The capital spending on new projects in the GCC will be in excess of $50 billion over the same period.

"The region, particularly the GCC countries, has one of the highest water consumption ratios in the world," said Terry Povall, Partner at the UK-based EC Harris.

"We are looking at a 50 per cent increased spending in the GCC on projects over the next five years in excess of $50bn. Moreover, the operational spend – the cost of rolling these assets – is estimated to increase to $35bn," he added.

This in itself has created several challenges for the industry. "The market in the region for the utilities sector, especially in the wastewater and water treatment facilities, is massive. This obviously comes from the fact that residential, commercial and retail developments grew so fast during the past few years that the infrastructure development could not keep pace," said Povall. "It represents an unprecedented growth, which we have never experienced. Hence, there is a massive need for best practice in terms of programme delivery. That experience is probably not here at the moment and needs to be brought in very quickly."

The main issue in the region currently is the lack of capacity and capability, he said. "The system itself is not sufficient to meet the demands of the population in the region. The capacity and capability of existing resources is also the same. By capability, I mean all around knowledge transfers. Therefore, it is important to look at other systems throughout the world, their best practice and capabilities," he said. "There is definitely a need for more international players to increase the best practice and also internally look at which models actually suit the business needs here."

Despite the current circumstances, financing of infrastructure projects would not be a major concern, he said. "As far as financing is concerned, the economic downturn has not reduced its availability but has enhanced the associated risks due to which funds are not being released. There will be funds available provided the risks can be managed."

In terms of investment opportunities, infrastructure projects provide a long-term sustainable profitable return because of its link with capacity demand from rising population. "In the property market it is a bit more volatile and it is a different ball game," said Povall.

However, a greater clarity needs to be adopted in terms of the financial structure of many of the water related projects. "The financial support for these projects seems to be unclear – whether it is going to come through the government or the private sector or through a combination of both. It more or less looks like is going to be a combination of both," said Povall. Financing is one of the reasons why people opt for a public-private partnership (PPP) model, he said. It also brings in expertise, which municipal bodies and government organisations need not possess.

"It also gives a single point of responsibility to one organisation and you can pass the risk down to that organisation. Also, it would be better equipped to carry that risk than a government body. They tend to be major contracts and are used extensively in North America, Canada, China, Philippines and Australia. Within the region, there are some projects in Oman, Saudi Arabia and Egypt," said Povall.

According to him, the key lesson for the UAE is in selecting the right solution in terms of the business model. "The risk factor associated in copying certain models is that people will see a successful model elsewhere and adopt the same model, without thinking about how it fits into their business," he said. "It also depends on the size and outlook of the business. Besides, there always has to be some regulatory process before introducing privatization," he said.

Also, the issue of tariffs could get complicated without proper guidelines. "One must set up a model right from the start with full transparency on how the tariff is put together. It should include the cost of financing, cost of operation and the development cost. The key issue in setting the tariff would be the assessment of future demand," said Povall.

"So, when you do get changes that are outside your control, then both the parties can go back and have an equitable view on the tariff structure. Where this fails is when you don't have a contract that makes provision for an open book approach about tariffs," he said.

While the private sector will be responsible for setting the tariff, it should be explained and justified if it is not acceptable to the customer. "Imagine if we had a privatised water sector before the crisis and the tariff has been put together based on the predicted growth during the past three years. Given the current situation where the growth is dropping, the tariff would be in jeopardy. These are times when we need a fully transparent system," he said.

Commenting on the risks involved in the PPP model, he said: "One of the two biggest risks for global contractor or service providers is the currency exchange. An international service provider ultimately would need to repatriate funds and the exchange rates over a long period of time – say 20 to 25 years is impossible to predict."


                                                                                        Cecilia Helland