Clean water is a Janus-faced resource. Its presence promises life, its absence, death. Yet, given water’s essential role and that it is without alternatives, it is surprising that it is often undervalued. But, attitudes are changing.
The ever-growing thirst of the world population, combined with the impacts of climate change, is making water scarce in many parts of the globe. There is growing awareness of this, especially in regions where water scarcity is approaching levels that will compromise industrial production and with it economic growth.
In a report by the 2030 Water Resources Group (
, 2009), it was estimated that within 20 years forecasted demand for water could exceed accessible supply by 40%. The report notes, “Historic rates of supply expansion and efficiency improvement will close only a fraction of this gap,” which means additional measures and investments are inevitable. Fortunately, there are ways to make up the “water supply gap” cost-efficiently. These include boosting the efficiency of water use, enhancing supply and developing a less water-intensive economy, which opens investment opportunities all along the value chain. Charting our water future A CURIOUS RESOURCE
Unlike copper,gas, wheat or gold, water cannot be invested in directly, making it a curious resource. Instead, investment can only be made in companies providing infrastructure or services that transport water in the quality and quantity demanded. Potential players range from water utilities and companies that deliver water technology, such as pumps, down to companies offering disinfection or water treatment solutions.
There are substantial opportunities for these firms as countries move to correct the chronic underinvestment that has plagued water for decades. For example, in the US, the Environmental Protection Agency’s
2005 Needs Assessment advocated an investment of $277 billion over the next 20 years for drinking-water improvements alone – an estimate that has been rising ever since.
OECD ( Infrastructure to 2030, 2006) projects that up to $772 billion will have to be spent annually worldwide by 2015 to modernize water and water waste services to meet global needs. This figure will rise to $1 trillion by 2025.
However, increased investment does not automatically mean growth for water-related companies. Annual growth is typically 5-10%, but some sectors excel, such as waste water treatment in China or consultancy services for the planning of increasingly complex water projects. Examples include the planning of sustainable water supply systems for growing communities and the remediation of polluted sites to protect groundwater quality.
In the wake of Hurricane Katrina, coastal protection for cities has also become an important theme. In addition, increasing health awareness has seen water regulations tighten and increased opportunities for companies that offer advice and planning services.
Opportunities to invest along the water supply chain are ample, but not always straightforward
Another much discussed field is desalination. Desalination plants are in high demand, particularly in small island countries, Australia and countries around the Mediterranean where water shortages are being felt. Unfortunately, there are no pure play companies in this sector which would allow the investor to benefit from this trend. Another downside to desalination is that, while the technology is simple, it consumes massive amounts of energy. This makes it more expensive than a traditional surface water supply infrastructure, which in turn is often more expensive to build than the implementation of efficiency measures.
Logic suggests water efficiency, particularly in terms of agriculture, must play an important role in securing long-term water supplies, and there are many companies that have innovative solutions. For example, in London, it has been calculated that leaking Victorian-era pipelines lose up to 40% of their water. There are companies offering PVC pipes, superior to non-plastic pipes, as replacements. Another creative solution is a structural pipe relining system that rehabilitates existing pipes. Other options include efficient irrigation equipment, allowing farmers to achieve the same crop yield with far less water.
There is no guarantee
Past performance does not guarantee future results. There have been periods during which the water industry underperformed the broader market and/or posted negative returns. Keep in mind that focusing in one sector or industry increases an investment’s vulnerability to any single economic, political or regulatory development. Foreign investing involves the risk of currency fluctuation and the impact of political and social change. Investing in emerging markets involves heightened risks related to the same factors, in addition to those associated with these markets’ smaller size and lesser liquidity.
FAR FROM STRAIGHTFORWARD
Opportunities to invest along the water supply chain are ample, but not always straightforward. Finding attractively valued companies that will benefit from the expected uptake in investments means monitoring several industries: utilities, chemicals, industrials, as well as energy and service providers.
In addition, macro economic developments that may have an impact on project financing also have to be assessed. While private investment typically aims to tailor water quality to the purity levels needed in production lines, basic infrastructure investments mainly depend on municipalities’ budgets. Financing is either from taxation revenues, water tariff increases or bond issuances, which then allow the municipalities to acquire equipment such as pumps and pipes, or undertake construction, plant operation and maintenance services.
Water infrastructure is more capital intensive than comparable public investments such as power generation or transport. In the past, funding constraints have seen investments deferred. The consequences can be seen in China, for example, where water scarcity is threatening economic growth. Lack of filtration and waste water treatment facilities have degraded water quality to a point where people rely on bottled water for personal consumption. China is taking substantial steps to address this. Other emerging markets are expected to follow, but Europe and North America will also need to increase spending as water quality standards continue to tighten and require additional filtration and disinfection equipment.