Privatization of the utilities sector in the Persian Gulf

In early May, Saudi Arabia’s ACWA Power announced a $10 billion investment in Malaysian renewable energy projects, highlighting its growth as a global leader in the utilities sector. ACWA Power’s successes and growth are emblematic of the opportunities created by Saudi Arabia’s decision in the early 2000s to allow the private sector to participate in the utilities sector. While utilities in the Gulf continue to be primarily run by the public sector, they are undergoing a shift toward privatization alongside privatization policies in other sectors aimed at economic diversification. For example, Dubai Electricity & Water Authority conducted 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 converted its government water and energy authority into a government company, a first step towards privatization, and in 2023, Kuwait conducted a feasibility study on the privatization of some of the country’s energy and water facilities.

Will privatization improve sustainable development?

The utilities sector in the Gulf is particularly energy-intensive, largely due to the high dependence of water supplies on desalination. The sector has faced criticism for its high carbon emissions and contribution to environmental degradation. Given its significant environmental impact, privatization could provide opportunities to increase the sustainability of the utilities sector and help it become more resilient to climate change, as extreme temperatures and sea level rise can impact both groundwater resources and desalination plants.

Privatization policies are often justified by the fact that private sector operations are often more efficient due to the profit motive, leading to increased investment in technology and more efficient processes. For example, Saudi private operators have made significant investments in reverse osmosis desalination plants, which are gradually becoming less energy-intensive and have lower negative environmental impacts than other desalination technologies. Moreover, private operators in the Gulf are increasingly directing their investments towards renewable energy. For example, the Shams 1 solar power plant provides renewable energy to households in Abu Dhabi, and the Al-Khafji desalination plant in Saudi Arabia is recognized as the world’s first solar-powered desalination plant.

The inclusion of private entities has led to sharp reductions in desalinated water prices, promoting financial stability and efficiency while contributing to climate efforts. Additionally, privatization initiated reforms. For example, Dubai Electricity & Water Authority reformed its tariff system after the IPO, introducing new approaches such as tariffs based on consumption levels that encourage reduced utility consumption. As these cases suggest, privatization has increased innovation, investment and efficiency in the sector, strengthening climate efforts and reducing the financial burden on the utilities sector for Gulf governments.

Challenges in the pursuit of privatization

While the region is beginning to witness the benefits of privatization, there is still a long way to go. Typically, privatization involves the transfer of public service functions from the government sector to private entities. However, regulatory power to set tariffs remains under the control of Gulf governments, which are likely to maintain the subsidy policy because it is consistent with their social welfare-focused governance model. Since one of the main concerns about utility privatization is the potential for tariff increases, it is understandable why Gulf governments retain the power to set rates. However, some Gulf countries offer tariff rates that are significantly reduced compared to revenues, leading to financial imbalances. For example, Saudi Arabia’s domestic water tariffs in 2015 were only 7% of the estimated marginal cost of domestic supplies, placing a significant burden on government spending. Maintaining such a policy will limit the benefits of privatizing public utilities.

Given the significant energy and water linkages in the region, this sector is vulnerable to energy market volatility. When Saudi Arabia attempted to reform and increase its tariffs after oil prices collapsed in 2016, it sparked unprecedented public outrage that led to the firing of key officials and policy changes. Since then, there have been no tariff reforms in Saudi Arabia. Such low tariffs encourage overconsumption, contributing to high levels of water and energy consumption in the region. For example, Qatar, which has the highest per capita income in the Gulf, does not require its citizens to pay for utilities and, not surprisingly, has the highest per capita energy consumption in the world. However, there have been some positive signs regarding subsidy reform in the Gulf.

Gulf governments have shown an intention to reform media subsidies as part of broader economic diversification plans. Reducing subsidies is seen as a necessary step towards improving fiscal policy. In 2016, Bahrain implemented a utility subsidy reform that limited subsidies to Bahraini citizens who were heads of household and only offered them to their primary residence. This policy was implemented without significant public opposition.

As demand for water and electricity in the region continues to grow across all sectors and greater use of municipal desalinated water is considered, particularly in agriculture, subsidy policies for utilities may become unsustainable and tariff reform will become much more critical.

Nevertheless, there has been a noticeable shift in utility sector policy in the Gulf in recent years. Success stories have emerged, including progress on sustainability, resourceful and fair tariff setting, and the global growth of Gulf companies in the utilities sector. While progress has been made on sustainability, lifting the financial burden on the utilities sector will remain a challenge as long as governments maintain subsidy policies. Governments in the region have once again demonstrated their ability to reassess their public utility policies and must continue to do so as more Gulf states consider privatization.