In early May, Saudi Arabia’s ACWA Power announced a $10 billion investment in Malaysian renewable energy projects, underscoring its rise as a global leader in the utility sector. ACWA Power’s successes and growth are emblematic of the opportunities created by Saudi Arabia’s decision in the early 2000s to allow private sector participation in the utility sector. While Gulf utilities continue to be predominately run by the public sector, they have been undergoing a shift toward privatization alongside privatization policies in other sectors aimed at economic diversification. For example, the Dubai Electricity & Water Authority held an initial public offering in April 2022, and Saudi Arabia has increased private sector involvement in water desalination and power generation projects. Moreover, Bahrain recently transformed its governmental water and energy authority into a governmental company, an initial stride toward privatization, and, in 2023, Kuwait conducted a feasibility study on privatizing some of the country’s power and water facilities.
Privatization to Enhance Sustainability?
The utility sector in the Gulf is especially energy intensive, largely due to heavy reliance on desalination for water supplies. The sector has faced criticism for its high carbon emissions and contribution to environmental degradation. Given the significant environmental impact, privatization could offer opportunities to enhance the sustainability of the utility sector and help it become more climate resilient, as extreme temperatures and sea-level rise can affect both groundwater resources and desalination plants.
Privatization policies are often justified by the fact that private sector operations are often more efficient due to their profit motive, leading to increased investment in technology and more efficient processes. For instance, Saudi private operators have made significant investments in reverse osmosis desalination plants, which are gradually becoming less energy intensive and have less of a negative environmental impact than other desalination technologies. Furthermore, private operators in the Gulf are increasingly directing their investments toward renewable energy. For example, the Shams 1 solar power plant provides renewable energy to Abu Dhabi households, and the Al-Khafji Desalination Plant in Saudi Arabia has been celebrated as the world’s first solar-powered desalination plant.
The inclusion of private operators has led to steep reductions in the price of desalinated water, promoting financial sustainability and efficiency while contributing to climate efforts. Additionally, privatization has instigated reforms. For example, the Dubai Electricity & Water Authority reformed its tariff system after its IPO, introducing new approaches, such as tariffs based on consumption levels, which encourage decreased utility consumption. As these cases suggest, privatization has increased innovation, investment, and efficiency in the sector, bolstering climate efforts and reducing the financial burden of the utility sector on Gulf governments.
Challenges in the Pursuit of Privatization
While the region is beginning to witness the advantages of privatization, there is still a long journey ahead. Typically, privatization entails transferring public utility service functions from government to private entities. However, regulatory authority over tariff setting remains under the control of Gulf governments, which are likely to maintain subsidy policies as this aligns with their governance model centered around social welfare. As one of the main concerns regarding utility sector privatization is the potential for tariff increases, it is understandable why Gulf governments retain authority over tariff setting. However, some Gulf countries offer tariffs that are heavily discounted when compared with revenue, leading to financial imbalances. For example, domestic water tariffs in Saudi Arabia in 2015 were merely 7% of the estimated marginal cost of domestic supply, imposing a substantial strain on government expenditure. Keeping such policies in place will limit the benefits of utility privatization.
Given the significant energy-water nexus in the region, the sector is vulnerable to energy market volatility. When Saudi Arabia attempted to reform and increase its tariffs after the 2016 oil price decline, it sparked unprecedented public outrage, leading to the dismissal of key officials and a policy reversal. Since then, there have been no tariff reforms in Saudi Arabia. Such low tariffs encourage excessive consumption, contributing to the region’s high water and energy consumption levels. For example, Qatar, with the highest per capita income in the Gulf, does not require its citizens to pay for utilities, and, unsurprisingly, it has the world’s highest energy consumption per capita. However, there have been some positive signs in subsidy reform in the Gulf.
Gulf governments have exhibited intentions to reform utility subsidies as part of broader economic diversification plans. Reducing subsidies is seen as a necessary step to improve fiscal policy. In 2016, Bahrain implemented a utility subsidy reform that limited subsidies to Bahraini citizens who are heads of their households and offered them only for their primary residence. The policy was put in place without significant public backlash.
As demand for water and electricity in the region continues to rise across all sectors and considerations are made for the expanded use of municipal desalinated water, particularly in agriculture, these utility subsidy policies may not be sustainable and tariff reform will become much more critical.
Nonetheless, there has been a notable shift in Gulf utility sector policies in recent years. Success stories have emerged, including advancements in sustainability, inventive and equitable tariff setting, and the global rise of Gulf companies in the utility sector. While strides have been made in sustainability, lifting the financial burden of the utility sector will remain challenging as long as governments maintain subsidy policies. Governments in the region have again demonstrated their ability to reassess their utility policies, and they must continue to do so as more Gulf states consider privatization.
