Urban Water and Sanitation in the Middle East and North Africa Region: the Way Forward

Urban Water and Sanitation

in the Middle East and North Africa Region:

The Way Forward

Jamal Saghir Manuel Schiffler Mathewos Woldu

January 2000

The World Bank Middle East and North Africa Region Infrastructure Development Group This paper is based on an earlier paper presented at the Eighth Meeting of the World Bank’s MENA Council of Advisors held in Jordan in December 1999. It is now being published to make the findings available to a wider audience. The findings, interpretations and conclusions expressed in this paper are entirely those of the authors. They do not represent the views of the World Bank, its Executive Directors, or the countries they represent.

Special thanks go to Jean-Claude Villiard, Director of the Infrastructure Development Group (MNSID) in the Bank’s MENA region, for his valuable support and comments, as well as to staff of the water team in MNSID and to Marie-Laure Lajaunie (MNSRE) for the information and comments they provided.

Jamal Saghir is Sector Manager, Manuel Schiffler is an Economist, and Mathewos Woldu is a Senior Economist in the Infrastructure Development Group in the Bank’s MENA Region. URBAN WATER AND SANITATION IN THE MIDDLE EAST AND NORTH AFRICA REGION: THE WAY FORWARD

Table of Contents

Executive Summary

I Introduction 1

II Characteristics of the Region: water scarcity 2

A Water shortages are serious and growing 2 B Water availability is very uneven in space and in time 3 C Some countries overexploit groundwater, and endanger ecosystems 4 D Shortages are compounded by deteriorating quality 5 E The cost of bulk water and of sanitation is rising 5

III Critical issues: managing urban water supply and sanitation 6

A Access to water and sanitation services is inadequate 6 B The technical efficiency of urban water supply is low 7 C Lack of proper attention to sanitation, wastewater treatment, and reuse 8 D Agriculture-urban water transfers are being avoided 9 E Cost recovery is low 10 F Capacities of many public institutions are weak 12

IV The Way Forward 13

A Improve utility performance: involving the private sector 13 B Define appropriate investment requirements: involving water users 16 C Meet investment requirements: increasing tariffs and mobilizing private capital 16 D Focus on poverty alleviation 17 E Improve water allocation 18 F Desalination 19

V World Bank strategy and support to the sector 20

A Strategy 20 B Attracting the private sector: options and key factor for success 21

VI Conclusion 24 URBAN WATER AND SANITATION IN THE MIDDLE EAST AND NORTH AFRICA REGION: THE WAY FORWARD

Table of Contents (Continued)

Figures:

Figure 1: Renewable water resources per capita and per year (1995) 2 Figure 2: Annual water availability per capita and per year 3 Figure 3: Municipal water supply: unaccounted-for water 7 Figure 4: Wastewater reclamation and reuse as a share of water allocated to municipal and agriculture uses and agriculture 9 figure 5: Intersectoral water allocation in MENA (1995) 10 figure 6: The status of water pricing in the municipal sector 11 figure 7: Desalinated water as a share of M & I water supply 19

***

Tables:

Table 1: Selected performance indicators of water and sanitation utilities 6 Table 2: Options for private sector participation in infrastructure 14 Table 3: Private participation in water and sanitation worldwide 14 Table 4: Conditions for successful implementation of private sector options 22

***

Box 1: Gaza management contract 15 Executive Summary

Water is a scarce and precious resource in the Middle East and North Africa Region. Population growth, rising living standards and urbanization increase the pressure on the resource, leading to increasing costs of urban water supply. Water scarcity and higher costs could further reduce the already low performance of many public urban water and sanitation utilities in the region. Physical losses and commercial losses are high; water is often supplied only for a few hours per day or even per week; little effort has been made to involve water users in low-income settlements to provide them with the most appropriate types of affordable water and sanitation services; tariffs are so low that in some countries even the operation and maintenance costs of the utilities are often not recovered; and wastewater is in most cases not adequately treated, leading to environmental and health hazards. In addition to these problems, governments are reluctant to transfer water from the main water user - agriculture - to urban areas at a relatively low financial cost, because they perceive the social and political costs of such transfers as too high.

At the core of many problems of the urban water supply and sanitation sector is the weak performance of public utilities. With the exception of very few cases, indicators for the level of service provision, technical efficiency and financial performance are much lower than in well- managed utilities, while staffing levels are usually higher than necessary. Substantial efforts have been undertaken in the past to improve the performance of public utilities through financial support for infrastructure investment, technical assistance, and covenants stipulating higher tariffs. However, in the absence of a change in the institutional framework and the incentive system, these efforts have been met with little success.

In light of the growing realization that weak performance is a major contributing factor to the poor level of water and sanitation services in the region, the Middle East and North Africa (MENA) urban water and sanitation strategy is to focus on: (a) utility reforms and improve sector finances; (b) increase private sector participation; (c) rebalance investment programs (water/sanitation); (d) meeting the needs of the poorest segment of the urban population; and (e) redefine the role of government and setting up sound regulatory framework.

The strategy has recently shifted to more emphasis on private sector participation. In the region, the Bank has supported performance management contracts in West Bank and Gaza and in Jordan, and it plans to support management contracts and/or leases in Algeria, Yemen and in other countries. Morocco has embarked on an ambitious program to grant several concessions for urban water supply and sanitation. Guarantees for water supply schemes and wastewater treatment plants are also sought in Lebanon, Jordan and Tunisia.

In order to successfully attract the private sector and to improve the level and the efficiency of services, the role of the public sector in water supply and sanitation has to be redefined, moving to more limited and different, but not less difficult tasks. It is essential for governments to demonstrate a strong political commitment, create an adequate legal and institutional framework, promote a high degree of technical skill among the civil servants regulating the operator, and to ensure a fair and transparent bidding process. An appropriate regulatory framework can and should also provide strong incentives for the private sector to focus on the alleviation of poverty. This could be done by requesting private operators to cover poor neighborhoods, to identify the most appropriate levels of service in those areas in close collaboration with local communities, and to design tariffs in a way that does not discriminate against the poor. I Introduction

The Middle East and North Africa region1—home to 4 percent of the world’s population—possesses only 1.4 percent of global water resources. Three quarters of the land mass is arid, making the region the driest in the world. It is defined largely by drought and desert, and suffers from the scarcity of fresh water, uneven availability, a growing gap between supply and demand, deteriorating water quality, and dominance of agricultural water use. Jordan, Yemen, and the West Bank and Gaza are among the countries least well endowed with water resources in the region.

The urban water and sanitation sector in the region has faced formidable challenges over the last three decades. High overall population growth and even higher urban population growth have not only increased pressure on water resources, but they also created a tremendous additional demand for urban water and sanitation infrastructure. In some cases – such as in Jordan and in Yemen after the Gulf War – this situation was exacerbated by massive influxes of refugees. While the additional demand for urban water infrastructure investment was largely met despite difficult challenges – often with substantial assistance by international donors – the operation and maintenance of urban water systems by public utilities in many cases remained unsatisfactory. Efforts by utilities to increase their performance were usually thwarted, often because of the constraints to which public utilities are subjected, such as restrictions on tariff setting, salary levels, and staffing. In many countries these institutional deficiencies contribute to the lack of water availability for urban water users, with general water scarcity at a national level and inefficient water allocation among sectors being additional causes.

This paper first outlines the framework conditions for urban water supply and sanitation in the region: How serious are water shortages? And what are the consequences of these shortages? Second, the paper discusses how decision-makers in the urban water sector have responded to the challenge of water scarcity: How efficiently is water used? Where has progress been achieved? And what are the shortcomings? Third, the paper highlights challenges for the future: How can a water crisis best be averted? What are the financial and investment requirements? What role can the private sector play? How can private participation best be attracted? Finally, the World Bank’s program of support in the urban water and sanitation sector is briefly described in the context of these challenges.

While the paper focuses on the urban water and sanitation sector, it also highlights the main issues related to water resources at the national level. It does not address issues of transboundary water resources. This paper benefited from the rich discussions and reports prepared in the context of the MENA/MED Water Initiative - a partnership among the countries of the Mediterranean and MENA, as well as the European Commission, the European Investment Bank and the World Bank.

1 The Middle East and North Africa region refers to the countries and territories of Algeria, Bahrain, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Libya, Malta, Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia, United Arab Emirates, Yemen and the West Bank and Gaza. For comparative purposes, we have, in some figures, added data on Turkey and Cyprus.

1 II Characteristics of the region: water scarcity

A- Water shortages are serious and growing

Under the pressure of growing population, water is becoming ever scarcer in the region, especially in the countries least endowed with water resources. Although urban water use accounts for only a small share of total water use, a combination of weak water utilities and of water scarcity at the source leads to intermittent supply in most cities in the region and to a lack of piped water supply for a large number of the poor in urban areas.

The population of the region, having more than doubled to about 270 million in the past 30 years, could double again in the next 30 years. As population has grown, the amount of water statistically available per capita has fallen substantially. Annual per capita availability, about 3,400 cubic meters in 1960, has fallen by 60 percent to an average of about 1,300 cubic meters today, the lowest in the world. It is projected to fall by another 50 percent, to about 670 cubic meters, by 2025.

Figure 1 compares the water availability of the countries in the region, and Figure 2 shows the decline in per capita water availability in MENA compared to other regions.

Figure 1. Renewable water resources per capita and year (1995)

Iraq

Turkey

Iran

Syria

Lebanon

Cyprus

Morocco

Egypt

Oman

Algeria

Tunisia

Israel

Jordan

Bahrain

Yemen

WB&G

Saudi Arabia

Libya

Qatar

UAE

Malta

Kuwait

- 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 m3 per capita

2 Figure 2. Annual water availability per capita and year

16 D Ã 14 V S World FH DÃ U LW 12 AFRICA X S R D ASIA HV F U UÃ 10 MENA UÃ H WH ÃS D UV 8 ÃZ WH OH H 6 E ÃP D LF Z E 4 H X HQ F Ã 2 5 0 1960 1995 2025 Source: World Bank compilation

Total water abstraction in the region is about 200 billion cubic meters per year, equal to about 660 cubic meters per capita per year, or about 50 percent of total water resources. This average, however, masks substantial differences in water endowments and uses across the region. In fact, at least eight countries—Yemen, Jordan, Libya, Saudi Arabia, and four Gulf countries—are already using more than their internal renewable water resources, either by overexploiting groundwater, by desalinating seawater, or by reusing wastewater. And while water availability in an average year is more than 3,000 cubic meters per capita in Iran and Iraq, it is less than 100 cubic meters per capita per year in Malta and the Gaza Strip.

B- Water availability is very uneven in space and in time

Water resources are also distributed very unevenly within countries. Ideally, water resources should be assessed and managed at the level of a river basin, using an integrated approach covering all water-using sectors at the geographical level of the river basin.2 Transfers from basins with surplus water to basins with water deficits—which are being considered in Morocco, Syria, and Yemen—are usually very costly. Such transfers are economically viable only under restrictive conditions, and usually only for municipal supplies, but not for irrigation.

The countries of the Middle East and North Africa are periodically hit by droughts, during which surface water supply can decline to about half the average level. The brunt of such droughts is usually borne by irrigated agriculture—to the extent it relies on surface water—through a reduction in the irrigated area. Although urban water users also feel the effects of droughts, municipal supplies are usually accorded priority over agricultural uses and thus are protected to a certain extent. However, urban water is still scarce.

Only about 7 percent of total water abstractions in the region are used for urban municipal water supply. This corresponds to a statistical average of about 175 liters per day for every urban inhabitant—at first glance, an ample amount. However, this average does not reflect the intermittent nature of piped water supply, the fact that many urban inhabitants do not have access to piped water, and leakage losses.

2 River basin agencies operating along these lines have been established in Morocco and Algeria. 3 Intermittent supply is common in many cities in MENA. Especially during summer, the intervals between “turns” of piped water supply increase significantly. During the summer, in Algiers, for example, water is provided to customers every other day, in Jordan twice a week, and in the city of Taiz in Yemen only once a month. Intermittent supply imposes substantial financial and social costs on consumers. Households throughout the region have spent substantial sums for roof tanks to store water. However, if roof tanks are empty or if pressure is insufficient to fill them, household members, in particular women, sometimes have to do without water for days and adjust household chores such as bathing children and washing clothes or dishes accordingly. As an alternative, they can purchase expensive water from vendors, which the poor cannot afford.

C- Some countries overexploit groundwater and endanger ecosystems

Groundwater resources are being depleted in many parts of the region, either through the mining of fossil aquifers or through the overuse of renewable aquifers. Increased diversion of surface water has endangered and in some cases destroyed valuable aquatic ecosystems.

Egypt, Libya, Tunisia, and Algeria are mining fossil groundwater reserves. Saudi Arabia has reduced groundwater abstraction for highly subsidized irrigated agriculture over the past few years, but groundwater abstraction continues to exceed recharge. Libya is increasingly allocating its fossil groundwater for municipal uses, transferring it from inland desert areas to cities in the coastal area through the “Great Man Made River”. In Egypt, Tunisia, and Algeria, agriculture in desert oases has been expanded by relying on mined fossil groundwater. It is not clear how long the fossil groundwater reserves are going to last, with estimates varying between several decades and many centuries.

Yemen, Jordan, and West Bank Gaza are among the countries in the region where the overuse of renewable aquifers is most acute. In parts of Yemen, such as in the Sana’a basin, groundwater abstraction exceeds recharge threefold. In some parts of Yemen, such as the Al Haima valley near Taiz, wells have dried up and entire villages have had to be abandoned. In Jordan, groundwater in the highlands around Amman is overused, while new supply options have had to be pursued to fulfill the municipal needs of Amman. In the Gaza strip, over-abstraction is causing seawater intrusion and a steady deterioration in the quality of the groundwater.

Increasing surface water abstraction threatens precious aquatic ecosystems in many countries of the region. In Northwestern Tunisia, the fragile salt balance of the Lake Ichkeul, which provides a unique habitat for migratory waterfowl, is endangered by diversions from its tributary rivers. In the Nile Delta, Lake Manzalah, which is protected as an aquatic ecosystem of international importance under the Ramsar convention, is also threatened by changes in flow patterns and pollution. The Azraq oasis in the western part of Jordan, which used to be an important resting point for migratory birds, has already almost completely dried up as a result of overexploitation of aquifers feeding the oasis. In all three cases, at least some of the diverted water was used for municipal uses besides the quantitatively more important agricultural uses.

4 D- Shortages are compounded by quality deterioration

Water shortages are compounded by quality deterioration from pollution and increasing salinity. Pollution is caused by point sources such as the discharge of sewage or leakage from unsanitary landfills, and non-point sources such as fertilizer and pesticides. Increasing salinity of groundwater can be caused by seawater intrusion or by overexploitation of inland aquifers. Surface water salinity increases due to drainage and wastewater return flows and because of low flow conditions in the lower reaches of rivers caused by upstream abstraction.

In many countries in the region, untreated municipal and industrial sewage is released into the environment, either into the sea or into the beds of wadis (small river beds that are filled with water only for a short time of the year), as it is the case in the West Bank, Lebanon, Yemen, and Morocco. In some cases, untreated or inadequately treated sewage is reused for irrigation in an uncontrolled manner, which obviously entails substantial health risks. Treatment is often inadequate, because treatment plants are not well maintained. And in the few cases where treatment is adequate, wastewater is sometimes discharged into the sea, although international experience has shown that adequately treated wastewater can be used as a safe and valuable resource for irrigated agriculture. Unsanitary landfills are another source of pollution, with the potential to seriously impact the quality of aquifers that are used as a source of municipal water supply.

Non-point pollution sources also have a substantial impact on water quality, especially in the case of fertilizers, the residues of which sometimes lead to nitrate concentrations in drinking water in excess of WHO standards. High nitrate content in drinking water can cause a higher incidence of infant death (“blue baby syndrome”). The extent of water pollution through pesticides is not well known due to gaps in the monitoring network, but highly persistent pesticides such as DDT continue to be used in many countries in the region. If a broad range of water quality parameters were consistently monitored and strict drinking water standards were enforced, the assessment of resources available for municipal uses would either have to be revised or expensive new treatment facilities would have to be built.

E- The cost of bulk water supplies and of sanitation is rising

The cost of water supplies and of sanitation is rising, because water has to be supplied from more remote and deeper sources and because of higher treatment requirements. Cities are growing at 4 to 6 percent a year, and already account for 60 percent of the region's population. Furthermore, in all countries it is taking time and political will to change existing allocation patterns and, in particular, to reallocate water from irrigation to urban uses. Finally, where cities depend on surface water supply, industrial pollution has necessitated the costly relocation of water intakes further upstream. The effect of these factors is substantial, with the cost of raw water increasing by a factor of 2 to 3 each time a new water source is tapped.

On the sanitation side, existing low-cost, on-site sanitation technologies have sometimes become non-viable in dense urban settlements. Growing concern for the

5 environment and the health aspects of reusing treated wastewater in agriculture often entail costly rehabilitation of malfunctioning wastewater treatment plants. The amount of investment needed to fully cover the growing cities in the region with sewers, and to adequately treat the resulting additional quantities of wastewater, is daunting. It is, therefore, likely that the cost of sanitation services is going to increase at an even higher rate than the cost of bulk water supply.

III Critical issues: managing urban water supply and sanitation

A- Access to water and sanitation services is inadequate

Although much has been accomplished in providing people access to improved water supply and sanitation facilities, about 45 million people (16 percent of the region’s population) still lack adequate access to safe drinking water and more than 80 million lack safe sanitation. Although most of them are in rural areas, some inhabitants of poor urban neighborhoods also do not have access to adequate water supplies from piped connections or standpipes, and have to rely on water vendors.

As elaborated further below, water supply in most cities in the region including Amman, Beirut, Sana’a, Algiers, and Damascus—is intermittent, with sometimes long intervals between water turns. As shown in Table 1, per capita water use of households with piped supply nevertheless is relatively high (80-110 liters per day net of leakage losses) in most cities, as households routinely store water in tanks. The rate of sewerage connection varies, with impressively high rates (more than 70 percent) in some cities, such as in Amman and Tunis. A high connection rate should not, however, be interpreted as an indicator of successful performance, since treatment plants are often inadequately operated (see below) and sewerage is a costly alternative, while on-site sanitation technologies are a viable solution for some urban locations. Finally, many urban water and sanitation utilities are overstaffed compared to international benchmarks, and cost recovery is low, with many utilities not even covering their operation and maintenance costs. All these issues are further elaborated in the remainder of this chapter.

Table 1. Selected performance indicators of water and sanitation utilities

Gaza Amman Tunis Sana’a Algiers Casablanca Good Practice UFW 31% 52% 21% ~50% 51% 34% 15 – 25% Water coverage* 99% 100% 100% 65% 100% 100% 100% Continuous No No Yes No No Yes Yes supply Per capita water 70 ~80 ~80 50 ~70 110 120 – 150 use (liters/day)** Sewerage 25% 78% 77% 22% 70% 70% -- Collection Employees/000 7 5.5 10 10 8.6 6 4 – 6 connections*** O&M cost No No Yes (Yes) No No Yes recovery Source: World Bank compilation * Including coverage from standpipes, but excluding private piped systems (in Sana’a). ** Estimated amount from public network actually used by the consumer, net of physical losses. *** Comparisons have to take into account the varying degree of sewerage coverage.

6 B- The technical efficiency of urban water supply is low

Up to 52 percent of the bulk water supplied to cities is not billed to water users, and is thus considered “unaccounted-for water” (UFW). This is extremely high by comparison to well-run utilities. UFW is as low as 8 percent in Singapore, for example, and less than 20 percent in most well-run utilities. UFW can be divided in two components: physical losses and commercial losses. Figure 3 shows the unaccounted-for water in various cities in the region.

Figure 3. Municipal water supply: Unaccounted-for Water

Damascus (1995)

Amman

Algiers

Sana’a

Hebron

Gaza (1995)

Oran

Lebanon (average)

Teheran

Casablanca

Gaza (1999)

Ramallah

Tunis

Dubai

0% 10% 20% 30% 40% 50% 60% 70%

Source: World Bank compilation. The high losses in Damascus in 1995 have since been reduced. The low relative losses in Dubai are influenced by high per capita water use, which makes a given amount of absolute losses per km of pipe appear low relative to total water use.

Physical losses—mostly leaks to the groundwater, as well as some evaporation from water flowing in the streets—usually account for a significant portion of UFW. Such losses are due to inadequate maintenance of pipes and other physical assets, which in turn is caused by the institutional and financial weaknesses so common in many public urban water utilities. Physical losses combined with intermittent supply also have an impact on drinking water quality, since polluted water leaking from broken sewers or

7 from cesspits is often pulled into water distribution pipes due to the substantial changes in pressure that occur when supplies are turned on and off.

Commercial losses can be due to illegal connections, malfunctioning meters, incorrect meter reading, and faulty billing. In all these cases, water that is not being billed actually does reach water users. According to some estimates, commercial losses constitute the major portion of UFW in some MENA cities. As in the case of physical losses, the ultimate reasons for commercial losses are the institutional and financial weaknesses of public urban water utilities.

C- Lack of proper attention to sanitation, wastewater treatment, and reuse

As in many other developing countries, sanitation tends to receive less attention and fewer financial resources than water supply. This may be justified to a certain extent, as consumers attach more importance to water supply than to sanitation. However, the lack of attention to wastewater in the region has reached proportions that are difficult to justify. In many countries in the region, such as Morocco and Algeria, more than half of the wastewater treatment plants are not functioning properly due to lack of maintenance. This situation will either lead to negative environmental impacts and health hazards from the agricultural reuse of insufficiently treated wastewater, or to the unavailability of this increasingly important water resource for irrigation.

Investment needs in urban sanitation are likely to exceed those for water supply, if sewerage systems are to be extended to cover an increasing share of the urban population. Furthermore, it is crucial that wastewater be adequately treated if it is to be used in agriculture without health risks. Should sanitation continue not to receive sufficient policy attention, there is a danger that high costs will be incurred with dismal results, as increasing quantities of wastewater are unable to be used in agriculture, or—even worse—if they are used and increase the incidence of disease.

Treated wastewater is currently being reused only to a limited extent in part because of the low cost of alternative sources of water supply for irrigation. For example, groundwater can be pumped at very low cost from a shallow aquifer in Gaza; and the tariff for surface water provided by the public irrigation system in the Jordan valley is only $0.02/m3. Under these circumstances, there is little incentive to use reclaimed wastewater, with its attendant risks (real and perceived) to health and the marketability of agricultural produce.

Practically all countries of the region reuse at least some of their wastewater. In some countries — especially in Saudi Arabia, the Gulf countries, and Israel a substantial share of the water supplied for municipal and industrial uses is reused in agriculture, for public parks and golf courses after treatment. However, in some countries the share of reused wastewater is still low because of inadequate wastewater treatment and of concerns about the marketability of agricultural product irrigated with wastewater.

8 Figure 4. Wastewater reuse in selected countries of the MENA region3

400

350

300

250 Wastewater generated 200 Wastewater reused 150

100

0 Israel Morocco Tunisia Jordan

Source:World Bank compilation (different years).

D- Agriculture-urban water transfers are being avoided

All the governments in the region have so far avoided agriculture-urban water transfers, despite their comparatively low financial costs, because of high perceived social and political costs.

Irrigated agriculture accounts for about 88 percent of water use in the Middle East and North Africa (see Figure 5). In nearly all countries in the region, public irrigation agencies provide farmers with surface water at subsidized tariffs. In many countries, a large number of farmers have drilled wells and are pumping groundwater at their own expense. However, many have received subsidized credits to drill the wells, many have benefited from subsidized diesel or electricity prices for pumping, and most do not pay a resource charge for the groundwater itself.

It has often been pointed out that the economic value of water in municipal and industrial uses is many times higher than in agriculture. Irrigated agriculture contributes 5 to 10 percent to GDP in most countries (excluding the contribution of rainfed agriculture), while industry contributes 20 to 50 percent to GDP, and the service sector (which is concentrated in urban areas) contributes another 30 to 50 percent. Thus, while irrigation accounts for an average of 7 to 8 times more water use than municipal activities, it contributes 4 to almost 20 times less to GDP than urban industry and services.

3 In the case of Jordan, indirect reuse after discharge into a wadi and/or a reservoir is included in the figures. The difference between wastewater generation and reuse in the case of Jordan is due to evaporation and seepage losses during wastewater conveyance. For Israel, Morocco and Tunisia figures on indirect reuse are not available. However, these quantities are estimated to be low for Morocco and Tunisia, as most large treatment plants discharge into the sea.

9 In parts of the region informal small-scale rural-urban water transfers have developed in a market setting. For example, in Amman and in Sana’a water vendors buy limited quantities of water from farmers owning wells and sell the water to urban consumers. The current use of tankers for agriculture-urban water transfers developed out of necessity, but it is less cost-effective than transfers using piped conveyance.

The following considerations should be taken into account while assessing any transfer water from agricultural to urban uses. First, agriculture-urban water transfers – no matter what technology is used - entail substantial financial costs for the physical transfer of water over long distances and high differences in altitudes. Second, and more important, such transfers are inevitably associated with social and political costs, as farmers may have to give up their livelihood, and as opportunities for rainfed agriculture or non-agricultural employment are very limited.

Because of these perceived high social and political costs the governments in the region have shied away from formal agriculture-urban water transfers involving piped conveyance by utilities. Instead, they have sought to increase urban bulk water supply, sometimes bypassing irrigated areas right next to the city.

Figure 5. Intersectoral water allocation in MENA (1995)

Dom. Ind. 7% 5%

Agr. 88%

E- Cost recovery is low

In all the countries of the region, tariffs for urban water supply and sanitation are subsidized, and the average share of the water bill in income is around 2 percent. However, in some cases the poor pay high prices for water due either to poor tariff design or—for those not connected or facing unreliable supplies—to their reliance on water vendors.

In some cities, such as Gaza, Amman, and Sana’a, water and sewerage tariffs were not sufficient to cover operation and maintenance costs until recently. In other countries, such as in Syria, tariffs still do not cover operation and maintenance costs. Only in a few countries, such as Tunisia, Morocco, and Iran, do revenues generate the modest surplus necessary to partially cover capital costs. But in no country in the region, except in

10 Cyprus, do tariffs recover the full operation, maintenance, and capital costs of water supply and sanitation. The current average level of water tariffs in the region varies between US$ 0.04/ cubic meter in Cairo and US$ 1.11/ cubic meter in Ramallah (see Figure 6). The level of wastewater tariffs (not included in Table 6) is usually much lower, and in most countries of the region the operation and maintenance costs of sanitation services are not recovered. Urban water utilities thus usually depend on subsidies from the central government. In Algeria, for example in spite of huge investments in urban water systems, amounting to US$3.80 billion over in the last 20 years, the situation remains critical and water shortages are the norm rather than the exception in many cities. The major financing agency has been the World Bank, which lent a total of US $ 1 billion from 1978 to 1996. In addition, public utilities often incur substantial new debt, potentially threatening their financial viability. Because of the dire financial situation of many public utilities, salary levels remain very low, leading to a lack of motivation on the part of employees. Maintenance is often deferred, exacerbating already low levels of technical efficiency, and leading to a vicious circle of lower quantities of water sold and even lower revenues.

Figure 6. The status of water pricing in the municipal sector

1.20

1.00

0.80

0.60

0.40

0.20

0.00 Average Water Tariff in Tariff US$/cum Water Average n ty ’a s ) t) a i a r e trip) a C gie Cairo mm S z San l wid A A y Ramallah (average) Ga untr o non (c a a (countrywide) a ira Govt. (Egyp i ri y Leb S Tunis Behe Khan Younis (Gaza

Source: World Bank compilation. For increasing-block tariffs, where more accurate data were not available, the average tariff has been calculated based on a family of eight and water use of 80 liter per capita and day.

It is sometimes argued that low urban water tariffs encourage wasteful water use. However, such waste is constrained by the fact that water supply in most cities is intermittent, forcing consumers to use less water than they would under conditions of continuous supply. In addition, the increasing-block structure of most urban water tariffs—which makes water more expensive if more water is used—also discourages wasteful consumption, if properly understood by water users, except perhaps for a small group of affluent urban water users for whom the size of their water bill is of little significance.

As noted above, the average water bill as a share of average household income in the region tends to be low, at around 2 percent. In some cases, water users have expressed 11 their willingness to pay more for water, if the service level is improved in terms of continuous supply and reliably good water quality. However, the many households that have already spent a substantial amount for large roof tanks may not be willing to pay more for improved service. In addition, there are political difficulties involved in explaining to urban users why tariffs will have to go up even if service levels remain unchanged, simply because expensive new supply schemes are needed to provide the same—usually unreliable—services to a growing population.

An issue that deserves particular attention is the design of tariff structures. Most water utilities in the Middle East use increasing-block tariffs, in part because they lead to cross-subsidies from large water users to small water users, based on the assumption that large water users are rich and small water users are poor. However, especially in poor urban areas, several households often share a single water connection, and poor families also tend to be larger than richer families. As a result, poor families sometimes have to pay very high water tariffs. Increasing-block water tariffs are also supposed to encourage water savings. However, this assumes that most water users understand the structure of the tariffs, which is not necessarily the case. The use of linear tariffs may thus sometimes be more compatible with the objective of poverty alleviation than is the current tariff structure.

Paradoxically, in most cities, people not served by the piped public water supply often pay the highest price for water. Vendors typically charge $2 to $3 for a cubic meter of water, which is about 10 times the tariff paid by those connected to the piped supply. In most cases, those who have to rely on water vendors are among the poorest in society, thus exacerbating the social impact of water scarcity and of insufficient coverage by the public network.

F- Capacities of many public institutions are weak

The limited capacity of most public water and sanitation utilities—as well as of public institutions for irrigation and water resources management—lies at the heart of the largely inadequate response to the daunting water problems in the region.

The disappointing performance of most public water and sanitation utilities can be explained to a large extent by the administrative and political environment in which these utilities have to operate. Some important factors affecting the performance of utilities are beyond their own control. For example, tariff increases are usually decided at the cabinet level. They are often postponed for political reasons such as upcoming elections, sometimes leading to a steady decline in real tariff revenues. Another issue is arrears by public entities, which sometimes have insufficient budgetary allocations to pay their water bills. More important, public utilities are often expected to contribute to the alleviation of unemployment by hiring and keeping on their payroll a large number of low-qualified staff, some of whom are not essential to maintaining operations. The number of employees per 1,000 water connections is between 5 and 10 in utilities in the region, while it is 4 to 6 in Western Europe and in well-run utilities in developing countries. At the same time, utilities are subject to civil service salary rules, severely restricting their ability to attract, motivate, and maintain qualified staff who are essential to successfully perform key technical and managerial functions.

12 Needless to say, this assessment of public water and sanitation utilities in developing countries is not restricted to the MENA. For example, a review of World Bank experience in the sector showed that out of 120 projects, only projects in four countries—Singapore, Korea, Tunisia, and Botswana—have public water and sewerage utilities reached acceptable levels of performance

IV The way forward

A- Improve utility performance: involving the private sector

To meet the challenges outlined above, fundamental changes are needed in the performance, incentive structure, and service orientation of urban water and sanitation utilities. The private sector can play an important role in facilitating these fundamental changes.

The difficulty of improving the performance of public utilities without such fundamental changes has been shown by four decades of experience with donor-assisted efforts, including substantial financial support to expand and rehabilitate systems, extensive technical assistance, and innumerable covenants stipulating tariff increases. These efforts have helped to expand the coverage of water and sanitation infrastructure, but they have largely failed at making urban utilities financially sustainable and at improving the technical efficiency of their operations.

While some public water and sanitation utilities—such as in Tunisia, Iran or the Jerusalem Water Undertaking in the Ramallah area of the West Bank—have performed relatively well from the beginning, there is no example of a public water utility in the region whose performance has improved significantly and where this improvement has been sustained. In order to achieve lasting and significant change, what is needed is a break in the prevailing institutional environment and a fundamental change in the nature of incentives.

The private sector can play a significant role in achieving such a change, because its involvement entails a change in the prevailing business culture and salary levels, along with much needed managerial and technical expertise in operation and maintenance, and in customer relations.

The scenarios for private participation in infrastructure (PPI) range from government retaining full responsibility for operations, maintenance, capital investment, financing, and commercial risk, to scenarios in which the private sector takes on much of this responsibility (see Table 2). The scenarios are differentiated by the allocation of responsibility for such functions as asset ownership and capital investment between the public and private sectors. The more risk and responsibility passed to the private sector, the more powerful the incentives to improve services. It should be noted that an outright privatization through the full sale of assets (divestiture), as practiced in England, has rarely been undertaken by any other country in the water and sanitation sector.

13 Table 2. Options for private sector participation in infrastructure

Option Asset Operations and Capital Commercial Scope of contract Duration Examples ownership maintenance investment risk Service contract Public Public and Public Public Meter reading, 1-2 years Chile (Santiago) private collection of bills, leak India (Madras) repairs etc. Mexico Management Public Private Public Public Full system 3-5 years Gaza contract Amman Bethlehem/Hebron Trinidad and Tobago Lease Public Private Public Shared Full system 8-15 years Guinea (17 cities) Senegal Poland (Gdansk) Build-operate- Private Private Private Private Bulk supply, 20-30 years Malaysia (Johor) transfer (BOT) wastewater treatment Australia (Sydney) plants Concession Public/Private Private Private Private Full system 25-30 years Argentina (Buenos Aires) Ivory Coast Philippines (Manila) Rabat Casablanca Divestiture Private Private Private Private Full system Indefinite England and Wales

Management contracts can play a particularly important role in water and sanitation, where private sector interest has been low compared to other infrastructure sectors. Management contracts have the potential to bring in significant private sector expertise and to improve operating efficiency, at least temporarily. However, they rely on donor financing and involve no financial contribution from the private sector. Nevertheless, management contracts improve the level of knowledge about water supply and sewerage systems, thus providing a better information basis for the government and for potential bidders. Perhaps more important, they also provide both governments and private investors with a certain level of confidence, which may facilitate more comprehensive and long-term private sector participation than may otherwise have been feasible.

Private participation in water and sewerage projects in developing countries has been increasing rapidly, as shown in Table 3.

Table 3. Private participation in water and sanitation worldwide

Number of Projects Awarded to Private capital Period private companies investment 1984-1990 8 $297m 1990-1997 97 $24,950m

14 These projects have been concentrated in Latin America and in East Asia, accounting together for 81 percent of global private investment in water and sanitation between 1990 and 1997. MENA represents 13 percent of total investment, but involves only 4 projects out of 97 and 7 in 1999.

The most ambitious PPI program in water and sanitation in the region has been initiated by Morocco. It included a concession for Casablanca in August 1997 and a second concession for Rabat-Salé in May 1998. Five new concessions are planned for Marrakech, Fez, Tangiers/Tetouan, Settat, and Agadir. The Bank has supported management contracts in Gaza in 1996 (see Box 1 below), as well as in Amman and Hebron/Bethlehem in 1999. Further private sector participation projects are planned for Algiers, Sana’a, and the Northern area of the West Bank.

Box 1: Gaza management contract In 1995, as the interim agreements between the Palestine Liberation Organization and the government of Israel were being finalized and signed, water and sanitation services in the Gaza Strip were in crisis. In mid-1996, Lyonnaise des Eaux/Khatib and Alami (LEKA) was awarded a four-year water services management contract to help local government service providers and the Palestinian Water Authority improve water service. The contract was the first of its kind in a World Bank-funded project in the Middle East. The contract fee is split between a fixed annual payment and an additional performance payment based on the achievement of performance targets. The contract is not funded by revenue from water and sanitation services. Rather, it is funded entirely by a US$25 million credit from the World Bank to the Palestine Liberation Organization for the benefit of the Palestinian Authority, because political and security concerns would likely have dissuaded operators from taking on such a large assignment without the support of the Bank. The Bank also contributed to another crucial aspect of sector improvement, establishing a US$12 million fund to invest in the operational capacity of water and sanitation infrastructure. Three years after the award of the contract, the water supply system is much improved. Unaccounted-for water dropped from 48 percent in 1995 to 31 percent in 1999. Water consumption for the same period was almost 16 million cubic meters, nearly 50 percent more than in 1995; per capita water consumption rose by 50 percent, and collections rose almost thirty-fold.

Two important questions for improving the performance of water utilities is how to best involve water users in decision-making, and how to make utilities more responsive to the needs of their customers. Users could be better involved in planning certain types of investments. For example, their preferences and willingness to pay for on-site sanitation or for full sewerage could be solicited at an early stage. User representatives could also be invited to serve on the boards of utilities. Call centers for customer complaints could be established, along with a program to monitor how fast action is taken on complaints. Furthermore, better and more focused efforts could be undertaken to inform water users about the structure of existing tariffs, the costs of existing and additional supplies, and the rationale for tariff increases. Both private sector companies and non-governmental organizations have extensive experience in how to bridge the gap that often exists between public water utilities and their customers.

Despite the prospective benefits of private sector participation, governments often have concerns as they set out to involve the private sector in water and sanitation. They usually are concerned about how utility employees will be affected, and fear labor unrest and the loss of control of a strategic and politically sensitive sector. They are also concerned that privatization will require price increases and therefore hurt the poor. Many of these concerns can be addressed through careful planning of the private sector arrangement; careful design of supporting policies and setting up sound regulatory frameworks. For example, labor concerns may be alleviated through retraining programs 15 and severance payments. Control over some strategic issues, such as protection from arbitrary tariff increases and guarantees of reliable service, can be achieved through an appropriate regulatory framework and through contract conditions. However, tariff increases are in most cases an unavoidable corollary of improved services and of the need to develop higher-cost sources for growing urban populations.

B- Define investment requirements: involve water users

A review of Bank-financed water and sanitation projects shows that MENA countries in the past focused their attention primarily on investments in large water and sanitation infrastructure. The high capital, operation, and maintenance costs of this infrastructure have made it more difficult to recover the full cost from users and to make water utilities financially sustainable. It should therefore be reconsidered whether new investments, in particular for sanitation, should rely on the costly technologies that have been prevalent in the region or whether low-cost alternatives should be used instead, where appropriate.

In some developing countries, such as Brazil and Pakistan, low-cost sanitation technologies have been introduced successfully by asking water users what level of service they would be willing to pay for. There is a range of innovative sanitation technologies to choose from. In some cases it may be preferable not to install sewers, but to continue to use existing on-site sanitation technologies such as cesspools and septic tanks. In other cases, sewers may be installed only for a block of houses connected to a communal septic tank. Under certain circumstances, however, the high-cost solution of connecting to a citywide sewerage network is the only feasible technical solution. In the wealthier neighborhoods, water users may be able and ready to pay the full costs of such systems. In poorer neighborhoods, however, it may be useful to involve water users early on in the design—and perhaps in the construction—of feeder sewers under the streets in front of their houses. Households that have been involved in such a way often develop a strong sense of ownership and are willing to maintain the sewers, while utilities can limit their responsibility to the maintenance of the main sewer lines. This group of users could pay a reduced sewerage tariff to take into account their contribution to building and maintaining the system.

The challenge is to create the institutional and organizational conditions that oblige suppliers of services to be more efficient and more responsive to the needs of the poor. Instead of implementing pre-designed projects, utilities would ask communities what kind of water or sanitation technology they want and would be willing to pay for, and perhaps support with their own labor. Instead of expensive, high-tech systems that they cannot afford, communities would be able to choose from a range of innovative systems that would make water and sanitation affordable.

C- Meet the investment requirements: increasing tariffs and mobilize private capital

The increasing investment requirements for the sector will have to be mainly financed through higher tariffs. The private sector can help to alleviate tariff increases through increased operating efficiency and through capital injections, but it cannot deliver results without sufficient revenues. 16 The eight countries in the region that have borrowed from the World Bank for the water and sanitation sector in the last three years—Algeria, Egypt, Jordan, Lebanon, Morocco, Tunisia, West Bank and Gaza, and Yemen—have invested US$0.8 billion annually in urban water and sanitation development, of which about US$0.5 billion has come from official development assistance. This represents an average of 0.5 percent of their combined GDP. In the future, these expenditures are likely to increase to 0.8 percent of GDP. Including Iran, Iraq, and Syria in the above estimate, the investment needs would be about $40 billion over the next 10 years3.

An estimate of the financing needs in water and sanitation in the region over the next ten years indicates that about 60 percent of the estimated future investment needs of $40 billion must come from governments (equivalent to US$ 24 billion), mostly through tariff revenues. The international donor community would contribute up to an estimated 20 percent — $8 billion. The investment opportunities for the private sector, whose participation is currently very low, are in the range of another $8 billion or 20 percent of investments. However, these opportunities will only materialize if governments make a concerted effort to remove barriers to entry and other impediments to private investment.

Generating sufficient revenue to finance the utilities’ contribution to the public sector’s $24 billion stake in these expected investments will only be possible through a combination of increased tariffs, improved billing, and a reduction of leakage losses. The private sector can contribute to increasing the operating efficiency of utilities and thus alleviate the need for tariff increases. It can also inject private capital and thus help to defer the need for tariff increases, but ultimately the return on the private capital injection will have to be earned through higher tariff revenues.

Concessions and Build-Operate-Transfer (BOT) projects are the most appropriate PPI instruments to generate cash injections to the water and sanitation sector. However, the risks associated with these projects are high. Therefore, the Bank may provide partial risk guarantees to some BOT projects, including the Awali Conveyor Project in Lebanon, the Disi-Amman Water Project in Jordan, and the Greater Tunis Waste Water Treatment Plant.

D- Focus on poverty alleviation

Of the 45 million people in the MENA region who still live without access to clean water, the vast majority of the unserved are poor people of which many live in the crowded low-income urban neighborhoods. Inadequate water and sanitation services to the poor have a particularly adverse impact on the poor, who are most vulnerable to the spread of water borne diseases. A major stride in providing improved services to the urban poor is expected to have a significant impact on their quality of life.

As indicated earlier, until recently Bank-supported projects in MENA focused primarily on investments in large water and sanitation infrastructure, mainly in major urban centers. They emphasized development and rehabilitation of water supply networks, encouraged private sector participation, improved performance the autonomy

3 This would allow, over the next 10 years, an increase of water supply service coverage from 84 to 90 percent, and an increase in sewerage and sanitation coverage from 72 to 80 percent, as well as a substantial increase in water use efficiency and the quality of treated wastewater. 17 of water utilities and supported regulatory systems as well as explicit subsidies and efficient and equitable tariff structures.

While reforming and improving the performance of public utilities is expected to address the problem of access to water and sanitation services by the majority of the population with household connection, in cities throughout the MENA countries, there is a substantial segment of the population that relies on the "informal sector" – i.e. water vendors and small scale private service providers. There are difficult policy and institutional problems such as informal settlements, law enforcement on non-payment, land tenure etc. that not even a well functioning water utility will be able to address effectively. This calls for a concerted public-private partnership.

In some cases, the poor may be unable to pay high lump-sum connection fees, although they are able and willing to pay relatively high water tariffs. In these cases, connection fees could be collected in installments over several years. This mechanism has been successfully applied in Latin America, in Tunisia and in Morocco. If water users in poor neighborhoods are involved in the construction and maintenance of portions of the water and sewerage network close to their homes, as described above, the connection fees could be completely waived and discounts on water and sanitation tariffs could be granted.

Finally, the structure of tariffs should be designed in such a way that poor households do not pay higher tariffs than wealthier households. As noted above, when several poor families rely on a single connection, and when poor families are very large, some types of increasing-block tariffs prevalent in the region turn out to be discriminatory. Therefore, such tariffs should be carefully analyzed and be reviewed in terms of their social impact.

The challenge is to adopt innovative and a more flexible technical and institutional approaches specifically designed to meet the needs of the poorest segment of the urban population. This calls for public-private partnership that creates a synergy between the formal and informal sector. The Bank will continue its efforts to ensure that the poor can gain access to efficient, sustainable water and sanitation services.

E- Improve water allocation

As mentioned above, reducing water use in irrigated agriculture is often the least- cost option for urban water supply, but it is being avoided by governments because of the perceived social and political costs of such transfers. However, there may be ways to alleviate these costs.

As the costs of bulk water supply increase, it may be warranted to explore how the social and political costs of potential transfers could be minimized. For example, a recognition of farmer’s de facto water rights, an emphasis on the voluntary character of all transfers, and the acceptance of the principle that farmers have to be fully compensated may go a long way toward alleviating fears of “selling the lifeblood of farmers to the city.” Water transfers would always have to be negotiated with those who hold de facto water rights, with full transparency for the conditions of such transfers, and within a clear regulatory framework.

18 Farmers could also consider renouncing only some of their water in exchange for financial support for the introduction of more efficient irrigation systems, which would enable them to farm the same area while using less water and even increasing their yields.

Because of the difficult political, social, and legal aspects of such transfers, it should, however, not be expected that substantial amounts of water in the MENA countries will become available from this source in the near future.

In parallel to fresh water transfers from agriculture to urban areas, increasing quantities of treated wastewater will become available to farmers in the vicinity of urban areas. It is crucial to ensure that this wastewater is adequately treated. Depending on the quantity and quality of water and wastewater, fresh water transfers and wastewater flows could be tied together in a water exchange, with compensation if the quantities and quality are not equivalent.

F- Desalination

Seawater desalination is practiced on a large scale in Saudi Arabia and in the Gulf countries, where it contributes substantially to municipal and industrial water supplies. The less affluent countries of the region, however, have not yet embarked on large-scale seawater desalination due to its high costs and, in many cases, to the availability of lower-cost sources of urban water supply. Desalination of brackish groundwater (water with a moderate salt content) is practiced on a limited scale in most countries in the region, for some industrial water uses such as foods and beverages, or to improve the quality of drinking water in specific locations.

Figure 7 shows the share of desalination of both seawater and brackish water as a share of total municipal and industrial supplies.

Figure 7. Desalinated water as a share of M&I water supply

Desalination in the Middle East and North Africa including brackish water desalination 3000 y

2500

2000

1500

1000

500 capacity in ’000 cum/da ’000 capacity in 0

E r n q n a a a a n lt A r eria a a ypt U I Ir g m Libya Qat hrai O M Eg Israel Kuwait Ba Al

Saudi-Arabia

Source: World Bank compilation

19 The cost of desalination, varying between US$0.60 and US$1 per cubic meter excluding distribution costs is two to four times higher than the current cost of bulk water supply (excluding distribution) in the region and several times higher than the value added of water in agriculture, which is the main water user in MENA. It is also much higher than the municipal water tariffs in most countries of the region. Finally, the costs of conveying water to and distributing water in the main urban areas—which are sometimes far away from the sea and at high altitudes, such as Amman or Sana’a—are sometimes several times higher than the costs of desalination.

Given the still relatively high costs of desalination and of conveying desalinated water to consumers, this technology should not be viewed as the solution to the region’s complex water problems. Desalination does have a role in the MENA countries as one option among others to be considered. But for the foreseeable future, economic considerations may warrant limiting its application in MENA borrowing countries to brackish groundwater and to seawater desalination on a limited scale for municipal purposes in water-scarce towns in coastal areas.

V World Bank strategy and support to the sector

A- Strategy

Over the past five years, the World Bank has been actively engaged in developing strategies and policies for water resources management and for urban water supply and sanitation in MENA.

In water resources management, the Bank has realized that a narrow sectoral approach to water projects—dealing separately with urban water supply and sanitation on the one hand, and irrigation and drainage on the other hand—is bound to fail under conditions of increasing water scarcity. It is now essential to take into account the linkages between sectors and to manage water resources in an integrated manner. In order to address these issues, the Bank has assisted Algeria, Egypt, Jordan, Yemen, Morocco, and Tunisia in preparing national water sector reviews or strategies aimed at gaining a better understanding the sector and reaching agreement on priority actions.

At the regional level, the MENA/MED Water Initiative is supporting countries in accelerating the development of comprehensive and integrated national water policies and strategies to meet the challenge of sustainable water resources management. The initiative supports regional seminars as well as research and knowledge dissemination. It envisions extensive cooperation among the various international organizations, donors, private sector participants, and academic organizations that have an interest in its common objectives.

In water supply and sanitation, as discussed above, it is difficult to achieve improvements without fundamental changes in the way urban water utilities are managed. Substantial financial support, extensive technical assistance, and efforts to increase cost recovery have so far produced only marginally satisfactory results. The coverage of water and sanitation infrastructure has been expanded, but most urban public utilities have not become financially sustainable, the technical efficiency of their operations remains low, and their economic efficiency—measured by their returns on capital—is modest or negative.

20 In light of the growing realization that weak performance is a major contributing factor to the poor level of water and sanitation services in the region, the MENA urban water and sanitation strategy is to focus on: (a) reforming utilities and improving sector finances; (b) increasing private sector participation; (c) rebalancing investment programs (water/sanitation); (d) meeting the needs of the poorest segment of the urban population and (e) redefining the role of government and setting up of a sound regulatory framework.

B- Attracting the private sector: key factors for success

The Bank’s strategy in MENA is to support private-public partnerships, which will gradually increase the role of the private sector in service delivery, management, and investment. A phased approach is being considered in different countries, including Algeria, Jordan, Lebanon, West Bank and Gaza, and Yemen. It consists first in the introduction of the private sector in the operation and management the utilities, or commercialization of the operations. For example, in the Gaza Strip, a private operator has been contracted in 1996 by the Palestinian Authority under a performance-based management contract to improve the drinking water supply and wastewater systems. Similar contracts have been concluded in 1999 in Amman and in Bethlehem/Hebron. The same is being envisaged for Algeria and Yemen. And Lebanon is moving toward contracting private operators for maintenance.

The approach used to foster private sector participation depends on each government’s main objectives; e.g., improving technical and managerial expertise, increasing efficiency, constructing large-scale projects, reducing the cost of public subsidies, and making the water sector more responsive to its customers. Regardless of the approach, a number of conditions need to be considered (Table 4).

Table 4. Conditions for successful implementation of private sector options

Option Stakeholder Cost- Good system Developed Good country Potential support and recovering information regulatory credit rating benefits of political tariffs framework the option commitment Service Unimportant Not necessary Possible to proceed Minimal monitoring Not necessary Low contract in the short term with only limited capacity needed information Management Low to moderate Preferred but Sufficient Moderate Not necessary contract levels needed not necessary in information required monitoring capacity the short term to set incentives needed Lease Moderate to high Necessary Good information Strong capacity for Not necessary levels needed required regulation and coordination needed Build- Moderate to high Preferred Good information Strong capacity for Higher rating operate- levels needed required regulation and will reduce costs transfer coordination needed Concession High levels Necessary Good information Strong regulatory Higher rating needed required capacity needed will reduce costs

Divestiture High levels Necessary Good information Strong regulatory Higher rating High needed required capacity needed will reduce costs Source: World Bank

21 What are the prerequisites for success?

If MENA countries are to reap the efficiency and productivity gains that private provision can bring to this vital sector, and if the private sector is to participate to the maximum in service provision and in tapping the market for private investment in water and sanitation infrastructure estimated at $8 billion over the next decade, several key issues will have to be addressed:

• Governments should set and pursue sound policies and establish an adequate legal, regulatory, and institutional framework. As MENA governments move further toward involving the private sector in infrastructure in general and in the water sector in particular, they will have to formulate overall objectives, strategy, and priorities, including a transparent and universally applicable set of policies and standards under which private infrastructure providers are expected to operate. These standards need to define, inter alia, pricing policies, scope of competition, performance criteria, monitoring arrangements, and service quality expectations. The specifics will vary according to country and sector circumstances. What is important, however, is that policies, regulations, and standards are fair and reasonable for all parties involved, that they are clear and unambiguous, and that they are dependable and not subject to arbitrary change.

• Given that private participation in infrastructure is a relatively new area for most MENA countries, MENA governments will have to develop more systematic approaches to regulation of the water and sanitation sector. Regulation will have to provide incentives for private suppliers of services to cut costs and provide better services to customers.

• The procurement arrangements for attracting potential operators must be clear, credible, and well designed. The bidding process should be fully transparent and the terms of privatization or the proposed concession, BOT, or management contract need to be organized so as to attract serious bidders. Competitive bidding is the most transparent approach, but it must be adapted to the complexity of project finance transactions and the desire to derive maximum benefit from the flexibility and innovation that private entrepreneurship can bring.

• Governments will have to deepen reforms of the legal system to enable the private sector to finance water infrastructure and other projects. Given the capital-intensive and long-term nature of water infrastructure projects, the private sector needs assurances of property rights protection, easy transferability of foreign exchange, and expeditious dispute resolution mechanisms, including international arbitration. Without these supporting reforms, private providers will demand higher returns to compensate for higher risks—which will be translated into higher prices for consumers.

22 • Foreign capital and expertise are much needed in the region, even in the high-income Gulf Cooperation Council (GCC) economies. Thus, allowing foreigners to participate in privatization and infrastructure financing is important.

• Government guarantees are almost certainly needed in order to reduce perceptions of risk. The basic approach to risk management should be based on the principle that the party best able to manage a risk at least cost should do so. It may be necessary to unbundle the various risks so as to determine which participant is best placed to manage high risk at the lowest cost, and how the cost of mitigation can be shared equitably.

• Risk mitigation should be well defined. Investors decide where to put their money on the basis of many factors, but fundamentally the issue is one of perceptions of the balance between risk and reward. Financial mechanisms that mitigate investors’ perceptions of risk in unfamiliar country markets can thus benefit both investors and the host countries. Investors can enter these markets with greater comfort—and new host countries that might not otherwise have benefited from foreign private investment flows may move into the ranks of countries for which perceptions of risk are gradually reduced. This is especially important for regions such as MENA, where perceptions of risks have historically been high. The benefits of risk mitigation have another aspect as well— reduction of the cost of investment funds to the host country or recipient entity. Where perceptions of risk are high, private investors and lenders will seek very high returns— again, especially in regions such as MENA, where foreign investors’ experience has hitherto been very limited (with the exception of the special case of oil). But the need to provide very high returns – as long as risks are perceived as being high - defeats the purpose of attracting private sector finance into infrastructure—to improve the quality, broaden the coverage, and lower the cost of services, so as to make services simultaneously better and more affordable for consumers, and cheaper for businesses, which can then become more efficient and competitive.

• Lack of appropriate term financing is widely considered a binding constraint. In most MENA countries medium or long-term debt is not available from local banks or capital markets, benchmark prices for term debt are limited, and skills or experience in debt financing are limited as well. Because of the nature of their assets, most infrastructure water and wastewater projects require long-term debt financing of 15 to 20 years. Governments and/or the private sector therefore need to establish long-term financing arrangements and mechanisms for infrastructure projects. Guarantees can play an important role, but specific new instruments—infrastructure funds, or arrangements to attract private equity funds and to permit pension and insurance funds to participate in infrastructure investments—will also be important for mobilizing additional finance.

• Government financial support can take many forms, including equity guarantee, debt guarantee, exchange rate guarantee, grant, subordinated loan, minimum revenue or physical output throughout guarantee (such as in a raw water purchase agreement), guarantee of performance of public enterprises or other public entities, and concession extension. These mechanisms have varying abilities to facilitate private financing, resulting in varying degrees of government financial exposure. Guarantees from the World Bank can further enhance the creditworthiness of projects.

23 VI Conclusion

Clearly, countries in the Middle East and North Africa face major water management challenges that, if left unattended, will constrain their efforts to achieve better living standards. There is a danger that the increasing investments that are being spent in water supply and sanitation will lead to disappointing results in terms of service coverage, service quality, and environmental improvement, unless countries succeed in tackling the areas of pricing and sector finances; attracting the private sector; meeting the needs of the poorest segment of the urban population; redefining the role of governments and public utilities; and setting up regulatory framework to break a cycle of low revenues, asset disrepair, poor service and slow expansion.