The water and power pricing dilemma

By Richard Menezes

Even in today’s difficult economic climate, when the world is struggling to balance growth and survival, there are many in the upper echelons of political establishments all over the world that dream of providing people with free power and water (or at least at a charitable price) to serve their own feelings of justice or equilibrium.

“Conservation, capacity and building efficiency should be the focus rather than subsidies or free water and power.”
-Richard Menezes

But how does this serve consumers and the country as a whole? This is a question that the Middle East especially should ask itself. For while there are a few that will benefit, it is the others who are not entitled to this charitable service that pay for it in the end - either through direct costs or through indirect taxes, fees and other means of collecting revenues. It means that those people who do pay in turn price their services, goods and activities at a level to absorb these costs (or higher, using the excuse), which then gets passed onto the market. These increases are then paid for by the very people who were given the subsidy in the first place. To an extent, such policies also curtail the growth of enterprise by limiting organisations' ability to reduce costs through economies of scale. In the end, no objective is attained (except the political satisfaction of doing something that in the true sense serves no purpose) because it is not possible for anyone to enable other people to lead a totally free life - even governments with all their wealth.

So what is the solution to this dilemma? It is simple. Water and power are generally interlinked by the energy efficiency component, especially in the Middle East. One needs the other. Potable water needs power for its production, and power needs potable water to become more efficient in production through combined cycle systems. Both need fuel (ideally natural gas but also oil), and therefore fuel becomes the cornerstone of the entire cycle. 

Fuel acquired at source comes at a much lower cost than the price sold in the market, and the deals made by governments with oil exploration and producing companies come with a hefty profit for both. There is always a component that is export-targeted to generate revenue and growth for the countries concerned, and is therefore investment-oriented. Then there is a significant percentage - around 10-15 percent, depending on the population of each country - that is utilised to make power and water.

Why are these oil deals not made such that the percentage of fuel going to facilities that make water and power go as profitless, or at least with nominal minimum margins? If the fuel costs going to these entities could drop by 60-75 percent, it means the cost to produce water and power will likely drop by 50-60 percent. After all, water and oil are God-given and therefore rightfully should go to the people first.

So how does this cycle end? Is subsidising water and power below costs of production reasonable? Or is giving fuel to these generating plants at cost price or with minimum margins a better deal? Obviously the latter makes more sense, since the first means producing power and water at a loss, while the latter merely means the state achieving no (or minimum) profit. Such a scheme could also be tied into incentives to make producers more energy efficient, and the focus should lie on that rather than giving water and power to people for free or at a subsidised rate, since that helps no one.

Making something at a high cost and selling it a lower cost is not a policy that helps anyone to sustain and grow, but instead creates a generation that is overly dependent on such policies for their continued survival. Conservation, capacity building and efficiency should be the focus rather than subsidies or free water and power. IT will help us to build a more efficient and sustainable world rather than one that is overly dependent on handouts. IT will also help to build a greener world for future generations.

Richard Menezes is CEO of United Arab Emirates-based Utico, a utilities company specialising in water, sewage, steam, power and related services for clientele requiring reliable, low-cost supply of utilities.