Water

Major Industry Trends

Water and the Global Economic Downturn

The provision of safe water is a prerequisite of economic development and activity, and thus water utilities tend to be among the industrial sectors least affected by an economic downturn. This is partly because of the essential nature of the good that they supply, but also because water utilities tend to be heavily regulated by the state in most countries. Thus, the water sector tends to suffer from a lack of competition, and utilities can rely on regulated income streams even in times of economic hardship. Certainly, water utilities around the world have reported healthy profits and revenues despite the global financial crisis. Examples include the following:

• United Utilities (UK), which supplies water to about 7 million people across northwest England, said, in January 2009, that it was trading in line with expectations and that it was confident of a good underlying financial performance in 2008/2009.

• American Water and Aqua America are the two largest quoted water utilities in the US. In March 2009, Global Water Intelligence said that it expected both companies to report strong earnings growth in 2009, having posted robust sets of full-year results at the end of February 2009.

• In February 2009, the Spanish water utility, Aguas de Barcelona (AGBAR), reported a 13.8% rise in 2008 net profit.

• Severn Trent (UK), which supplies water and sewerage services to more than 3.7 million households and businesses in central England and mid-Wales, said, in March 2009, that it expected sales to fall by just £25 million (US$37 million) in the fiscal year ending end-December 2009, due to reduced commercial demand. Its commercial customers included the collapsed UK retailers, Woolworths Group plc and MFI Retail Ltd, but total revenues in fiscal 2008 amounted to £1,279.2 million.

Water Shortages Could Become a Serious Threat

“Water receives less attention than other environmental issues such as the climate and pollution, but the problem of water scarcity is at least as important—and, arguably, more pressing—than that of global warming,” the Financial Times reported in December 2008. The newspaper added that a rising global population, industrialization, pollution, and climate change itself are all putting fresh-water supplies under strain.

Certainly, there has been concern for some years that lack of water could lead to conflicts in the developing world. In 2005, for example, the former UN Secretary-General, Boutros Boutros Ghali, warned that competition for water resources could provoke wars in Africa and the Middle East. He added that military confrontation between the countries of the Nile basin was almost inevitable. Indeed, it could only be avoided if they shared water equitably, he said. The BBC reported that while Egypt had long been the greatest user of Nile water, countries upstream, including Kenya, Ethiopia, and Tanzania, on both the Blue and White Niles, were increasingly demanding a greater share. Furthermore, Boutros Ghali said that Egypt’s demand for water would continue to increase rapidly because of “a demographic explosion,” which had seen its population rise from 20 million people in the 1950s to 70 million today.

Water shortages are also causing problems in the developed world. The Spanish press reported on an outbreak of “water wars” in summer 2008, when the country experienced its worst drought in 40 years. The BBC reported that the growing problems caused by a lack of water had “set region against region, north against south, and government against opposition.”

Furthermore, water shortages in Spain are set to worsen, according to the BBC, which said, “Climate experts warn that the country is suffering badly from the impact of climate change and that the Sahara is slowly creeping north—into the Spanish mainland.” Earlier in 2008, the city of Barcelona almost ran out of water, causing the government of Catalonia Province (in which Barcelona is located) to plead for water to be transferred from rivers such as the Ebro, causing a furious row between the regions. Eventually, Barcelona shipped in millions of liters of water from France, and accelerated work on the giant desalination plant on the edge of Barcelona, which promises to provide 180,000 cubic metres of water per day. Other areas of the country are also suffering, especially already arid areas along the Mediterranean coast, from Catalonia down through Valencia, Alicante, Murcia, and Almeria.

Global Financial Crisis Threatens Development of Water Utilities in the Developing World

Water is vital for human life and economic development. Yet while access to water is taken for granted across the developed world, almost 1 billion people around the world have no access to safe water, and 2.6 billion people—out of a global population of around 6.5 billion—have no access to sanitation. The United Nations Millennium Development Goals pledged at the start of this decade to halve, by 2015, the proportion of the population without access to safe drinking water.

In March 2009, however, the World Bank said that the global financial crisis could set back development in water utilities by a decade or more as investment falters and people become increasingly unable to afford water bills. Jamal Saghir, Director of Energy, Water and Transport at the World Bank, was reported as saying that as funding dries up, a vicious circle could re-emerge of poor services, low willingness to pay, and low investment. He added that water utilities around the world would have to boost efficiency to convince cash-strapped governments they were a sound investment. Even well-run water utilities in rich countries suffer leakages of between 10% and 30%. Singapore, the most efficient country in the world in terms of water usage, loses less than 5%. However, in developing countries, wastage is above 40%, and can be even higher. In Maputo, the capital of Mozambique, 60% of water is lost before it reaches the customer.

Angel Gurria, Secretary-General of the Organisation for Economic Cooperation and Development (OECD), said that national governments must revise the way they fund water services—typically a mix of tariffs paid by users, tax revenues, and, in some countries, aid transfers. If the financial crisis makes it harder for developing countries to borrow, they must find ways of gradually moving to more tariff-based systems, which also protect those who are least able to pay, he said.

The OECD has also pointed out that population growth is adding to pressure on water resources. The global population is growing by around 80 million people per year, and by 2050 there are expected to be 9 billion people on the planet. Feeding these extra mouths, and growing more biofuels will place a major strain on water supplies, particularly by the agricultural sector, which already takes up 70% of available fresh water, according to the OECD.

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Market Analysis

The Global Market

The Financial Times (December 15, 2008), quoting figures from Lux Research of the US (see More Info), said that the water-services industry had a global turnover of US$385 billion in 2007, while a further US$64 billion went to companies selling water-related equipment. OOSKAnews, which publishes news and business intelligence on the global water sector, puts a higher value of around US$470 billion on the industry.

The Financial Times added that, while agriculture is by far the biggest user of water in the world, consuming around 70% of fresh-water supplies, other activities also consume vast quantities of water. For example, it takes 2,400 liters of water to make a hamburger, and 11,000 liters to make a pair of jeans. Other industries also depend heavily on water. Semiconductor manufacturers, for instance, are among the biggest industrial users of water, while power generators “require plentiful supplies of water for cooling, and other manufacturers use water for purposes from cleaning to cutting materials.”

Water Utilities Attract Huge Investment

The water industry has generally been regarded as a safe and rather boring area by investors. Prices tend to be regulated, meaning that profit growth is capped. In the past 10 years, however, privatization programs in many countries have attracted investors, and the immense growth potential of the water industry in developing countries has also caught the attention of investors. They believe that acute shortages and worsening pollution in countries such as China will support demand for clean water and sewage treatment—and the services of operators providing them—for many years to come. China opened its water industry as recently as 2004, but its plan to invest US$130 billion in water and wastewater treatment between 2006 and 2010 has ignited interest among foreign companies such as Veolia Environment, the world’s largest water utility.

A similar pattern can be seen around the globe. The UN’s Third World Water Development Report, issued in 2009, said that between US$92.4 and US$148 billion would need to be invested in water supplies and wastewater services each year from 2006 to 2025. In July 2007, Stenham Advisors established a fund to invest in the global water industry, saying the industry would require around US$1 trillion over the following 20 years. The company said the massive sum reflected chronic underinvestment in water infrastructure in recent years. It said that China and India alone would absorb 25% of the US$1 trillion sum.

Advanced economies, as well as the developing world, need to invest huge sums just to maintain services over the coming decades, according to the OECD. In March 2009, it said that in the United States alone, US$23 billion would be needed annually over the following 20 years, a figure that does not take into account dams, dikes, and waterway maintenance. The OECD said that France and Britain would have to boost water spending as a share of GDP by about 20% just to maintain services at current levels, while Japan and South Korea would need to make increases of more than 40%.

Climate Change to Affect Investment in Water

The water industry is likely to be one of the industries most affected by climate change. Changing weather patterns are likely to have a dramatic impact on water demand and supply, as can be seen from events in Spain (see Major Industry Trends). Unsurprisingly, therefore, the industry is paying close attention to the subject. In February 2009, for example, eight of the top US water utilities said that they were joining forces to study how rising sea levels, droughts, and other effects of global warming are taking a toll on supplies of drinking water.

According to the Reuters news agency, the coalition known as the Water Utility Climate Alliance said that water agencies need access to the best possible climate-change research as they prepare to invest hundreds of billions of dollars in infrastructure over the next 15 years. “Our systems are facing risk due to diminishing snowpack, bigger storms, more frequent drought, and rising sea levels,” said Susan Leal, general manager of the San Francisco Public Utilities Commission, a member of the alliance. “We need to be organized to respond to these risks—that’s why we’ve formed this alliance.”

In January 2009, according to Reuters, scientists at the Scripps Institution of Oceanography said a water-supply crisis was looming in the western United States, thanks to human-caused climate change that has already altered the region’s river flows, snowpacks, and air temperatures. The scientist said that changes over the past half-century have meant less snowpack and more rain in the mountains, rivers with greatly reduced flows by summer, and overall drier summers in the region.

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