PUSHING WATER UPHILL - - SAUDI WATER SECTOR CHALLENGES

UNCLAS SECTION 01 OF 02 DHAHRAN 000150

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SUBJECT: PUSHING WATER UPHILL - - SAUDI WATER SECTOR CHALLENGES

REF: 08 JEDDAH 184

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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

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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

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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 The SAG recently repealed income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

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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

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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

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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

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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