Water Industry

Major Industry Trends

Water and the Global Economic Downturn

The provision of safe water is a prerequisite of civilized society and of economic development and activity. Since demand is constant, usually with a slight upward growth curve, 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. Heavy regulation restricts entry to the sector so the water sector tends to suffer from a lack of competition.

While governments and regulators tend to exert strong downward price pressures, making infrastructure investment problematic, utilities can rely on solid, regulated income streams even in times of economic hardship. As a result, water utilities around the world continued to report healthy profits and revenues through the global economic downturn of 2008–09. Examples include the following:

• United Utilities (UK), which supplies water to about 7 million people across north-west England, said that during the six months ending September 30, 2009, its revenues rose by £6 million to £1,210 million, and underlying operating profit increased by 1% to £370 million.

• American Water and Aqua America are the two largest quoted water utilities in the United States. In 2009, American Water generated US$2,440.7 million in total operating revenue, compared to US$2,336.9 million in 2008. Aqua America reported revenues of US$670.5 million in 2009, up from US$627.0 million in 2008.

• Suez of France, which supplies drinking water to 76 million people, announced revenue of €12.3 billion in 2009, 0.6% up on the previous year.

• Severn Trent (UK), which supplies water and sewerage services to more than 3.7 million households and businesses in central England and mid-Wales, reported revenue of £1,642.2 million in 2009, up from £1,552.4 million in 2008.

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 are all putting fresh-water supplies under strain.

According to the World Water Council, which was established in 1996 on the initiative of renowned water specialists and international organizations, in response to an increasing concern about world water issues from the global community, “while the world’s population tripled in the 20th century, the use of renewable water resources has grown six-fold.”

The organization adds that “within the next 50 years, the world population will increase by another 40–50%. This population growth—coupled with industrialization and urbanization—will result in an increasing demand for water, and will have serious consequences on the environment.”

Already, there is more wastewater generated and dispersed today than at any other time in the history of our planet: according to the World Water Council, more than one in six people lack access to safe drinking water—that is 1.1 billion people; and more than two in six lack adequate sanitation—2.6 billion people.

The Council also warns that as the resource is becoming scarce, tensions among different users may intensify, both at the national and international level, adding that more than 260 river basins are shared by two or more countries. “In the absence of strong institutions and agreements, changes within a basin can lead to transboundary tensions. When major projects proceed without regional collaboration, they can become points of conflict, heightening regional instability,” says the Council, which cites the Parana La Plata, the Aral Sea, the Jordan, and the Danube as examples of where regional tension may occur.

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 in his opinion, 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.

According to the Intergovernmental Panel on Climate Change, 60% of the world’s population could experience severe water shortages. More than 33% of the world is already under water stress, where poor water supplies affect food production, economic development, and, inevitably, human health.

Food production is constantly under threat in many parts of the world from water shortages, as was highlighted by a report from the International Water Management Institute (IWMI) published in April 2010. Agriculture currently uses 70% of the freshwater available for human use, and, according to the IWMI, unless there is a huge leap in water-use efficiency on farms worldwide, a 70–100% increase in food production will require roughly twice the amount of water in use today.

“The numbers don’t add up,” said IWMI deputy director Colin Chartres. “That amount of additional water just isn’t there. In fact, because of rising demand for water in other sectors, agriculture will have to produce more food with even less water.”

A number of reports in 2009 and 2010 have emphasized the threat of water scarcity. Lloyd’s insurance group warned that water stress was leading to price instability in agricultural markets. It said the record sugar price levels in August 2009 were in part a response to the projections of weaker monsoons in India and irregular rains in Brazil.

Meanwhile, Mumbai provides an example of the sort of problems facing cities in the developing world. In August 2009, the BBC reported that the city needs 4 billion liters of drinking water every day to service the needs of all its residents, but that the main civic body responsible for the city’s water supply, the Brihanmumbai Municipal Corporation (BMC), reports that it can only supply 3.3 billion liters a day. Anil Diggiker, the BMC’s additional commissioner, told the BBC that the organization was trying to address the shortage. “We will have to augment alternate water sources like rainwater harvesting, dug wells, and bore wells,” he told the BBC. “People should not waste the water.”

The BBC warned that there are fears that if the population continues to grow and demand for water hits new highs, then the crisis could escalate, and the city may run out of water within 15 years. In 2010 there were water riots in the city and a similar situation was only averted in 2011 thanks to heavier-than-usual monsoon rainfall, which made around 50% more water available from the dams in the state of Maharashtra.

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Market Analysis

The Global Market

The Financial Times (December 15, 2008), quoting figures from Lux Research of the United States (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.

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, and its plans to invest US$130 billion in water and wastewater treatment between 2006 and 2010 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, last issued in 2009 and published every three years, 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%.

In a 2011 report, accountants KPMG point out that treating raw water, distributing it to the public, and managing wastewater are expensive processes. The average cost to desalinate seawater is US$1,000 per cubic meter per day, plus US$400 to treat the same amount of wastewater. The average per capita consumption of water, whether in the Gulf Cooperation Council nations or in the US, is in the range of 400–500 liters per day. At the same time, the average capital investment in water projects runs between US$200 and 300 million. Public–private partnerships have a real role to play in helping to fund such projects, as an additional funding source. The risks to investors, however, include public pressure on governments to nationalize water assets in times of water scarcity and outcries against “profiteering” over water.

Climate Change to Affect Investment in Water

The water industry is likely to be one of the industries most affected by climate change, and changing weather patterns are likely to have a dramatic impact on water demand and supply. Unsurprisingly, therefore, the industry is paying close attention to the subject. In February 2009, for example, eight of the top ten 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 (WUCA) 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 February 2010, WUCA released a white paper that outlines planning approaches to help water utilities adapt to climate change. The Alliance said that planning methods are necessary because many water utilities cannot afford to delay significant decisions and wait until the range of potential climate-change impacts is substantially narrowed.

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