Saturday 11 January 2014

GCC plans shared water network

Across the Middle East and North Africa, ensuring a reliable supply of water is a top priority, as demand soars from both rapidly growing populations and water-intensive industries in the world’s most water‑scarce region.

Desalination plant

By Peter Feuilherade

This article was first published in The Middle East magazine, London, December 2013 issue
Across the Middle East and North Africa, ensuring a reliable supply of water is a top priority, as demand soars from both rapidly growing populations and water-intensive industries in the world’s most water‑scarce region.

Figures from the World Bank in 2012 showed a decline in per capita renewable water resources from over 3,000 cubic metres/year in the 1950s to around 715 in 2011, which is below the World Health Organization's water poverty threshold of 1,000 cubic metres/year per capita.

The projected impacts of climate change on future water availability in the MENA region are not favourable, with some countries expected to experience up to 40% decreases in precipitation and runoff by the end of the 21st century. "Ever-increasing water demand - coupled with rapid population and economic growth - will likely add to the region’s water stress and pose serious challenges to the region’s future development prospects," the World Bank argues.

The rate of water extraction is also far greater than natural replenishment. The Abu Dhabi‑based Arab Water Academy estimates the collective water shortage of 17 Arab countries at over 30 billion cubic metres, a deficit which is expected to triple by 2030 and increase to over 150 billion cubic metres by 2050.

The Gulf Cooperation Council (GCC) intends to complete a common regional water network by 2020, as part of efforts to address rising population growth in the Gulf region over the next three decades,

Four of the six GCC states - Bahrain, Qatar, Kuwait and Saudi Arabia - are ranked as the most heavily affected by water scarcity in the world. According to the global management consulting firm Booz & Company, Saudi Arabia and the UAE respectively consume 91% and 83% more water per capita than the global average, while Qatar and Oman also use more than the global average.

However, the GCC countries, in the words of a recent report by the Oxford Business Group (OBG), "are in the unique position of being able to leverage their considerable wealth to invest in developing technologies and innovations with the aim of gaining a competitive advantage in the global water sector".

Most of the GCC's water supplies come from desalination. As the OBG report notes, the GCC already accounts for 57% of the world's desalination capacity, and GCC countries plan to invest more than 100 billion dollars between 2011 and 2016 to develop more efficient desalination technologies, wastewater recycling and building water treatment facilities.

Regional water network

The GCC is conducting technical studies in the Saudi capital Riyadh, eastern Saudi Arabia and northern Oman as part of plans to build a regional water network.

The total cost of building the network is estimated at 10.5 billion dollars - 3 billion to build desalination plants and 7.5 billion for pipelines, pumping stations and reservoirs.

In Oman, environmental impact assessments will also be carried out to identify the best places to build desalination plants in Sohar, the sultanate's industrial hub 200 km north of Muscat, and Al Ashkharah, on the Arabian Sea. Oman also plans to build strategic water storage reservoirs in Muscat to avert a crisis if desalination plants are disrupted.

Other GCC water projects in the next few years will see Saudi Arabia complete the world’s largest desalination plant in Ras al-Khair on the Persian Gulf. Abu Dhabi will add more than 30 million gallons per day of desalination capacity to its water network following a green light for a power and water plant extension at Mirfa. And Kuwait is constructing two reverse osmosis desalination plants that will produce nearly 50 million gallons of water per day.

High price of desalination

Desalination, however, carries enormous economic and environmental costs. Despite efficiency improving more than fivefold since 1979, to desalinate a cubic metre of seawater costs one dollar, making it a relatively expensive way of producing potable water.

The desalination process also discharges salt back into the Arabian Gulf and other oceanic sources, jeopardizing their marine life and introducing new environmental risks, the Booz & Company study said.

Seawater desalination is an energy-intensive process, consuming eight times more energy than groundwater projects, and accounting for between 10% and 25% of energy consumption in the GCC.

The current almost total reliance on fossil fuels for water desalination is not sustainable - Saudi Arabia alone uses 1.5 million barrels of oil per day in its plants. This adds to the problems of energy intensity already plaguing the region.

Many of the problems related to desalination could be reduced by replacing fossil fuels with renewable energy sources. This would cut the cost of energy consumption, which accounts for 30‑50% of total water desalination costs. A gigawatt of energy produced by oil and gas generates 700 and 460 tonnes of carbon dioxide respectively. The same amount of energy produced by solar energy (concentrated solar power – CSP) releases just 17 tonnes of carbon dioxide, according to Dr Asma El Kasmi, director of the Arab Water Academy.

Her views mesh with those of the World Bank, whose report "Renewable Energy Desalination: An Emerging Solution to Close MENA’s Water Gap" recommended greater investments in renewable energy and suggested that CSP was the most suitable source of renewable energy, owing to its scalability and ability to provide energy 24 hours a day. The World Bank report noted, however, that CSP may only be an option in the long term because of its current high cost.

Dr Nasser Saidi, founder and president of Nasser Saidi & Associates, an economic advisory and consulting company based in Dubai, notes that although the MENA region is home to 6.3% of the world’s population, it has access to only 1.4% of the world’s renewable fresh water. "To make matters worse, the region currently exploits over 75% of its available renewable water resources due to its burgeoning population, increased urbanization, mispricing of water and rapid economic growth," he warned in an article on the Gulf Business website in October 2013.

"Saudi Arabia in an ill-fated drive to increase food production has - over a 15-year period - largely depleted its water aquifer that had taken millions of years to accumulate. It will be forced to stop its wheat production by 2016. Yemen is already a hydrological basket case and Gaza is an ecological disaster," Saidi commented. In the GCC, a major policy issue is that "the bulk of the region’s water is misdirected into agriculture, a sector that provides less than five per cent of GDP".

Overcoming water scarcity, Saidi argues, requires a combination of ecosystem and water management systems, improved efficiency and pricing of water use, and investment in water infrastructure.

To close the "water gap" in this region, the World Bank estimates that approximately 104 billion dollars per year will be needed, equivalent to about 6% of the MENA region's GDP. However, the Bank warns that the costs of failing to take action could be even higher, reaching up to 300-400 billion dollars per year.

Microfinance in MENA - an untapped market

Historically, most MENA microfinance programmes date from the mid‑1990s, but the sector has made little headway in the region. MENA continues to be the smallest microfinance market worldwide, in terms of both borrower outreach and gross loan portfolio.

Container ship in Latakia, Syria

By Peter Feuilherade

This article was first published in The Middle East magazine, London, December 2013 issue 

The microfinance industry provides small loans and other financial services including savings, insurance and money transfer systems which are essential for low‑income households and small enterprises which are excluded from formal banking systems. These informal lending and borrowing organizations enable users to manage cash flows to finance day-to-day living, invest productively and respond to financial shocks. In recent years, microfinance in some parts of the world has experienced a transformation from what was originally a socially motivated movement to a broader portfolio of financial services, of which payments and savings are becoming the main products

The Washington-based Center for Financial Inclusion at Accion ranks Latin America and the Caribbean as the best region in the world for microfinance, followed by Sub-Saharan Africa, Asia, Eastern Europe and Central Asia, and lastly the Middle East and North Africa (MENA). The World Bank notes that microcredit accounts for just 0.2% of the MENA region’s gross domestic product, and lending by microfinance providers reaches only 1.8% of the adult population, half the rate of South Asia, Latin America and the Caribbean. Even in Morocco, which has MENA's most developed microfinance sector, microcredit loans account for just over 1% of total bank credit, compared with 7% in Latin America and the Caribbean and 5% in Africa.

Historically, most MENA microfinance programmes date from the mid‑1990s, but the sector has made little headway in the region. MENA continues to be the smallest microfinance market worldwide, in terms of both borrower outreach and gross loan portfolio. The reasons include poor regulation and perceived weak risk management, exacerbated by recent political events and social upheaval. 

According to a market profile by the Washington-based Microfinance Information Exchange, which provides data and analysis on some 2,000 microfinance institutions (MFIs) worldwide, in the six MENA countries which reported data in 2012 there were some 1.2 million active borrowers, with a gross loan portfolio of 742 million US dollars. Within the region, microfinance markets are in different stages of development. The number of borrowers in 2012 ranged from 674,302 in Morocco and 209,861 in Tunisia to 36,726 in Lebanon and 20,331 in Iraq. Egypt had 141,299 borrowers, while Jordan had 101,089. Other growing microfinance markets include Yemen, with more than 82,000 borrowers at the end of 2012, and West Bank and Gaza, with about 43,000 active clients.


Many experts believe that insufficient supervision and regulation have held back the growth of microfinance in MENA countries. A 2013 report by the Economist Intelligence Unit (EIU) on the global microfinance business environment noted that the regulatory environment in MENA had seen few changes during the previous year. Morocco updated its Microfinance Associations Law and additional rules and regulations are forthcoming. "The main impact of the Law has been to encourage consolidation among smaller microcredit associations (MCAs). However, some microfinance professionals have criticised the Law because it does not assist MFIs in transforming into commercial banks, nor does it assist MFIs that would prefer to remain NGOs," the EIU report commented. In Egypt, a long‑awaited update to the 2002 NGO Law that also regulates MFIs operating as NGOs is still under consideration, while legislation specific to the microfinance industry "has been delayed repeatedly due to political turmoil," the report added.

In the view of Hoda Salman, MENA representative for the Netherlands-based microfinance investment manager Triple Jump, "many MFIs have difficulty securing commercial funds due to weak MFI structures and capacities, restrictive NGO regulations or political and economic instability that can render local currency rates on foreign commercial debt unaffordable". A major hindrance to growth in the sector, she adds, is "the absence of microfinance-specific regulations in many MENA countries, which prevents NGO MFIs from transforming into for-profit companies and/or deposit‑taking institutions".

Peter McConaghy, a World Bank microfinance analyst, agrees that a lack of regulation to support the robust growth of MFIs is to blame for the low levels of microfinance penetration in the MENA area. While noting that each country in the region poses unique challenges, he argues that "the inability of MFIs to accept deposits in many of the region’s markets, underdeveloped financial infrastructure, and low levels of financial literacy among potential beneficiaries all contribute to the limited microfinance outreach in the region."

Potential to expand

But despite microfinance in MENA being undeveloped, it has the potential to expand in a region where, as the World Bank notes, "political and social transitions in countries across MENA are placing additional economic pressure on firms and households". Unemployment levels are higher than in all other world regions and youth unemployment, at 25%, is a particularly pressing public policy issue.

TechNavio, an international technology research and advisory company, forecasts that the global microfinance market will grow at a Compound Annual Growth Rate (CAGR) of 16.61% over the period 2012-2016, with one of the key factors contributing to this growth being the increased focus on untapped markets.

ln Yemen, for instance, with only 7% of Yemenis possessing a bank account, long-latent demand among the population for financial services would seem to make the country an ideal market for microfinance. Analysts also see substantial room for growth of the microfinance industry in Lebanon, particularly in rural areas.

In many MENA countries, despite the increasing use of technology, mobile and correspondent banking is still in the pilot stage. There is great scope for the development of microfinance mobile phone services enabling the transfer of money, although central banks across the region have yet to extend their regulations to cover such innovations.

Philippe de Fontaine Vive, the European Investment Bank Vice‑President of Innovation, believes that for microfinance to expand in the MENA region, significant institutional and capacity building efforts are needed, at all levels including regulatory and supervisory capacity, and especially for smaller MFIs, in order to increase client outreach.

"Financial institutions need to strengthen their capacity to expand their offer of credit and ultimately also other financial services such as deposits. Microfinance remains limited and very few MFIs offer financial services beyond basic credit. Following the recent events in the region, expectations in microfinance as a means to fight unemployment, increase social inclusion, and provide access to finance to the 'very base of the pyramid' are high," he added.

For Hoda Salman of Triple Jump, in addition to the ongoing political and economic instability and insecurity in many of the ‘recovering’ countries, the main challenges for the microfinance industry in MENA lie in the area of regulation. "A conducive microfinance regulatory framework would allow MFIs to provide a wider range of financial services and access more sources of capital (such as equity), amongst other things, to reach more low-income, yet economically active, people," she argues.