Istanbul, Turkey November 8, 2006

1. OECD Conference Public-Private-Partnership for Infrastructure Financing PPP in the MENA Water Sector Challenges and Opportunities Istanbul, Turkey November 8, 2006

2. Turkey 3,292 Iraq 2,892 Iran 2,022 1,426 Syria Lebanon 1,150 Morocco 886 Egypt 752 Tunisia 496 440 Algeria 333 Oman Israel 271 Palestine 213 Yemen 198 Jordan 156 Bahrain 145 Qatar 116 Libya 104 KSA 91 UAE 78 0 Kuwait The MENA region is one of the driest regions in the world, with most countries falling below the water scarcity level Renewable Water Resources (2005) (m3/capita/year) Water scarcity 1,000 m3/person

3. However, some of the MENA region countries have relatively high water consumption rates Urban Water Consumption and GDP per Capita 900 800 Canada Inefficient distribution Lifestyle drivers 700 600 United States UAE Armenia Venezuela Australia 500 Consumption per Capita (l/capita/day) 400 Mexico Japan Qatar Georgia Lebanon Sweden Argentina 300 Chile England & Wales Norway Saudi Arabia Austria Cyprus Germany Switzerland 200 Finland Jordan Environmental concerns Morocco 100 Oman Netherlands China Indonesia Tight supply Yemen Senegal 0 0 10,000 20,000 30,000 40,000 GDP Per-Capita Adjusted by Purchasing Power Parity (USD)

4. The water sectors in the region are facing a number of serious challenges across the whole value chain Sourcing Treatment Transmission & Distribution Customer Service Usage Sewage Collection & Treatment • Fast depletion of non-renewable reserves • Ineffective supply management policies and plans (e.g., desalination vs. ground and surface water, reuse water) • Issues with quality of water supplied • Environmental challenges in desalination and ground water reserves • Water distribution coverage rates well below international average • High level of unaccounted for water compared to international best practices • High water delivery costs • Lack of service continuity • Long response time • Tariffs below cost recovery level • High rate of un-metered water and technical problems with meters • Very low revenue collection rates • Lack of effective demand management (consumer awareness of water scarcity; conservation policies and plans) • Limited collection network coverage • Very low capacity for wastewater treatment • Operational efficiency issues

5. Water and especially wastewater coverage is limited Network Coverage (2005) Potable Water Wastewater MENA Average 75% MENA Average 48%

6. Unit costs are relatively high and tariffs cover less than 20% of delivery cost Tariff to Cost Ratio vs. Water Delivery Cost 1.2 Oman Denmark UK 1 Europe Average Finland Sweden Netherlands(1) 0.8 Australia Cost Recovery (Tariff/Cost) 0.6 0.4 Lebanon 0.2 Saudi Arabia Tunisia Bahrain Morocco Jordan Iran Egypt Iraq Algeria Syria 0 Libya 0 0.5 1 1.5 2 Water Delivery Cost ($ per m3)

7. Delivery is burdened by low productivity in the water sector Water and Wastewater Staffing Efficiency(Number of Staff per 1000 Water and Wastewater Connections) 19.9 19.7 MENA Countries Best Practice Average = 2.5-3

8. Water Wastewater MENA governments plan to spend around USD 100 billion by 2015 to meet the growing demand Expected Investments by 2015 in MENA Water and Wastewater Sectors (USD Billion) 24.5 5% 18.7 22% 13.2 6% 8.2 95% 4.6 78% 12% 5.7 94% 3.9 3.4 2.8 2.3 31% 2.5 5% 1.9 1.3 1.4 10% 7% 1.1 0.8 0.8 88% 0.7 10% 21% 0.2 0.3 69% 9% 8% 95% 90% 6% 19% 93% 90% 91% 79% 92% 94% 81%

9. While PPP is likely to be one of the main enablers of future sector development, it should be supported by a holistic reform approach Sector Reform and Privatization Approach Select and implement suitable PPP approach Introduce private sector to increase efficiency, improve service and ensure continuous and universal access to quality water Review water sector policies Review policies related to water usage and resources, tariffs, water quality and environment, and investment climate Redefine Institutional Setting Review role of existing institutions and restructure/reorganize as required, and establish new institutions to support PPP and reform initiatives

10. MENA countries should explore different PPP approaches and tailor them to the water sector maturity and local environment PPP Participation vs. Sector Maturity Key Considerations • Service contracts are at best a cost-effective way to meet special technical needs, but their benefits are limited • Management contracts are a good first step, and are most likely to be useful where the main objective is to rapidly enhance a utility’s technical capacity and its efficiency in performing specific tasks, or to prepare for greater private involvement • Leases are an efficient way to pass on commercial risk and are most appropriate where there is scope for big gains in operating efficiency but only limited need or scope for new investments • Concessions have advantages in that they pass full responsibility for operations and investment to the private sector and so bring to bear incentives for efficiency in all the utility’s activities • Build-operate-transfer (BOT) or variations resemble concessions for providing bulk services but are normally used for greenfield projects, such as a water or wastewater treatment plant Divestiture / BOO Full cost recovery Concession / BOT Lease Water Sector Maturity Management Contract Service Contract Low cost recovery Responsibility of Private Sector No asset ownership; with operational responsibilities Asset ownership with operational and commercial responsibility

11. PPP initiatives should be driven by clear objectives and targets and monitored by a set of evolving KPIs PPP – Key Performance Indicators ILLUSTRATIVE • Asset utilization • Productivity levels • Water re-use KPIs Success Factors Develop Best-In-Class Water Operations • Easily measurable (uncontested measures) • Reasonable targets (balance cost and benefit) • Aligned with government objectives • Evolving with sector maturity • Limited in number • Customer service • Revenue collection • Wastewater treatment rate Focus of KPIs • Unaccounted for water • Water / wastewater network coverage Fix Infrastructure Meet Basic Needs Sector Maturity

12. In parallel, governments should develop comprehensive water resources and usage policies … Policies/Initiatives Focus Water Resources Policies/Initiatives Water Usage Policies/Initiatives • Balancing desalination and groundwater resources (balancing cost, national interest and availability) • Driving other water resources including treated water, surface water, etc. • Monitoring legal usage of water resources (mainly for ground water) • Water conservation technologies for urban, agriculture and industrial usage • Coordinated awareness campaigns among various ministries (e.g., industry, agriculture, etc) • Technical standards for high water consuming equipment/machines

13. … and should carefully manage tariff changes and their impact on the privatization process Tariff Changes – Approach and Requirements ILLUSTRATIVE Key Success Factors Manage demand • Decoupling of tariff increase from privatization initiatives • Alignment of redesigned tariffs with affordability indicators • Phasing of tariff increases with noticeable service improvements • Setting effective control systems for illegal water use End Use Based Approach full cost recovery Customer Based Tariff Differentiation Current State Increase cost recovery Volume Based Low Cost Recovery Full cost Recovery Degree of Cost Recovery

14. Policy Setting Planning WRM Regulation Operations MENA governments should also review their institutional setting, focusing involvement more on policy as opposed to operations Water Sector – Change in Institutional Roles ILLUSTRATIVE Current Target Setting Government/ Ministry National Utility Company Government/ Ministry Independent Regulator Private Operator(PSP) Setting Long-term Water Sector Policy Developing and Implementing PPP Schemes Setting Tariffs Planning and Managing Demand Planning Long-term Infrastructure Requirements Promoting Water Conservation Allocating Inter-regional Water Resources Monitoring Economic Performance Settling Disputes Enforcing Quality Standards Coordinating Operations Developing, Operating and Maintaining Water Systems

15. As they restructure and create new institutions, governments should effectively plan for employee transition PPP – Employee Transition Challenges and Strategies Challenges Strategies • May require some lay-offs • Induce uncertainty that may impact efficiency • Face push-back from political figures • Create lack of motivation • Training of employees • Effective redeployment plan • Time to prepare/perform • Effective change management • Assurances/guarantees

16. Finally, governments should think through the best approach to adopt when restructuring the water sector Alternative Approaches for Restructuring Evaluation Criteria High • Higher price for privatized assets • Acceptance of stakeholders • Number of potential investors • Staying independent form strategic investors • Improved exit options • Speed of transformation / privatization • Access to management / technical expertise Privatized Utlitiy Private Sector Controls High RiskApproach A Degree of Privatization B Public Water Utility Today Public UtilityControls C Low Low High Restructuring/Value Creation

17. Sourcing Treatment Transmission & Distribution Customer Service Usage Sewage Collection & Treatment UAE – Abu Dhabi’s experience Select and implement suitable PPP approach • ADWEA introduces private sector participation in water and power through IWPPs • ADWEA seeks an 8-year operation and maintenance contract in ADDC & AADC Review water sector policies • ADWEA is responsible for implementing policy towards the water sector, including its privatization • ADWEA and ERWDA organizes Water and Energy Conservation Campaign • Abu Dhabi Government establishes an independent regulator (the Regulation and Supervision Bureau) to regulate all companies operating in the water and electricity sectors Redefine Institutional Setting • ADWEA creates Transco a state-owned company responsible for transmission of water and electricity • ADWEA established TAQA as holder of its shares in IWPPS • ADWEA establishes ADDC & AADC state-owned companies responsible for water and electricity distribution

18. Sourcing Treatment Transmission & Distribution Customer Service Usage Sewage Collection & Treatment Saudi Arabia’s experience Select and implement suitable PPP approach • SEC approves 4 IWPPs (3 are already awarded) • MOWE seeks Management Contracts for main cities • MOWE seeks BOT for Jeddah and Riyadh wastewater treatment • SWCC develops privatization strategy Review water sector policies • MOWE develops strategic transformation plan • MOWE undertaking national water resources study • MOWE launches national water conservation campaign • SEC approves set up of National Water Company (NWC) Redefine Institutional Setting • SWCC launches restructuring and unbundling of Desalination and Transmission • MOWE launches restructuring of sector into regional utilities

19. Sourcing Treatment Transmission & Distribution Customer Service Usage Sewage Collection & Treatment Oman’s experience • MNE seeks to review the concession agreement awarded and to involve the private sector in the state owned companies • MHEW introduces private sector participation in billing and collection – contracts awarded to two companies Select and implement suitable PPP approach • MNE approves Barka and Sohar IWPPs and is in the process of privatizing Ghubra Review water sector policies • MNE is developing a water and wastewater sector privatization strategy • MNE seeks to draft a water sector law • MNE forms two state-owned companies OWSC and SSDSC, which operate as a concession, to develop sewage network and STPs in Muscat and Salalah Redefine Institutional Setting • MNE seeks to redefine the water and wastewater sector structure and institutional setting and to introduce new legal and regulatory requirements

20. OECD Conference Public-Private-Partnership for Infrastructure Financing PPP in the MENA Water Sector Challenges and Opportunities Istanbul, Turkey November 8, 2006