The fight is on for water and nowhere is it more apparent than in the Middle East and North Africa Region (MENA) where scarcity is felt more acutely than most of the rest of the world. Consider the following. Worldwide, the average water availability per person is close to 7,000 m3/person/year, whereas in the MENA region only around 1,200 m3/person/year is available. One half of MENA’s population lives under conditions of water stress. Moreover, with the population expected to grow from around 300million today to around 500 million in 2025, per capita availability is expected to halve by 2050.
Not surprisingly, governments in the region are paying attention to the mounting need for fresh water, and have increased their investments in the water sector. Around US$120bn to US$130bn are expected to be invested in the Middle East between 2005 and 2015, an increase of 59% compared to the previous decade’s investment. In the water sector, for example, the GCC has 60% of all the water desalination capacity, but zero technology and therefore General Electric is investing heavily in this sector. Given the magnitude of the investments needed, governments in the region are rapidly privatising the water sector. So strong has been the funding requirement in the sector that water constituted 15% of the total World Bank lending to the MENA region between 2002 and 2006.
Considering the potential, private equity activity in this sector is scaling up. Amongst some of the notable private equity deals in the sector is Gulf Capital’s recent acquisition (in 2007) of 60% in Metito Group, the largest Arab water engineering and concession company. The deal sheds light on how leading financial institutions are positioning themselves to take advantage of the upcoming trend for privatising the water sector in the Middle East. Metito was one of the few regional companies to tap into this growing trend as early as 1999. In that year, Metito secured its first concession to supply water to a part of the Sharm El-Sheikh region of Egypt. That concession now supplies 36 hotels and Middle East leisure projects with all their water needs.
The true test of any private equity sector is exits. Abraaj Capital bought Septech way back in 2004. Septech, a wastewater treatment company, was exited after three years, generating a 39% IRR for the regional private equity fund based in UAE. The company found a profitable niche in providing treatment plants for new developments in the leisure sector in the country. Post acquisition, Abraaj mapped out the evolution that aided Septech’s plans to expand beyond the UAE, and then to accelerate that growth across the region. Septech is now serving clients in Oman, Qatar and Saudi Arabia, as well as being involved in major UAE projects, including the Palm Atlantis. There are other examples as well. Istithmar, a Dubai-based private equity fund, is a 95% shareholder in Dubai-based Palm Water – increased from 51% following the withdrawal in April of Singapore’s Hyflux – which was established in 2005 to carry out water and wastewater projects, predominantly on Nakheel developments such as Palm Jumeirah.
Even the trend towards water sector-specific funds seems to be increasing. Swisscorp, a Switzerland-headquartered investment firm, started ‘MENA Water Ventures’, which was launched in partnership with Groupe Danone late in 2003. More recently, Abraaj Capital launched a US$2bn Infrastructure Growth Capital Fund alongside Ithmaar Bank and Deutsche Bank, which includes water investments. The fund has a target IRR of 15% per year and a life of 10 years. Bunyah GCC Infrastructure fund is another initiative that is looking to invest in water and wastewater projects (apart from other infrastructure projects). The US$400m fund, which will be managed by Instrata Capital in Bahrain was launched in late 2007.
For private equity players, the upcoming privatisation of the Saudi water sector could prove to be another massive opportunity. The recent water shortages in Jeddah that have led to an urgent rush to secure water supplies, for example, have expedited the Saudi Government’s plans to privatise the Saline Water Conversion Corporation (SWCC), which oversees the water sector production and distribution in Saudi Arabia and has water production assets worth around US$800bn. Saudi Arabia is the largest market for water and waste water in the region. Nearly US$28bn, 23% of the region’s total, are to be invested in Saudi over the next 10 years, of which approximately US$6bn will be allocated for building new water desalination plants.
What about those who point out the extinction of private equity post-global credit crunch? Leading private equity players in the region believe that the international credit crunch is unlikely to affect the regional firms or deals, due to infrastructure developments and privatisation of government-owned companies, apart from flowing liquidity courtesy of high oil prices. The potential in the water theme remains immense, as it is likely to be a favourite with Shariah-compliant funds. And imagine the potential if the regional governments treat this sector as a matter of national security. This, coupled with a likely revaluation of regional currencies, could mean global private funds being seriously interested in the white gold theme.