Water and Money Have a $1 Trillion Relationship Crisis: Gadfly

Some 4 billion people live with severe scarcity at least one month of the year and half a billion do so all year round. Some companies trying to address these problems are listed below. With dividends reinvested, the S&P Global Water index of leading companies returned more than 7 percent annually over the past decade, according to Bloomberg data.

  • Suez
  • Veolia
  • Danaher Corp
  • Xylem Inc
  • Beijing Enterprises Water Group

At this rate, Cape Town won’t be the last big city to almost run out of water. Population growth, urbanization, old infrastructure, pollution and climate change: all are a recipe for more scarcity.

That’s worrying because farming, electricity generation and manufacturing, not to mention Google and Amazon’s data centers, depend on H2O — and, of course, we need it to survive. “There’s a 100 per cent correlation between water availability and GDP growth,” says Arnaud Bisschop, a fund manager at Pictet Asset Management. “If there’s no water there’s no economic growth.”

water imbalance chart

Trillions of dollars of water infrastructure spending will be needed in coming decades. With public finances stretched, a big pool of that will have to be private sector money. That won’t happen, though, unless water and capital can repair their dysfunctional relationship. To take only two examples, left-wing British opposition leader Jeremy Corbyn wants to re-nationalize water companies, while Gabon has just seized sites operated by France’s Veolia Environnement SA.

With freshwater so unequally distributed, there’s much at stake. Some 4 billion people live with severe scarcity at least one month of the year and half a billion do so all year round.

Companies trying to address these problems (while making money) include France’s Suez and Veolia, Danaher Corp and Xylem Inc of the U.S. and Beijing Enterprises Water Group. With dividends reinvested, the S&P Global Water index of leading companies returned more than 7 percent annually over the past decade, according to Bloomberg data.

Some believe water’s emergence as an asset class is just getting started. Suez boss Jean-Louis Chaussade thinks it could be more valuable than oil one day. However, its special status among commodities may well discourage investment.


In the U.S., where the water market is fragmented and about 85 percent of people still get water from a public entity, investment has fallen so far behind that an estimated $1 trillion of capital will be needed over the next 25 years.”


Unlike crude oil or electricity, water is rarely traded on exchanges or across borders. Transport is expensive. “There isn’t a homogeneous global water price and it’s hard to imagine there ever could be,” says Bisschop.

Having enough water to drink is a human right and the public is unwilling to pay much for something that falls from the sky. Hence, governments often set artificially low water rates, making it harder to recoup investment.

There are other complications. Demand is growing rapidly in emerging economies as living standards improve. But in some developed countries, household use is in decline because of more efficient smart meters, water-saving toilets and the like. In France, billed water volumes are falling by up to 1.5 percent a year, Suez says.

There’s much less venture capital going to the water sector than to renewable energy.

There’s an argument that water supply — a natural monopoly — should be state-owned. But barring a few exceptions such as Israel and Singapore, the public sector isn’t doing a great job looking after this precious resource, as Cape Town’s crisis and Michigan’s lead poisoning fiasco make clear.

In the U.S., where the water market is fragmented and about 85 percent of people still get water from a public entity, investment has fallen so far behind that an estimated $1 trillion of capital will be needed over the next 25 years.

In Britain, one of the few countries to have fully privatized its water industry, utilities have been justly criticized for piling up debt and funneling massive dividends to private equity owners. It would be a pity if that shabby example caused the world to shun private capital.

For all their faults, U.K. water companies have invested more than 126 billion pounds ($176 billion) since privatization. “Privatization has delivered what it was supposed to,” says Credit Suisse analyst Guy MacKenzie. “Pretty much every service or quality metric has improved significantly.” With some notable exceptions, of course.

So mobilizing more private capital will need thoughtful regulation to match investor incentives with the public good.

For example, if a company helps customers use supplies more sparingly (a good thing!) it will make less money unless regulators create structures that decouple revenue from consumption. Tiered pricing, where a household’s basic water needs are provided at low-cost but thereafter the utility is allowed to charge higher prices, could make a water project more attractive for investors while encouraging efficiency. Yet it is controversial.

Where possible, utilities in places with lots of rain could also be encouraged to sell the surplus to dryer areas, especially if that’s cheaper than building infrastructure like desalination plants.

Chucking money around isn’t a panacea, of course. With agriculture gobbling up about 70 percent of freshwater consumption, countries could make big strides just by allocating supplies better. Should farmers really be growing almonds in California? Still, in ever thirstier times, water and capital are going to need to get along better.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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