James Simpson, Partner; Chris Shelton, Associate; Martin Skehill, Counsel; and Giulia De Michelis, Associate, Winston & Strawn
The World Health Organisation has reported that more than 40 per cent of the global water-stressed populations live in Sub-Saharan Africa, with an estimated 44 per cent of the urban population and 24 per cent of the rural population having adequate sanitation. Reports suggest that by 2030, 75 million to 250 million people in Africa will be living in areas of high water stress. In the GCC, it is predicted that water availability will halve by 2030, whilst population is expected to increase by over 25 per cent to 52 million.
In an effort to combat future water scarcity, GCC countries are increasing their investment into water and wastewater infrastructure.
The United Arab Emirates is widely recognised as a leader in the development of water production and treatment. In late September, the UAE unveiled its Water Security Strategy 2036, which seeks to ensure sustainable access to water during both normal and emergency conditions. The strategy aims to: reduce the total demand for water resources by 21 per cent; increase the water productivity index to $110 per cubic metre; reduce the water scarcity index by three degrees; increase the reuse of treated water to 95 per cent; and increase national water storage capacity up to two days.
Other countries at the forefront of water and wastewater investment include Saudi Arabia and Oman. Saudi Arabia recently announced new water projects, worth a reported $1.3 billion, in an effort to boost local water production and distribution, in line with the Kingdom’s Vision 2030 and the National Transformation Programme 2020. Of particular note is the Rabigh 3 IWP project, which will be a 600,000 cubic metres per day (cm/d) reverse osmosis seawater desalination plant, expandable to 1,200,000 cm/d. Oman is also aggressively pursuing investment into the water sector, with the Oman Power and Water Procurement Company projecting water demand to increase at a rate of five per cent a year to 2023, from 746,000 cm/d in 2016 to 1.1 million cm/d by 2023.
Traditionally GCC countries have focused on large-scale power and water desalination projects, through the IWPP (independent water and power project) model. One of the most recent success stories to incorporate private participation is the Abu Dhabi Water and Electricity Authority’s Mirfa IWPP, which at the time of writing was only days away from achieving commercial operation.
Despite the success of the IWPP model, we are increasingly seeing a shift from IWPPs to stand-alone IWPs (independent water projects). This can be attributed to a number of factors, including a focus of renewable energy, advances in technology such as reverse osmosis becoming more efficient and cheaper, and an increased capacity on the grid (especially in the United Arab Emirates due to the imminent completion of Abu Dhabi’s first commercial nuclear power plant unit). Of particular note is Oman’s IWP programme, which saw three projects reach financial close in 2016. These included the Sohar IWP (250,000 cm/d), Barka IWP (280,000 cm/d), and Quurayyat IWP (200,000 cm/d). Each of these projects included private participation at the sponsor and financing levels. Other IWPs in Oman include the Salalah IWP, Sharqiyah IWP, and Duqm IWP; projects also under consideration include the Khasab IWP and Wadi Dayqah IWP.
However, increasing water capacity is only part of the picture—wastewater treatment, and the related recycling of wastewater, are growing areas that present exciting prospects.
In this context, the UAE in particular has invested heavily to improve wastewater management systems and enhance the use of treated wastewater as a valuable alternative water resource. Improving wastewater management can help achieve a sustainable water supply, by reducing the pressure on existing water resources and bridging the gap between the demand and supply for non-drinkable recycled water.
To promote the use of recycled water as a “renewable” water resource, policymakers have also been developing regulatory regimes which establish quality standards for treated wastewater and regulate its reuse. In Abu Dhabi and Dubai, for instance, statutory regulations have been introduced with the aim of controlling non-domestic discharges into the relevant wastewater systems and to set minimum standards for recycled water, as well as for the discharge of trade effluent.
Some GCC countries have also continued to expand and upgrade their wastewater infrastructure and recycled water distribution networks. For instance, other countries to have successfully used private investment in the wastewater sector include Bahrain with its Muharraq wastewater project, which despite the civil unrest of the Arab Spring, was able to reach financial close in 2011. Morocco and Jordan have also been successful in collaborating with the private sector, and Kuwait has a significant project in the pipeline. Most recently Saudi Arabia announced its intentions to build wastewater treatment projects in Jeddah and Dammam. These projects will be offered to the private sector on a build, own, operate and transfer (BOOT) basis.
In Abu Dhabi, four new major independent sewage treatment plants have been developed under two 25-year BOOT concession agreements. These plants have now all been commissioned and are fully operational. Further, the Emirate has undertaken an extensive expansion of its wastewater collection network, with the Middle East’s first deep-tunnel sewer network, the ground-breaking Strategic Tunnel Enhancement Programme (STEP), which is set to become operational imminently. STEP is one of the longest and deepest gravity-driven wastewater tunnels in the world; it was implemented on a design and build basis and was procured through a competitive tender that resulted in six contracts being awarded to a range of international contractors.
Dubai has likewise been very active in enhancing its water and sewerage systems and increasing wastewater recycling capacity. Currently, Dubai is planning to undertake a substantial expansion of its wastewater network, by way of a new major deep-tunnel sewer scheme. The project is expected to be completed within the next five to seven years. A new public-private partnership law was also introduced in Dubai at the end of last year, which has the clear potential of leading to an increase in private-sector participation in the development of wastewater infrastructure in the future.
The GCC’s ability to mobilise private participation (for instance, as demonstrated by its IWPPs and IWPs) can be exported to the wider META region through five fundamental pillars:
- A clear, fair and consistent independent regulatory regime: The GCC experience demonstrates the benefit of having a clear and consistent independent regulatory regime built to respect political realities, facilities private investment, and ensure fair regulatory oversight for both the public and private sectors.
- A transparent procurement process: A transparent procurement process is essential to encourage market participation. Project procurement should be by reference to specific non-discriminatory criteria and open to appropriate public scrutiny. For example, the opening of financial bids should be on a bid submission date and should take place in public.
- A well-structured and consistent contractual template: It is also important for projects to be well-structured and follow contractual templates that deliver bankable projects while not requiring extensive reworking for each new development.
- Stability and strength of off-take arrangements: The key to a successful project seeking to encourage private participation is a bankable contractual structure. The off-take contract(s) should ensure a source of revenue over a tenor which is sufficient to ensure repayment of the project finance loan and provide returns to investors. In this respect, the careful selection of creditworthy counterparties is one of a number of critical factors which will determine the bankability of a project. This may involve governments being required to provide payment and/or termination guarantees.
- Making use of the multitude of financing sources: Projects in the GCC have been able to mobilise and leverage all possible financing resources, from domestic capabilities to multilateral partners. These have included export credit agencies, multilateral financing institutions, development finance institutions and political risk insurances providers. All these sources are likely to be vital for the development of projects throughout the META region.
Power projects and water and wastewater projects tend to share a number of similar features, such as project structure, risk allocation regime and contractual documentation. However, it is important to recognise that, in order for a water or wastewater project to be successful, specific features unique to those projects need to be considered and factored into the transaction structure. For instance, wastewater projects will typically feature “all or nothing” completion requirements and novel technical considerations. Financing considerations may also differ due to, amongst others, lower capital costs and a variable input (influent) as opposed to a steady fuel supply found in power projects.
The GCC’s ability to successfully engage private participation in their water and wastewater sectors has created a bankable blueprint that can be exported to other parts of the META region. We expect, as countries seek to guarantee their future water security and wastewater infrastructure, that this blueprint will be exported throughout the META region.