Rising demand-supply gap brings GCC water policy in the spotlight

The widening gap between demand and supply of water in the GCC is quickly establishing itself as a central policy concern, especially given the expectations of continued rapid economic growth in the years to come, warned a new report on GCC water resources by NCB Capital.

In spite of the exceptional scarcity of water in the region, the GCC countries have internationally high levels of per capita water consumption, said the report.

Giving country-specific data, the report states that Saudi Arabia and the UAE have the highest total per capita consumption and jointly make up some 90 per cent of the region's total water demand.

"Water withdrawal per capita in the two countries is significantly higher than the Middle Eastern regional average but far lower than in the more prosperous – and water-rich – Western economies led by the US average of 1,648 cu m. The growth in water demand, however, has been high," the report said. "Kuwait saw a 6.8 per cent annual rise in water demand on a compounded basis between 1995 and 2002, while the corresponding figure for the UAE was 6.6 per cent between 1995 and 2005. Saudi Arabia's water demand grew by an annual 2.4 per cent in 1992–2006."

As far as the main sources from where demand for water is coming in the region, agriculture is the primary one throughout the GCC, followed by the household sector.

Industrial water demand, by contrast, has tended to make up a relatively modest proportion of the total. The share of agriculture in the individual Gulf countries varies between 45 and 88 per cent, while municipal demand accounts for 9-50 per cent of the total.

The role of agriculture has to date been most important in the largest regional countries, Saudi Arabia and the UAE, as well as Oman. The role of industrial demand is greatest in Bahrain but still a very modest six per cent, the data in the report reveals.

Municipal demand for water has grown substantially due to a growth in population and urbanisation. "The aggregate population of the GCC countries has grown at a CAGR of three per cent during the decade spanning 1998 to 2008 to 40 million with Qatar recording the highest growth (5.8 per cent) followed by the UAE (5.3 per cent). Saudi Arabia's population, which accounted for nearly 66 per cent of the GCC total in 2008, grew at an annual rate of 2.9 per cent over the same period.

"These numbers are markedly ahead of those for most other leading emerging markets as well as the global average of 1.2 per cent. The expansion in population has directly contributed to higher municipal water demand in the GCC," said the report

Economic development

Moreover, the rapid pace of economic development in recent years has driven regional urbanisation rates to a range of 72-98.5 per cent.

According to academic estimates, the average daily per capita domestic water consumption in rural areas is approximately 15-20 litres, which compares to as much as 100-350 litres in urban centres, the report mentions.

Flawed agricultural policies draining water resources also add to the strain. Agriculture consumes about 80 per cent of the region's water resources but contributes less than two per cent of GDP. Many of the agricultural activities were financially profitable only because of generous government incentives and subsidies.

As a result of the aggressive efforts to develop the agricultural sector, land under irrigation across the region increased at an average CAGR of six per cent between 1980 and 1995.

"Minimal regulatory oversight allowed farmers to tap into the limited groundwater, leading not only to depletion of this scarce resource but also to inefficiencies in irrigation networks. Flawed practices led to the loss of more than 50 per cent of the water extracted, most of it from non-renewable fossil aquifers.

"Internationally, agriculture typically accounts for 70-80 per cent of water consumption in economies where it is a major contributor to GDP or employment, as well as in countries endowed with high renewable water resources. In this context, the region's agricultural water demand represents a major anomaly," it said.

On the other hand, industrial water demand in the GCC, while still modest, has been increasing rapidly – at a CAGR of 4.4 per cent per year during 1990–2006. The growing demand by an increasing number of industries, especially food, is mainly met through costly desalination.

The industrial production structure of the GCC is currently heavily focused on petroleum refinement, which is water-intensive.

Water scarcity in the Gulf results from low rainfall, high evaporation rates, and the absence of large renewable resources. Renewable resources, including lakes or rivers originating in or flowing through the region, are negligible.

However, anecdotal evidence across the region of wells drying up and groundwater salinity increasing suggests that there has been significant groundwater depletion due to heavy extraction, especially for agricultural purposes, the report said.

In such a scenario, desalination augments natural water resources.

"The use of desalination as a non-conventional water resource is long established in the region, which by now accounts for more than 40 per cent of total desalinated water production in the world," the report added.

The total desalination capacity, including plants under construction in the region, is more than 25 million cu m per day. Desalination plants now provide the majority of municipal water supplies in the GCC countries, as per the data in the report.

Due to limited sources of water, treated wastewater reuse is also beginning to gain importance as a non-conventional water source in the Gulf.

Treated wastewater is currently used to meet non-potable municipal needs such as washing cars, flushing toilets or gardening, or for recharging groundwater and aquifers.

It accounts for approximately 16 per cent of the GCC's municipal water demand or two per cent of total water demand. The contribution of treated wastewater to the region's water resources can be improved by investing in municipal sewage collection networks and treatment facilities, pointed out the report.

To deal with the problem, the report also argues the case for better agricultural policies and tariff rationalisation essential for demand management.

Paradigm shift

Agricultural policy in the Gulf is undergoing a fundamental paradigm shift as reflected in Saudi Arabia's reversal of its food self-sufficiency policy. The Saudi Government in 2008 introduced a decree that called for a 12.5 per cent annual reduction in local wheat production over an eight-year period, starting in 2009, the report said.

"However, the government continues to maintain a guaranteed purchase price for locally grown wheat at $266.67 per metric tonne until 2016. Other similar measures have involved the elimination of barley production in 2003.

"The Saudi decision to phase out wheat production by 2016 is likely to have a profound impact on water demand management. In 1993, the government reduced the area of wheat-producing farmland eligible for price subsidies by 25 per cent.

"After the reform, the area under wheat cultivation contracted by some 325,000 hectares between 1992 and 1994, and water pumped from fossil aquifers declined from 28,576 million cu m to 15,376mn cu m.

To decrease their reliance on imports, GCC nations are buying farmland in countries such as Sudan, Egypt and Pakistan. The UAE alone is estimated to have entered into deals for developing more than 70,000 acres of land in Sudan and 100,000 acres of farmland in Pakistan," the report added.

There is also an urgent need to revise water tariffs in the region, argued the report. Tariffs have been kept low since the 1990s through heavy subsidies. In Qatar, for example, nationals are provided free water, although expatriates are charged at a subsidised rate. The cost of producing and distributing water, by contrast, is estimated to be $1.64/cu m and $1.1/cu m, respectively.

The rising cost of producing water is increasingly pushing regulators to consider raising tariffs. Government authorities in Qatar, Saudi Arabia, Bahrain and the UAE have mooted plans to study tariff increases. The issue is contentious, however, and will require strong political backing to go through.

The privatisation of desalination plants could be a trigger in at least some changes. Indeed, developers have been quoting increasing tariffs in their bids, reflecting the rising cost of producing water in the GCC.

Low water tariffs are a contributing factor to high per capital consumption rates in the GCC and an increase in cost to consumers is likely to induce better water management. There is also a need to charge for water consumption by private wells, which is currently not being metered in most countries.


Managing water scarcity

Considering the growing demand for water and the finite sources of water, the report lists some points that can help in better managing the region's scarce water resources.

The policy focus has until now been on enhancing supply through the increased use of non-conventional water, especially desalination. Other aspects of water resource management remain relatively neglected, by contrast, although greater attention to them would entail considerable efficiency gains. While some progress can be expected from wastewater reuse, demand management is a particularly important area where considerable further progress remains possible.

Key steps that merit greater consideration include the following:

- Centralised administration of water resource management. The most common overlap in the regulatory set-up in GCC today is in the use of groundwater, which usually falls under agriculture ministries, thus creating a conflict of interest as the user of water also acts as its regulator

- Establishing a long-term integrated plan for water resource management. The plan should be formulated in co-ordination with agencies governing the supply side – groundwater, desalinated water, water distribution and waste collection services and sewerage treatment – and the demand side, user segments such as agriculture, and urban and industrial development authorities

- All water users should be brought under formal regulation. Strict licensing of private wells can significantly curtail waste and unauthorised usage. Attention must also be paid to distribution waste and penalties established for transgressions

- The adoption of more market-based pricing. Water tariffs should recover at least a portion of the costs of producing water and making it available to the end user. At the same time, tariffs should reflect the users' ability to pay, given the social importance of water

- Virtual water accounting should be used to evaluate agricultural policies and industrialisation ventures Information taken from NCB Capital

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