Utility Development vs Government Control

The Middle East is seeing a tug of war between governments and the private sector for utility development. Utico’s Richard Menezes draws a comparison between government policies and regulations for privatisation in the MENA region, specifically in UAE and Oman.

In the UAE, Abu Dhabi Water and Electricity Authority (ADWEA) is the pioneer for privatisation of utilities. Dubai Electricity and Water Authority (DEWA) is following suit. ADWEA has a system with a regulatory body, gas supplier company, transmission company and a distribution company. It goes for bulk purchase at a cost percentage basis with a few variables and fixed cost on a 60 percent government and 40 percent private developer shareholding basis on a firm take or pay contracts for at least 20 years. Taxation is limited and there is a mandate for listing the company at a certain time frame. Energy costs are set at both subsidised and market conditions to gauge competitiveness and provide flexibility to the government.

Oman has a somewhat similar policy and regulatory framework as the ADWEA of UAE except that they allow for only maximum of 15 years contacts and they offer 100 percent ownership by the developer. Both are based on generation models only and the government provides the remaining segments required to give full body to serve the consumer.

The proposed Utico model would be to have some of the above features and some new. Let us start with basics like demand and consumer/tariff profiling. We must structure the industry as only two general categories: domestic and non-domestic (including commercial and industries). Farm or agriculture use must be considered mainly for water re-use projects and not for fresh water irrigation applications unless they go for strict drip or hydrophonic cultivation where once again this can be categorised as commercial.

When we have two sets of users, we then should set efficiency levels as being the criteria for the lowest tariff. Domestic consumers should pay more as they use more; general pricing for all the population with differentiations based on income rate consumers in terms of consumption. 

However for the industry it should be exactly reverse; it should be set on the number of people employed and growth plans and unit utility consumption for the produce. As the company grows and employee numbers increase - and with this unit consumption goes down due to increased efficiency - their tariff rates should also come down as an incentive. This will help all industries to hire more and fund at least part, if not the majority, of the capital investments by actual utility cost savings as they grow their business. It is also green because we encourage efficiency building.

It is a pro-active participation by the government and is truly fair. In terms of contracts, governments should focus on concessions, rather than utility purchase or off-take agreements with private service providers and also give them the opportunity to set up their distribution networks for developing areas based upon base prices and royalties payable. Governments should only own the transmission network (this too can be privatised with ingenuity but is a different topic for discussion) and this will result in truly healthy bottom lines, by providing the "up-side" potential for the service provider through better service to the consumer, generate efficiencies and better quality of the consumer base. Increasing their participation on 100 percent basis for developing areas will thus help to build stronger business models, increase efficiencies, innovative funding schemes, technology upgrades, unique consumers service provider partnerships, royalties, etc.

Governments should only set the guidelines; quality and quantity control and efficiency building for consumption through lowering unit consumption for the consumer base should be set as the sole criteria. Ultimately consumers opinion and satisfaction and efficiencies should be set as the yardstick, and should remain as the monitoring instruments with the government. This will build a greener utility with a pro-active government regulation than pure government control alone.

To discuss this more in detail would require many more pages than this short article. However, simplicity of any program is the best formula for implementation success. Again this is a view point that can go on and on.

About

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.