ministry of Water and Electricity. End Note.) Rising fresh water consumption -------------- ¶3. (U) Most estimates put Saudi per capita water consumption at about 240 liters per day, much higher than the wetter European Union average of approximately 150 liters per day. The CEO of Saudi's National Water Company (NWC) said at the conference that urban areas receive 60% of their water supplies from desalination and 40% from ground water. However, the agricultural sector, which represents more than 80% of total water usage in the Kingdom, relies largely on nonrenewable underground aquifers. The SAG recently repealed income subsidies for water-intensive wheat crops, a widely criticized food-security policy (ref A),but the even more water-intensive alfalfa crop that feeds Saudi Arabia's large dairy industry has increasingly gained favor among farmers. Demand for all water sources is expected to climb rapidly, reflecting Saudi Arabia's burgeoning population and rapid industrial growth. ¶4. (U) The NWC is seven months young. It is an effort to consolidate the numerous smaller and less efficient companies throughout the Kingdom, as there are Water Directorates in each city. The NWC currently operates in Jeddah and Riyadh with plans to expand to another 15 cities in the Kingdom. Its goal is to improve supply and demand management, improve infrastructure, and increase the level of services and to become a world class regional utility in the Gulf. Many challenges will have to be overcome once the smaller companies are amalgamated into the NWC, among the most daunting will be changing the work culture, attitude, and behavior of the more than 6,000 employees transitioning from a government bureaucracy to a customer-oriented organization. There are also 10 different authorities that presently regulate wastewater. Low water tariffs, leaky infrastructure -------------- ¶5. (U) Several conference speakers noted substantial opportunities to conserve water through a handful of policy changes. First, the exceptionally low water tariff, roughly $0.10 per cubic meter on average, is among the cheapest rates in the world and does not reflect the $.80 to $1.20 cost per cubic meter to desalinate the water (which excludes substantial transportation costs and greatly subsidized fuel for power generation). A higher tariff, they believe, would change behavior and incentivize conservation leading to substantial water savings. Second, nearly a third of total water produced DHAHRAN 00000150 002.2 OF 002 is lost between the source and the end user due to leaky pipes and inefficient infrastructure. Third, the agricultural sector currently uses outdated irrigation methods that lose almost half of the water taken from aquifers through leakage and evaporation. Planned reforms but no regulator -------------- ¶6. (U) The SAG aims to privatize or contract out the management of the water distribution networks with the hope of shifting the industry to a profit-oriented and, thus, more efficient business model. However, vague regulations have complicated this effort. A long-time utility consultant in the region told PolOff, "It is still unclear who is ultimately responsible in the water sector." The consultant added, "The ministry that owns the water company shouldn't be regulating it." Several different speakers at the conference emphasized the importance of passing a comprehensive "water law," which should clarify complicated regulatory matters and facilitate private sector investment. (Note: A comprehensive Electricity Law was implemented in 2006. A draft Water Law was introduced last year but remains in the draft stage. End Comment.) Old desalination facilities -------------- ¶7. (U) Saudi Arabia has the largest installed desalination capacity in the world producing more than 4 million cubic meters per day. However, many of the approximately 35 desalination facilities in the Kingdom use old technology and are at the end of their useful lives. These provide almost all of the industrial and potable water supplies in-Kingdom while water originating from aquifers is used for agriculture. Replacing desalination plants and other water infrastructure improvements will require massive investments over the next decade, with the U.S. Department of Commerce estimating the need for almost $5 billion annually over the next 20 years. To help achieve this and take advantage of private sector capital, the government-owned Salt Water Conversion Company (SWCC) will be privatized over the next few years. SWCC is responsible for all of the Kingdom's desalination facilities. ¶8. (SBU) COMMENT: Saudi Arabia has the cash to invest in sufficient desalination capacity to meet short-term increases in household and industrial demand for fresh water. Whether the Kingdom has the will, however, to implement politically sensitive policy fixes such as raising water tariffs is uncertain. Saudi and expat industry leaders think the fixes are inevitable, but they will not invest until the KSA commits to a water price hike. END COMMENT. KENNY