Last year Thames Water predicted that we would be reduced to using standpipes in London over the Olympics. They launched an advertising campaign to encourage water conservation, only to be rewarded by the wettest summer for 100 years and pictures like this one.
We Brits wouldn’t be happy if we didn’t have some weather to complain about, so we we’ve had plenty to smile about in the last few years! Thames Water was very embarrassed by this campaign which illustrates how difficult it can be to predict short term trends in weather patterns.
London may not be at risk of drought near term, but at a global level McKinsey forecast that by 2030 the demand for water will exceed supply by 40%. Even allowing for some margin of error in their calculation, this creates a few problems. One sort of problem is illustrated by the news that Ethiopia has upset Egypt by beginning to construct a dam on the River Nile .
Politicians are reported as having privately talked of war. We are likely to see more news items like this over the coming decades.
Climate change will cause more precipitation, but not in the places that need it most. Just now the Great Lakes in America are at such low levels that shipping is required to be regulated, costing millions to businesses .95% of Texas is currently in drought , causing farmers to consider switching crops, meanwhile Alberta is recovering from floods.
So how can we respond to these issues? Actually there’s a lot that can be done to make our use of water more efficient. The largest water utility in America – New York City Department of Environmental Protection – has seen water demand decline by almost 50% over the last 30 years, in the face of an increasing population .
This has been achieved partly through the introduction of water meters, which have now been applied to 98% of accounts, and also by replacing toilets with 15 gallon flushes with 5 gallon flushes. They project that demand may decline further due to increasing rates and better billing information for customers through AMR (Automatic Meter Reading) meters. This goes to show what can be achieved with some relatively simple measures. It also shows how consumers’ behaviour can change when they are given responsibility over the amount of water they require.
Awareness of water issues is intensifying. Water has no substitutes when ingested, but not all water needs to be pure enough to ingest. The water that flushes my toilet is purified for ingestion at present – in the future this should change. Only about 1% of household water is ingested or used in cooking .
There is also a need for investment in water infrastructure in order to enable it to cope with a growing population, and increased incidence of floods and storms. At current rates of spend, the US will take 700 years to replace its ageing water infrastructure – for the UK it’s over 1,000 years . Meanwhile there are an estimated 24,000 water mains breaks per year in the US, causing massive water wastage .
Thames Water estimates that preventative investment costs around one tenth of the cost of reactive work, so there is a clear financial incentive to invest accordingly. For example, South West Water, part of Pennon Group, estimate that conservation of upland bog ecosystems can reduce the need for storm water capacity reservoirs and water management infrastructure, with an investment of £6m from 2010-2015 enabling the company to avoid costs of up to sixty times this amount up to 2030 .
Much more proactive work of this nature can and should be done. All of this creates opportunities for water investment. The water sector has a total market size of $450bn today, and is growing by 4-6% per annum .
Within this, we have identified areas of superior growth on which to focus our investment activity. For example, we invest in companies producing pumps and filters such as Pentair, or with involvement in infrastructure investment such as Suez Environnement. We also invest in environmental consultants such as Tetra Tech and Arcadis, companies which are well placed to benefit from further investment in water and from changing patterns of consumption. These companies are often also the first to be called up when there is emergency work required due to storm flooding or infrastructure problems.
Water shortages – and excesses in the form of flooding – are becoming so severe in much of the world that a steep increase in the rate of investment in water infrastructure is unavoidable, in our view. For the sake of our water rates, I hope that expenditure is proactive rather than reactive. But for the sake of our investments, reactive work comes at a much higher margin! Either way, we believe that water should be an ideal ‘rainy day’ investment for the longer-term perspective taken by our fund, because upgrading the infrastructure can only be staved off for so long.