Water Conditioning & Purification Magazine

Blood of the Earth— Store of Economic Value Part 1: Overview of the World Water Market

By Steve Maxwell

Editor’s Note: In this first article of a three- part series, industry consultant Steve Maxwell provides a broad overview of the global water challenge and the role of water in the world economy. In later installments, he will review key trends and developments within the commercial water industry, drivers behind the industry, a range of proposed solutions to the water problem and an overview of commercial business opportunities offered by the industry—with specific reference to the POE/POU and residential markets. This series of articles is adapted from his recent and widely read “2009 State of the Water Industry Report.”

Decades from now, it seems likely that historians will look back on the 2008-2009 timeframe as a turning point due to rapidly growing recognition and appreciation of the critical role that clean water plays in the functioning of industry, international politics and the biological health of the planet and its people. It can also imply and create value in the global financial infrastructure.

The significance of water in the world economy—and public concern about the safety of tap water—continues to grow. Clean water is not only a vital prerequisite of all life—the blood of the earth, as the ancient Chinese called it—but in various forms, it is also and increasingly recognized as a true store of economic value in troubled times.

There is no substance more critical to life than water; we cannot live without it for more than a few days. Even though it is abundant in some areas, it is hardly surprising that water should eventually begin to take on more economic recognition and financial value.

Modern water treatment technology and distribution infrastructure have allowed us to conquer disease, to build advanced industrial economies and to dramatically increase standards of living for many of the world’s people.

Supply issues
In conjunction with advances in plant genetics and modern agriculture, improving irrigation techniques have made it possible to feed a rapidly growing world population, to turn deserts into productive farmland and to quench the thirst of sprawling metropolises—a harsh rebuke to the predictions of Malthus. But it may be only a temporary rebuke.

We continue to deplete our groundwater resources and pollute our surface rivers and streams at an alarming rate and steadfastly look the other way while our water infrastructure crumbles. Because water is artificially cheap, most of us use it less efficiently than we easily could and we blithely assume that it will always flow when we turn on the tap.

There is gathering evidence, however, that we are converging towards a point where many around the world will no longer have sufficient clean water to support their current lifestyles. Half of the world’s population is expected to suffer from severe water shortages by the year 2050. A report just issued at the 2009 Davos World Economic Forum warns that the world is quickly headed towards ‘water bankruptcy’ and rates this as one of the world’s most pressing problems.

Many still seem to believe that water simply falls out of the sky and that it should be basically free, forgetting that it costs money (hundreds of billions of dollars a year) to collect, clean, store and distribute water. In the US, many treatment plants, reservoirs and distribution pipelines were built 50 to 100 years ago and are rapidly decaying, with leakage rates as high as 50 percent in some of our older cities.

More ominously, many of our underground aquifers and surface water sources are irreversibly contaminated or are drying up from decades of overuse. Nonetheless, political leaders are rewarded for minimizing public spending in the short term rather than insuring that their constituents will have vital water resources in the future.

Indeed, one of the biggest challenges in water is improving public understanding and awareness of these vexing problems. Also as challenging is explaining what we can each do to begin solving them.

Water value
At a fundamental level, the main reason for this nonchalance and indifference is that water remains absurdly cheap relative to its real value. Americans today pay an average of a quarter of a penny per gallon for clean drinking water that seems to magically flow out of taps, or only about $25 to $30 (USD) a month for the typical family.

One simply cannot find another product whose real value so far exceeds its price or for that matter, one whose price is often so unrelated to its true cost of delivery. But as time goes by, we will all eventually bear the costs of correcting the water pollution problems that we have created and rebuilding the infrastructure that we have allowed to decay. Higher water prices will eventually force us to pay more attention to this problem on both an individual and a collective basis.

Because we currently find ourselves staring at more immediate economic and financial crises, some issues surrounding water and environmental stewardship may have to be pushed to back of the political agenda for awhile longer. But commercial opportunities continue to grow; water itself seems to be increasingly considered as a store of value—maybe not yet quite as valuable on a unit basis as gold or silver, but a store of value nonetheless.

The water industry will continue to be one sector of the overall economy that is absolutely critical to economic vitality and human health and increasingly one where investment dollars are more likely to retain their value. Indeed, in many ways, water stocks (particularly water utility stocks) may represent the ultimate defensive and recession-resistant investment.

In tough times, consumers may cut back on a lot of things, but water is probably not one of them. This is especially true when it remains so cheap relative to all others goods and services.

Commodity of water
Water is different from any other commodity or resource. The quantity of water on the earth is basically fixed (although we can contaminate some water so much that it is no longer usable and we can clean some sources of water, like seawater, such that they become more usable).

However, in many parts of the world, we’re hitting ourselves with a ‘double whammy.’ By decreasing the quality, we are effectively decreasing the quantity too.

A few years ago I compared the global water problem to a huge asteroid hurtling directly toward the earth, an imminent and life-threatening crisis that could only be solved if all the people of the earth quickly put their differences aside, focused on the problem and began working together to find a solution. As each year passes, the world’s water problems grow in terms of geographic extent, scientific complexity and human impact and our collective ability to understand and correct these problems is stretched thinner and thinner.

The twin challenges of water quantity and water quality represent an inexorable crisis; one that is not going away and one that will ultimately overshadow shorter-term geopolitical, financial and even energy crises that typically attract far more attention. Now more than ever, we need to develop an urgent focus and cooperative international approach to really begin solving our water problems.

To be fair, as a wise person once said, “it is difficult to make predictions, especially about the future.” There may be room for disagreement about the timing or eventual extent of some of these problems, but it’s hard to deny that they are hurtling towards us at increasing velocity.

As the world’s population continues to grow and as we continue to pollute and disrupt the earth’s natural water systems, it seems pretty easy to predict that we are headed toward a true global water crisis. The only issue is when.

Many of the issues mentioned above are inevitably going to reach a boil in the future—some perhaps in the quite near future. They, therefore, must rapidly become top policy priorities for governments around the world.

Challenges and threats to global water availability and water security continue to grow around the world. This will translate into more and better opportunities for commercial water product and service companies (including the POE/POU and residential water treatment industry) to provide new and innovative solutions.

Prices will inexorably rise and, as a result, we will all become more attentive and more efficient in our water usage and quality. These trends and the broad forces that are shaping the future of the commercial water industry are the focus of this series of stories and the original report.
From a broader and longer-term perspective, despite the recent turmoil in world financial markets, the water business is booming. There is no doubt that it will continue to show strong and consistent growth in the future.

The water business in a nutshell

Key drivers

  • Water quality and water scarcity problems are reaching crisis proportions worldwide.
  • Awareness of water problems is gradually increasing—but public education and more attention is critical.
  • Regulation and enforcement levels are increasing and new policies and approaches are emerging.
  • Huge economic (and human) capital investments are required—much more focus is needed.

Key trends and developments

  • More regulation and government oversight of water issues and markets seems inevitable.
  • Our dilapidated and crumbling infrastructure cries out for more attention and investment dollars, now.
  • Conservation and more efficient use of water will allow us to extend our existing resource base.
  • As water becomes more dear, recycling and re-use will become more common and more readily accepted.
  • Better monitoring and metering of water consumption will also help us become more efficient.
  • Residential consumers are becoming more proactive about the quality of the water in their homes.
  • There has been a surge of financial interest—from all types of investors—in the water business.
  • Consolidation and rearrangement of asset ownership in the water industry is on-going.
  • We may also see broader consolidation of municipal water and wastewater utilities in the future.
  • The controversy over privatization, out- sourcing and the role of private companies in water rages on.
  • Many paradoxes in the pricing, conservation and financial value of water continue to confound the industry.

Possible solutions

  • Increasing water prices are inevitable and needed—and will help us better manage this scarce resource.
  • We must devise water policy at the global level, but strive for individual solutions at the local level.
  • There is much we can all do, in our day-to- day lives, to conserve water and use it more efficiently.
  • Technology can help, but we should not rely on a technological fix to solve all our water problems.
  • We must strive to develop better laws and public policies, to address complex water problems.

Source: TechKNOWLEDGEy Strategic Group

About the author/company
Steve Maxwell is Managing Director of TechKNOWLEDGEy Strategic Group, a Boulder, CO-based management consultancy specializing in merger and acquisition advisory services and strategic planning for the water and broader environmental industries. Maxwell is also the Editor and Founder of “The Environmental Benchmarker and Strategist,” the environmental industry’s most comprehensive source of competitive and financial data. He is also the Editor of a recent book published by the American Water Works Association, entitled “The Business of Water,” a collection of past business and commerce related articles from the “Journal AWWA.” He has advised dozens of water firms on strategy and transactional issues and can be reached in Boulder at (303) 442-4800 or via e-mail at maxwell@tech-strategy.com.

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