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Four Stubborn Facts that will Determine Iraq's Future (Part 2)

September 28, 2018

 

 

 

The water crisis in Basra is now a serious humanitarian emergency. The metrics of Iraq's current crisis must form the basis of any meaningful discussion, these being the challenge of Iraq's demographic youth bulge, the supply and demand of water and electricity and the limited long term budgetary constraints on supplying these services.

 

At the same time, it is tempting for some politicians to believe the Iraqi budget can supply all of these essentials while resisting privatisation. For example, one MP recently attacked the government’s record on electricity generation, saying that Egypt had achieved better results while attacking market liberalisation.

 

In fact, Egypt is in the process of an aggressive privatisation strategy, following a Siemens mega deal similar to what has been proposed in Iraq. If Iraq implemented a similarly bold privatisation strategy without higher public sector employment, it would probably lead to major protests: Cairo residents now pay bills as high as a quarter of average monthly income.[i]

 

While Iraq’s tariff structure does not even come close to this level of payment, other emerging economies, notably Turkey, have succeeded in gradually reforming the power sector after the government allowed private investment in 1984, eventually making terms of foreign investment attractive enough to massively boost generation between 2000-2010,[ii] while the economy grew impressively following the country’s 2001 financial crisis.[iii] As one CEO of a foreign company in Turkey commented,

 

“As a fast-growing market, it became evident that the ever-increasing demand for electricity could not be met solely by public resources and the additional resources needed to meet this demand required extensive investments."[iv]

 

Iraqi policy makers and those who work with them need to focus on these realities. Turkey could have easily chosen a different path and despite its current problems, could have become a very different country. Iraq can still make the right choice, but time is running out.

 

In part one of this article, unemployment and corruption were discussed (“facts 1 and 2”). This section deals with other systemic problems including government coordination and resistance to market liberalisation.

 

3) No progress without strategy   

 

While there have been some attempts in Iraq to follow strategy, many efforts involve ad hoc measures, with the promise of thousands of public sector jobs being only one example. Prior to the election, one Iraqi politician promised a $234 million tourism “water world,” for Basra, while services languished.[v] Likewise, at the end of 2017, the Ministry of Environment in Basra worked with local activists on a scheme to plant a million new trees in the province to combat desertification.[vi] Based on a project to cultivate 125,000 trees in Iraq with 15,000 cubic meters per day, such a project would entail using a significant amount of Basra’s desalinated water, desperately needed in local homes. Both of these ideas have little or no relation to existing national strategies.

 

According to the USAID Tarabot program,

 

“Project planning in Iraq has historically suffered from poor coordination, resulting in the redundancy of projects and poor matching of national objectives and the needs of citizens. This is partially a result of a dual budget system, in which ministries build infrastructure in the provinces using national capital investment funds while governorate offices implement their own projects through a separate regional development fund. Under this arrangement, ministries and governorate offices implemented projects independently of one another, with little to no coordination.”

 

Poor project coordination has been identified as a major problem in Basra despite a growing emergency for over a decade. A 2013 study on the water sector in Iraq prepared for the Japanese government (which has sent considerable assistance in the form of soft loans in this sector) noted how,

 

“a lack of strategic coordination between the disparate government entities tasked with developing Iraq’s potable water infrastructure,” was a major problem. The report explained how, “The Ministry of Water Resources, Ministry of Municipalities and Public Works, Provincial Councils, Governors Offices and District Councils all have inputs into the development of water infrastructure. Often these bodies do not coordinate effectively, to the point that their respective plans are often contradictory.”[vii]

 

This persisted for years as the emergency grew: In 2009, six years after locals were warning of increasing salinity in Basra’s water supply, U.S. State Department reported how,

 

“Basra Province's Agricultural Director is prepared to announce a water catastrophe because the saltiness of the Shatt Al-Arab had reached a level making planting crops and rearing animals impossible. Residents were leaving the area."[viii]

 

With 95,000 Basrawis hospitalised from drinking poor quality water, there should now be urgent coordination on existing strategies and a review of industrial wastewater treatment. For example, the 2013 study on the water sector explained how,

 

“Iraq’s Dora Refinery in Baghdad has a dedicated treatment plant that processes 750 cubic meters per hour. This water is discharged into the Tigris River in Baghdad, with an Iraqi scientist noting that the water is not adequately treated and leads to “a harmful environmental impact on the Tigris River.”[ix] The same report noted how the cement industry regularly disposed of untreated industrial wastewater.

 

Iraq needs to coordinate on existing strategies--many of them highly detailed and drawn up by Iraqi technocrats and foreign advisers. Basra will need great assistance from Baghdad and external advisers, particularly because the province that has historically suffered low capacity for project execution. In 2011, Basra had the lowest budget execution rate of all provinces, with just 8% of funds allocated being spent, with Ninewa coming next, at 24%.[x]

 

This means that because of the war on ISIS and the decimation of Iraq's oil revenues, the province had little more than two years of limited federal funding to achieve anything in an area riven with tribal conflict and led by a provincial council paralysed by political division.[xi]

 

Even as the province recovered from its last major episode of violence in 2008, a JICA study that year on the water supply in Basra and Hartha estimated that treated water supply was only 412,000 tons per day, short of maximum demand of 914,000 tons per day (1 ton of water is approximately the same as 1 cubic meter/m³) while in some districts, ageing infrastructure meant that leakage was as high as 50%.[xii]

 

With higher per capita income and a population growth averaging at least 3% per year, not to mention rural-urban migration, we can expect actual demand to be well over 1 million tons/ m³ per day. In August 2018, Bloomberg news reported on the struggle of a family in Basra who purchased 2 m³/day as a private delivery, which would work out at 730 m³/year. Although the report did not say how large the family was or whether they had livestock, the average family sizes in Iraq are 6.8 for rural areas and 7.9 for urban areas (UN Population Fund) and often far larger.[xiii]

 

In the UK, the upper estimate of water use for a family of 6 is 265 m³/year.[xiv] This means that, if Basra city (not governorate) has a population of 2.15 million people (UN, 2013)[xv] there were approximately 272,151 families in Basra in 2013. However, considering population growth at 3% per year, the population of Basra has likely risen by at least another 193,500, to 2,343,500.

 

Therefore the current number of families in Basra is (very approximately) 296,645, probably well over 300,000 given rural-urban migration. This means that the upper limit of domestic demand, if we take the example from the Bloomberg article could be 296,645 x2m³/day= 593,290 m3/day for domestic use for Basra city alone, probably over 700,000 m³/day.

 

The fact that this is lower than the JICA demand estimate for 2008 is concerning and points to a number of issues including high losses--as high as 50% in Basra from network leakages, and wasteful use in some districts, including informal settlements diverting water, caring for livestock etc. One of PM Abadi’s last acts in his post was to order an investigation into these problems and possible “corruption” in the water sector.

 

Overall, the picture is distorted not only due to the absence of a national census but to the growth in informal settlements, as rural communities abandon failing farmland to live in cities. A study released in late 2017 involving the Ministry of Planning and the UN found that there were over 500,000 illegal housing units in Iraq in over 3,687 informal settlements, with Baghdad having the highest number, at 1022 areas, followed by Basra, which had 677 informal settlements.[xvi]

 

At the very least, the relevant government officials should review the Strategy for Water and Land Resources for Iraq (SWLRI) a hugely detailed study made between 2010 and 2015. [xvii] Based on the concept of “integrated water resources management,” the study covers the years up to 2035, and considers land use, domestic, agricultural and industrial demand, all digitally modelled in one of the most complex studies conducted in Iraq post 2003. Previously, the Iraqi Ministry of Water relied on a national strategy made by the Russians in the 1980s. SWLRI cost $35 million dollars and involved training hundreds of Iraqis. If Iraqi authorities or anyone else--the Holy Shrines authority or foreign advisers, want to help Basra, they need to review this study first.

 

Second, there are various projects in the works for Basra that should form the basis of emergency action. In March 2018, British company Wood Group began a project with Biwater to assess the water situation in Basra for further work.[xviii] Why wasn’t such work done earlier?

 

There can be little doubt that some projects stalled because the oil price had collapsed and Iraq was spending all of its budget on salaries (and at one point could not even afford that) in addition to the war on ISIS. On September 10, 2016 the Ministry of Water Resources said it had no budget to deal with the water problems in Basra.[xix] However, a year later this situation had improved, but not quickly enough to finish one of the most important water projects in the province.

 

By July 2018, the UK export credit agency, UK Export Finance announced that they would be providing 85% of the financing for $810m storm and sewage water network in Hillah, Babel, in cooperation with the Ministry of Construction, Housing, Municipalities and Public Works.[xx] Before this, the last major contract for Basra was for a 200,000 m3/day desalination plant, to be completed in 30 months, which went to a consortium of Hitachi, Violea and the Iraq Arab Contractors Company, at a cost of $220 million.[xxi]

 

This project was supposed to be completed in 2016-- but was delayed by the oil price crunch and according to one account, administrative delays on the Iraqi government side. Another report suggests that attempts to extort the contractors by “armed groups,”[xxii] also caused delays.[xxiii] According to Niqash, the project, which was supposed to be finished in August 2018, had to stop work due to riots in Basra.

 

This would have added a substantial amount of available water, considering a 2010 project in Samawa, which would treat 32,000 m3/day was intended to serve 250,000 people.[xxiv] Relevant stakeholders in Iraq’s stability should urgently inquire about the status of these projects, and another potential project, proposed last year for a 91,200 m3/day day treatment plant, complete with 42 km of transmission and distribution pipelines.[xxv]

 

Long term maintenance assistance should be in place to sustain these projects. For example, in 2004 the U.S. began work on the $277 million Nasiriyah Water Treatment Plant, which was handed over to Iraqi authorities on 12th September 2007. While ambitious, the project quickly fell victim to wider problems in the sector, with a lack of electricity stalling pumps and treatment equipment, inadequate maintenance and a lack of qualified staff and a distribution system unable to cope with high water pressure.

 

In one of the five towns the project served, the water line had been illegally tapped, while the U.S. government audit of the project also placed blame on the Ministry of Municipalities and Public Works staff, who apparently did not send staff to training sessions for project sustainment. [xxvi]

 

In the long term, the success of these water projects brings us back to the topic of anti-corruption and job creation. With job creation, Iraq can continue tariff reform to manage water demand sustainably, as is currently being attempted in Sulaymaniyah with a project to install water meters.[xxvii] Furthermore, anti-corruption efforts should focus on vital service projects in the water sector, as the 2013 water sector report notes, “the majority of water and sewage projects in Iraq have been awarded to Iraqi construction and contracting companies. However, it should be noted that this is changing, as there has been a clear trend of projects implemented by Iraqi companies either not being finished, going way over budget, exceeding deadline, or in some cases the contracting company simply stealing the money and leaving.”

 

4) The electricity crisis won’t end without tariff reform

 

Until the war with ISIS, Iraq was on track to provide relatively good electricity provision in many parts of the country. In fact, electricity production has risen steadily since 2003, only beaten by soaring demand as millions of Iraqis enjoy low/ no tariff supply and per capita incomes have risen sharply. Consider the basic facts of supply and demand in the sector:

 

In early 2014, when Iraq’s generating capacity hovered at 12 Gigawatts (GW) Minister of Electricity Abdul Kareem Aftan announced that as much as 8000 MW (8GW) was planned to come online, hitting 20 GW by 2016. Considering that peak summer demand is often estimated at over 50% of production capacity, Iraq’s early 2014 peak demand would have been around 18 GW, meaning that many areas of Iraq would have had 24 hr electricity if not for the fact that technical and non-technical losses (damaged infrastructure, theft from the grid etc.) were up to 30% in some areas. Current peak demand is approximately 23.5 GW,[xxviii] so we could expect that by now, with oil prices rising again, Iraq would not be far off much better supply, were it not for the war with ISIS.

 

The recent war caused grid losses of more than 8 GW.[xxix] Iraq then struggled through low oil prices to bring production capacity back up to around 15 GW in the summer of 2018, well below the 23.5 GW summer demand, but supply then dropped due to problems at the Mosul dam hydroelectric plant and Iran cutting exports up to 1.5 GW, which may have been the spark of the Basra unrest.

 

For now, Iraq can be hopeful that another 10 GW is under construction and that there are efforts to make existing stations more efficient and reduce losses. However, if Iraq wants to have any electricity at all in future, it will need to implement the privatisation strategies called for in the Electricity Master Plan, which PM Abadi attempted to implement amid tough political opposition.

 

For example, Iraq’s own reconstruction strategy estimates that it will require as much as $7 billion to rebuild stations destroyed in recent fighting. Under higher oil prices in 2012, the MOE budget was $5.6bn ($4.1bn for capital investments) and during this period, the projects which took Iraq from approx 10 GW to 12 GW were funded.[xxx] With the prospect of new mega deals with either Siemens or GE, we are back to the 2008 period when Iraq signed $7 billion worth of deals with both Siemens and GE.[xxxi]

 

Next time, at least some of this expenditure simply has to go back to the investor through a more efficient tariff system, which is deeply unpopular in Iraq. The problem is, higher oil prices will bring higher demand, at least 35 GW by 2030, possibly even higher.[xxxii]

 

This means that funds will have to go back to the Ministry and the investors, including foreign companies like Siemens and General Electric, who are in the process of building and maintaining 1000s of MW.[xxxiii] Better billing for higher domestic use, for example, mid-level government workers, has led to significant drops in demand in peak times, as high as 47% in some areas. According to one recent study:

 

“The end-user metering in Iraq is very poor, with a combination of outdated or malfunctioning meters and widespread theft or unmetered connections. Estimates suggest that around 23% of the total electricity generated is lost to theft via illegal connections to the system. In addition, the majority of the existing end-user meters, around 80%, are more than 30 years old and some of them have never been recalibrated. The poor end-user metering is compounded by the absence of effective billing and collection systems and procedures, which in turn leads to widespread thefts, non-billing and payments. Of the estimated total system losses, about 50% is non-technical losses.”

 

In Basra in the spring of last year tariff reform was met with widespread protest, with tribal support.[xxxiv] Imagine then, the effective implementation of better metering and tariff collection as new projects come online and wasteful use is cut—it is highly likely that Iraq would come close to closing the supply gap, especially given the added advantage of increasing gas use for power through the Basra Gas Project. The latter initiative is truly one of the success stories of post 2003 Iraq and has yet to be exploited to full potential. Left unaddressed however, a combination of irregular oil revenues and population rises could cause electricity provision to collapse from inefficiency. Therefore, private finance is vital to ensure sustainability.

 

References

 

 

[i] The Economist: Egypt's President Grows Even More Intolerant of Dissent. 27.09.2018 https://www.economist.com/middle-east-and-africa/2018/09/29/egypts-president-grows-even-more-intolerant-of-dissent

 

[ii] Power Engineering International: Dynamic energy market offers plentiful power opportunities. 03.24.2016 https://www.powerengineeringint.com/articles/print/volume-24/issue-3/features/dynamic-market-offers-plentiful-opportunities.html

 

[iii] Daron Acemoglu and Murat Ucer: The Ups and Downs of Turkish Growth, 2002-2015: Political Dynamics, the European Union and the Institutional Slide. https://economics.mit.edu/files/11509

 

[iv] Power Engineering International: Dynamic energy market offers plentiful power opportunities. 03.24.2016 https://www.powerengineeringint.com/articles/print/volume-24/issue-3/features/dynamic-market-offers-plentiful-opportunities.html

 

[v] Iraq Business News: $234 Million Resort to be Built in Basra. 02.05.2018. http://www.iraq-businessnews.com/2018/05/02/234m-resort-to-be-built-in-basra/

 

[vi] Saleem al-Wazzan: In Basra, Fighting Rising Temps With Trees. Niqash. http://www.niqash.org/en/articles/society/5739/

 

[vii] Water and Sewage Sectors in Iraq: Sector Report — February 2013http://www.meti.go.jp/meti_lib/report/2013fy/E002792.pdf

 

[viii] Wikileaks cable, September 2009: https://wikileaks.org/plusd/cables/09BAGHDAD2469_a.html

 

[ix] Report not publicly available. 

 

[x] The World Bank: Republic of Iraq Decentralization and subnational service delivery in Iraq: status and way forward. 2016 http://documents.worldbank.org/curated/en/583111468043159983/pdf/Iraq-Decentralization-JIT-Assessment-Report-March-2016-FINAL.pdf

 

[xi] The Economist: Basra: The Blighted City. 21.11.2015. https://www.economist.com/middle-east-and-africa/2015/11/21/the-blighted-city

 

[xii] JICA evaluation, 2008. https://www.jica.go.jp/english/our_work/evaluation/oda_loan/economic_cooperation/c8h0vm000001rdjt-att/iraq09.pdf

 

[xiii] Iraq National Population Commission/ UNFPA report 2012. https://iraq.unfpa.org/sites/default/files/pub-pdf/PSA%20English%202012.pdf

 

[xiv] The Consumer Council for Water website UK: https://www.ccwater.org.uk/households/using-water-wisely/averagewateruse/

 

[xv] UNDP Basra analysis 2013. https://web.archive.org/web/20150926015108/http://www.iau-iraq.org/documents/378/GP-Basrah%202013.pdf

 

[xvi] UN Habitat study on informal settlements, 2017. https://unhabitat.org/new-research-finds-3-2-million-iraqis-living-in-informal-settlements/

 

[xvii] Outline of SWLRI. http://t-zero.it/en/portfolio/swlri-strategy-for-water-and-land-resources-in-iraq/

 

[xviii] Press release: Biwater and Wood partner to develop drinking water supply for Basra. https://www.waterworld.com/articles/wwi/2018/03/biwater-wood-partner-to-develop-drinking-water-supply-in-basra-iraq.html

 

[xix] Adnan Abu Zeed, Al Monitor. Iraq's Basra Plans Dam on Vital River. 05.08.2018.  https://www.al-monitor.com/pulse/originals/2018/08/shatt-alarab-iraq-basra-dam-water.html

 

[xx] Andrew Roscoe, UK to finance $810m Iraq water network project. MEED. 02.07.2018. https://www.meed.com/uk-finance-810m-iraq-water-network-project/

 

[xxi] Veolia press release Jan. 2014. http://www.veolia.com/middleeast/sites/g/files/dvc171/f/assets/documents/2014/03/pr_bassorah_29012014.pdf

 

[xxii] Salah Nasrawi, Al Ahram Weekly. The Iraqi Growth Myth. http://weekly.ahram.org.eg/News/6020.aspx

 

[xxiii] https://www.youtube.com/watch?time_continue=2678&v=jZttptvHlIY

 

[xxiv] Reliefweb: Iraq: A Project to Address the Shortage in Potable Water Supply. 03.02.2010. https://reliefweb.int/report/iraq/iraq-project-address-shortage-potable-water-supply

 

[xxv] Protenders.com: Al Basra Water Supply Improvement (Package 2) https://www.protenders.com/companies/protechnique/projects/al-basra-water-supply-improvement-package-2

 

[xxvi] SIGIR Report on Nasiriyah water treatment plant. https://iraqslogger.powweb.com/downloads/PA_08_139.pdf

 

[xxvii] Salah Nasrawi, Al Ahram Weekly. The Iraqi Growth Myth. http://weekly.ahram.org.eg/News/6020.aspx

 

[xxviii] T&D World: ABB to Install Substation in Iraq https://www.tdworld.com/substations/abb-install-substation-iraq

 

[xxix] Luay al Khatteeb and Harry Istepanian, "Turn a Light On: Electricity Sector Reform in Iraq." Brookings Institution. 03.2015.  https://www.brookings.edu/wp-content/uploads/2016/06/Alkhatteeb-Istepanian-English-PDF.pdf

 

[xxx] International Energy Agency: Iraq Energy Outlook, October 2012. https://www.iea.org/publications/freepublications/publication/WEO_2012_Iraq_Energy_OutlookFINAL.pdf

 

[xxxi] Simon Webb: Iraq signs billion-dollar power deals with GE, Siemens. Reuters. 28.11.2008.  https://www.reuters.com/article/us-iraq-ge-siemens/iraq-signs-billion-dollar-power-deals-with-ge-siemens-idUSTRE48Q30Y20080928

 

[xxxii] Hashim al Rikabi: An Assessment of Electricity Sector Reforms in Iraq. Al Bayan Centre. 2017. http://www.bayancenter.org/en/wp-content/uploads/2017/09/909865676600.pdf

 

[xxxiii]  Power Technology.com Baghdad Bismayah (Bismaya) Combined Cycle Power Planthttp://www.power-technology.com/projects/baghdad-bismayah-bismaya-combined-cycle-power-plant/

 

[xxxiv] Inside Iraqi Politics Issue 171

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