OECD Observer
Water: Opening the tap

A salmon would find it a hardscrabble life in the waterways of the Middle East and North Africa (MENA). Not because of dried riverbeds, overfishing or pollution, but because the region has more dams per cubic metre of water than any other place on earth.

Water here is heavily managed and heavily consumed. Domestic consumption in the Gulf states runs 50% higher than in the US, although the per capita amount of water available per year is 1,200 m3, compared to 7,000 m3 globally. Drinking water only accounts for 8% of consumption; 22% is for industrial use, and 70% for agriculture.

Fortunately, the region boasts some of the world's best hydrological engineers and is a leader in innovative technologies like desalination and wastewater recycling. Unfortunately, many of these efforts fail to bring the expected returns due to inefficiency, poor regulation, bloated subsidies and underinvestment in maintenance. When the conversation turns to the MENA water sector, investors' mouths go dry.

The economic crisis has not helped. The MENA-OECD Investment Programme Steering Group announced that OECD inward foreign direct investment (FDI) in MENA had dropped 13%, and outward FDI fell 6%. Gulf countries fared the worst, losing an estimated 21% in the run-up to the crisis, between 2007 and 2008.

In July, the MENA-OECD Initiative on Governance and Development met with Arab experts to discuss ways to improve governance in the water sector. Geographical and political factors complicate the situation. About 60% of MENA water flows across international boundaries, raising questions of sovereignty. This trans-jurisdictional aspect of water governance is one reason why governments are wary of privatising the sector, even though only 2 of 13 MENA countries have succeeded in covering their operational and management costs.

One of investors' bugbears is inefficiency. Agriculture uses 70% of water reserves, but because of leaks and waste only half of this water reaches crops. Farmers and other consumers would find the situation intolerable if heavy subsidies did not buffer them from the unpleasant reality. A consumer in Egypt, for instance, pays only 20% of water treatment and delivery costs.

Weak regulation is another deterrent to investment. When low-cost drilling arrived in the 1960s, individuals began extracting water from aquifers (the layer of permeable rock, gravel, sand, etc. that stores groundwater) at a pace that overwhelmed regulators. Over-extraction now drains national assets in some countries at a rate equivalent to 1-2% of GDP. Governments must shift their efforts from augmenting supply to managing demand.

Available water per capita in the MENA region is expected to halve in forty years. In just 15 years, the area's population of 300 million is projected to reach 500 million, for which some 100 million new jobs will have to be created. MENA countries are struggling to cope with this surge in demand, and are turning to OECD instruments, such as Private Sector Participation in Water Infrastructure: Checklist for Public Action, for guidance.

Public-private partnerships (PPPs) would certainly help, but investors are leery of PPPs without a sound regulatory framework. The type of regulation chosen depends on whether the political system functions according to civil or to common law. Civil law informs most choices in the Maghreb, where horizontal, cross-sectoral approaches are favoured, whereas the Gulf states prefer sectoral regulation, granting considerable discretion to the delegated authorities.

Unlike salmon, investors don't like to swim against the current; but sheltered by better regulation, transparency and predictability, they are likely to return to MENA's water sector. LT

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© OECD Observer, No. 275, November 2009