Water Investment Opportunities in the Persian Gulf

Q&A with Paul Wood, Waterfund Managing Director, Europe & Middle East

Paul has over 12 years experience in the energy and commodities sectors, working across Europe, Africa, Asia-Pacific and the Middle East. Prior to moving to Dubai in 2006, Paul spent three years in London and three years in Singapore with the Petroleum Argus group developing pricing indices used as benchmarks within global physical and OTC oil products markets.  As Business Development Manager at the Dubai Multi Commodities Centre (DMCC) Paul devised and coordinated project strategies and built economic models for a range of commercial infrastructure projects in the UAE, including commodity futures contracts, a US$200mn oil products storage facility, and a state of the art electronic platform for hosting commodity-backed Islamic finance transactions, the first of its type in the world.

Paul is originally from the UK and graduated from Cambridge University with an MA in philology. He is fluent in French and also speaks and writes Arabic and Farsi.

As one of the driest regions on earth, what are the opportunities for investors in the Persian Gulf who want to profit from owning water assets?

For over fifty years, the oil industry of Saudi Arabia was supported with plentiful, cheap groundwater from the Arabian Aquifer, one of the great water resources in the Middle East.  Today, the Arabian Aquifer has been virtually exhausted, with most wells delivering a fraction of their former production.  Because the Gulf Cooperation Council (GCC) states average only three days of rain per year, securing and managing a regular supply of water is now more urgent than ever and will require massive capital expenditures over the next decade.

The Gulf’s rapid population growth – one of the fastest growth rates in the world – and high per capita daily water consumption, compounds the need for infrastructure-led solutions.  Unlike California, water conservation is not part of Arab culture and is not an option.

Per capita average daily consumption in the Gulf domestic sector alone ranges between 300-750 litres, ranking the GCC the number one water consumer in the world. In addition, although the hydrocarbons boom of the past decade has spurred economic growth, it has contributed to deficits in water resources, with experts predicting the current 20bn m3/yr deficit to balloon to some 50bn m3/yr by 2030.

Oil revenues have always provided ample capital to Saudi Arabia, the UAE and others to meet the infrastructure challenge.  Today, the landscape is changing because private investors are increasingly sought after for industrial and retail water users.  I will explain some of these opportunities in more detail shortly.

Are the Gulf countries moving forward aggressively to secure more water and, if so, is there a favourable investment environment in which this can be accomplished?

The Gulf countries are already the world’s biggest users of desalination, so they are deeply familiar with the technological challenges. Governments in the region are constantly investing in large scale desalination plants and are partnered with the world’s leading engineering firms in implementing and operating these facilities.

These same countries are, however, increasingly aware that government is no longer capable of bearing the full cost of this enormous burden. They are looking to engage with the private sector to supply technology as well as the financing and operation of the desal facilities. Innovative public private partnerships (PPPs) or Build Operate Transfer (BOT) type arrangements in Saudi Arabia, Qatar, Oman and the United Arab Emirates are increasingly common.

Veolia, GDF Suez, AECOM, CH2M Hill, MWH Global, Siemens, and GE are just some of the major engineering firms involved in water in the Middle East.

The opportunities available in the region are diverse, ranging from large power and desalination plants that feed major cities and residential areas (requiring investments of $500mn and above), to more niche opportunities that supply individual industrial facilities.

Is there currency risk in Saudi Arabia, Qatar, and the other GCC states?

The GCC states have longstanding and unbroken exchange rate pegs to the US dollar through every economic cycle of the past forty years.  The currency outlook remains unchanged given the dependence of Saudi Arabia and others on US dollar denominated energy income.  In terms of foreign reserves, Saudi Arabia has sufficient dollar reserves to maintain current budget expenditures for over seven years without any income.  I would be hard pressed to find a more stable exchange rate peg anywhere in the world.

How has Waterfund been involved in such opportunities?

Industrial water fetches a much higher price than retail water in the Middle East because price discussions are bilateral, private, and not subject to regulation.  Industrial facilities, such as oil wells or industrial zones, are often in places that cannot connect to the main water networks, which are focused on large urban areas. This creates a significant need for niche, small-scale opportunities to meet the demands of individual industrial facilities.

Despite vital need for these water facilities, industries like oil and gas, cement manufacturing, etc. do not have the in-house capacity to build and operate water-related infrastructure themselves and therefore seek firms that can provide these services. In response to this need, Waterfund has compiled a portfolio of approximately $300mn of industrial desalination projects, ranging from $5mn-$50mn each.

Since the water produced from such projects is not subject to the heavily regulated tariffs imposed on the much larger desalination plants supplying urban areas, Waterfund can negotiate tariffs directly with the end users, ensuring tariffs are sufficient to meet cost and accurately reflect supply and demand dynamics. These bilateral Water Purchase Agreements allow Waterfund to secure outsized returns above those secured by operators of larger plants, who are subject to regulation and politically driven decisions that can stifle supply and demand dynamics. As I already mentioned, an added benefit to investors is that all local currencies in the Gulf have been consistently pegged to the US dollar for many years, a situation unlikely to change in the near future. This helps reduce the currency risks that often accompany investment in developing economies.

How can the Water Cost Index (WCI) and the Waterfund Insights platform be of use to the region?

The GCC is well aware that water needs to be priced more attractively to obtain private investments in water.  This has entailed development of regulatory and tariff regimes and investment frameworks that set the foundation to attract private sector capital. Waterfund Insights is a natural partner for supporting such initiatives because we value the full cost of the water and we can ‘stress test’ the tariff regime to ensure that investment returns are resilient under a variety of scenarios.

As they focus these efforts, Gulf governments are realising that more attention needs to be paid to cost recovery that compensates plant investors, as well as to price-signalling mechanisms that reduce high per capita consumer demand for water. Ironically, despite having some of the highest water supply costs, the Gulf has consistently had some of the lowest retail water tariffs in the world.

By working with the Waterfund Insights platform, regulators and water agencies in the region are able to better measure the cost impact of spending and demand, thereby allowing for more efficient and informed investment decisions. Waterfund Insights also measures the impact of Red Tide, an algal bloom that can clog and disrupt desalination plants processes.

The cost transparency and deep analysis provided by the WCI and the Insights platform also change the way governments view water, providing a nuanced understanding of how water sector investment can transform heavy cost burdens into a rich economic opportunity for future stakeholders.

Thank you Paul.  This opportunity seems much clearer than water investing in regulatory quagmires like California.  Where can I learn more about Waterfund’s specific investment opportunities in the Middle East?

For more information about Waterfund’s specific investment opportunities in the Middle East, please sign up for Blue Bonds on our website:

Posted in Newsletters.