The State of the Water Industry, Part II
Moving Toward a Solution
Steve Maxwell — Dec 01, 2009
EDITOR’S NOTE: This article is adapted from the Steve Maxwell’s 2009 State of the Water Industry Report titled “Water: Blood of the Earth, Store of Economic Value,” published earlier this year. The report outlines the investment trends and opportunities in the global water sector, as well as the underlying issues affecting the industry. The following is excerpted from Section VII: “Moving Toward a Solution.” For additional information, the author can be reached at (303) 442-4800 or via e-mail at maxwell@tech-strategy.com. The full 30-page report can be downloaded at no cost at www.tech-strategy.com.
Decades from now, it seems likely that historians will look back on the 2008-2009 timeframe as a turning point — with a global financial crisis the likes of which has not been seen in decades, an historic changing of the guard in American politics, and exploding interest in environmental and energy policies.
Less dramatic perhaps, but likely to be just as significant over the longer term is the growing recognition and appreciation of the critical role that water plays, not only in the functioning of industry, international politics, and the biological health of the planet, but also the value it can imply and create in the global financial infrastructure.
In Part I of this series (September/October 2009), we examined recent trends in the water market. Among the key trends are:
- Water investments gain attention as economy falters;
- Renewed focus on the environment;
- Intertwining aspects of water and global food production;
- Water to make oil, oil to make water;
- Growing concerns about global climate change;
- The bottled water craze cools off;
- New policies and new ways of thinking about water;
- Public vs. private ownership.
Several important conclusions and lessons emerge from a more detailed study and review of the water industry. When one more fully understands the array of pressing challenges here, it becomes more feasible to think through strategic alternatives and begin to propose potential solutions. There are obviously many studies, scholarly reports and policy analyses available which discuss the urgency of the world water challenge — many of them putting forth an urgent “Chicken Little” type of doomsday warning. In this report we have tried to focus on the facts and figures, and the broader context of the world water challenge — while at the same time pointing out the criticality and the many very real urgencies of the situation. But none of this is very helpful or productive unless solutions and ideas for improvement are also proposed.
Fortunately, the impending world water crisis lends itself to small and incremental improvements. Across the board in the water industry, there are many solutions or steps — some of them perhaps baby steps — that can be taken immediately. There are simple things that can be done individually and collectively to address and reverse some of the more problematic trends — to begin to move in the right direction. All of these actions can be undertaken voluntarily, but they will all gather considerably more momentum as water prices rise, and as our “water behavior” begins to have a bigger and bigger impact on our pocketbooks. In this section, I propose some perspectives and approaches that might help us move toward solutions to the global water challenge.
Rising Prices: First and foremost — as I have emphasized repeatedly throughout this report — water prices simply must rise for many of the necessary changes in thinking, policies and practice to really begin to occur.
If there is one single and inescapable conclusion resulting from any review and discussion of the water business, it must surely be the inevitability of continuously rising water prices over the longer-term — indeed, the urgent need for rapidly rising water prices in many parts of the globe. Water has traditionally been priced so low that most users simply don’t have any serious economic incentive to conserve it or use it wisely. People naturally don’t pay much attention or conserve a commodity if they tend to view it as virtually free — and until recently, that is exactly the way in which a lot of people viewed water. (Indeed, there are still those today who suggest that water should be provided free to everyone — demonstrating a remarkable lack of understanding of both the hydrologic cycle and the water infrastructure system.)
The true cost of delivering clean water — as well as the average price of water — is continuing to creep slowly upward in most localities, but in most areas, prices are not rising at the rate necessary to upgrade and maintain our infrastructure on a truly sustainable basis. Almost all water utilization decisions and resource management issues would be far more efficient and solutions would begin to emerge more quickly if water prices were higher. As prices rise, decisions about water usage will inevitably begin to take on greater significance in the overall economy, and many of the incipient trends discussed above will gather steam — greater reliance on re-use and recovery, more emphasis on conservation, a continuing trend toward more private-public partnerships, and more rapid advances in technology.
There is no doubt that higher water prices will gradually force more logical and sustainable decision-making in our use and allocation of water. As prices rise, water usage naturally will be more carefully measured and monitored, in turn reinforcing even better usage and allocation habits. However, higher water prices also inevitably raise the issue of a variable “ability to pay” across society, and the question of whether or not subsidies should be provided to certain groups. This is an issue which may not be adequately addressed by market mechanisms, and which must receive careful attention from federal and local policy makers.
The key policy question here is whether prices should simply be allowed to rise gradually and naturally due to the market forces, weak though they are, or if they should be increased more sharply by some sort of well-reasoned political mandates and policies. Short of more reasoned approaches, there is always the looming possibility that water prices will skyrocket in certain areas as a result of haphazard responses to water dislocations or public health catastrophes. At the end of the day, the issue of higher water prices reduces to a massive public education initiative. Those of us in the water industry must help to build a better understanding and promote broader public acceptance of the fact that water is valuable, and that it is simply going to cost more in the future.
Many observers have pointed out that we suffer not so much from an absolute shortage of water as from an inability to properly manage and allocate the water that we do have. This is a good perspective to keep in mind. An authoritative special report a few years ago from the Economist concisely concluded that water is “ill-governed and colossally under-priced” around the world. Or, as Peter Gleick of the Pacific Institute put it in a recent report, “there is a vast amount of water on the planet — but we are facing a crisis of running out of sustainably managed water.” In short, increasing prices will naturally help to improve the allocation of water, but they must be combined with smarter policies and more innovative management approaches.
Finally, as a point of reference, water prices around the world have increased over the past year by an average of about 7 percent, according to Global Water Intelligence (GWI). Averages can be deceiving — some areas have seen water prices increase by as much as 50 percent a year, while others continue to enjoy free water. In one of its reviews of water pricing around the world, GWI asserted that “there is no correlation between....water scarcity and water price.” The report also observed that there is no other product whose price to the consumer is so totally unrelated to its cost — an observation that seems to often go unnoticed or ignored in most economic and political debates. We still don’t recognize the true value of water — and few of us currently have to pay anywhere near what it is really worth to us (see “Water is Cheap, Ridiculously Cheap” TEBS, Winter 2006). Indeed, to paraphrase Benjamin Franklin’s observations of over 200 years ago — “we only recognize the true value of water when the well runs dry.”
Global Perspectives, Local Actions: Pondering how to deal with the world’s water problems increasingly brings to mind the old political bumper-sticker — “Think Globally, Act Locally.” While technologies, conceptual solutions, and broad policy approaches may be similar and applicable around the globe, implementation of those policies and approaches need to be much more location-specific. We need to increasingly look at water challenges and issues from two perspectives — the global and the local. Perhaps said another way, we need to view challenges and evaluate solutions from both the policy level and the implementation level.
As opposed to other broad environmental problems — such as air pollution and global climate change — water challenges and solutions tend to be regional or even local in nature, and in many cases are specific to the individual watershed basin. If China burns less coal, air pollution problems in Japan may improve; however, better water conservation practices in Arizona aren’t going to help to alleviate water shortages in southern India. Some areas don’t yet have serious water problems, while others face severe and immediate water availability or water quality challenges. More arid regions generally face nearer-term and more serious supply issues — though that is not always reflected in current pricing today. Water quality issues may vary extensively from one basin to another, based upon levels of industrial activity, historical population patterns, and so on. Technological solutions such as desalination may be economically feasible in one area but not another, depending upon alternative supply sources, local energy costs, or distance to the sea.
This “local” perspective is most likely to reflect the form of a single river basin area, or watershed region. Within a river basin, all users tend to have a common problem or set of circumstances, and hopefully a similar set of objectives in water resource usage and management. Within an individual watershed region, all users should be willing to address, and pay for certain water quality and water availability, whereas they may be far less concerned about quality or quantity issues in the neighboring watershed basin. We must strive to reform political and social institutions to take account of this more regional or local nature of water problems — systems which will work to coordinate national or international policies with regional decision-making bodies and localized solutions. It is critical to note that there are some 260 “major” river basins in the world that cross 145 national boundaries. Some 60 percent of the world’s population lives within those 260 basins.
This fact alone makes it clear that we are facing serious political problems in the water arena in the future.
Although practical solutions for many water problems may be more regional in nature, price increases are likely to occur across the board. The supply and demand characteristics of water may vary from place to place — and the allocation and distribution of water may be more dysfunctional in one area than another. However, in the final analysis, we are all going to have to treat water as a bigger expense item in our individual budgets, no matter where we live.
Promoting Greater Efficiency: Even without the hammer of higher prices forcing us to make more rational decisions, we can all do much more to conserve water and improve efficiency, both in how we produce and how we consume water. As we have discussed, there remains much “low-hanging fruit,” and governments, businesses and individuals must all work to exploit these potential savings. Most significantly, there are numerous means by which we could begin to conserve and use agricultural water more efficiently. Better soil moisture monitoring and smart irrigation are just two obvious ways that we could save on some of this vast volume of water usage. Storing water in underground aquifers instead of in surface reservoirs to eliminate loss through evaporation, and the lining of earthen irrigation ditches could also save large amounts of water. When one considers that in many arid states over 80 percent of total water consumption is attributable to agriculture, it is clear that small percentage gains here can free up massive percentage gains for potential municipal and industrial usage.
At the level of the individual user, low-flow toilets and shower-heads, xeriscaping or wiser lawn watering practices, and other home conservation techniques have already begun to show considerable per-capita usage declines. Some newer areas are encouraging housing and construction codes which allow the collection of used household water to irrigate lawns or outside plants. As mentioned, rapidly growing southwestern cities such as Denver and Albuquerque have shown that is fairly easy to cut individual water consumption by as much as half without severe hardship. There seems to be no reason why other parts of the country can’t begin to do the same thing, even though droughts or high prices are not yet forcing the issue.
In many regards, the potential for improved efficiency and greater conservation also reduces down to a public education challenge. Higher prices will eventually force more attention, but better public understanding of the water resource challenge and what we can all do to contribute, will also help to spur smarter use. Some regions and individual cities have shown good progress in conservation and efficiency via extensive public outreach and education programs, but unfortunately too many cities and towns still don’t care or recognize the magnitude of the challenge.
Virtual Water Concepts: Where it makes comprehensive sense — and there are many areas where it does — we need to start incorporating the concept of virtual water into our trade and commerce patterns. Here again, higher water prices will help to force smarter and more logical regional allocation of scarce water, but in the absence of higher prices, there is progress that can be made. An international system to promote export of more water-intensive foodstuffs such as rice, to relatively drier countries, can free up water there for other more critical uses — and perhaps create a more stable political situation in the process. The liberalization of agricultural trade policies and tariffs is obviously a vexing political challenge, but progress here could well contribute to better production decisions, and ultimately to the individual competitive advantage of nations.
Rising food prices are a harbinger of the growing water crisis. Many food experts believe that the world faces a real risk of widespread famine in coming years, and the regional variability of water resources is a critical consideration in the equation. Although there has been a brief respite in the last few months, the prices of such food staples as rice, wheat and milk rose to record levels in 2008. A report by the British think tank Chatham House early in 2009 said that “long-term resource scarcity trends, notably climate change, energy security and falling water availability” will put increasing pressure on food prices and production.
At the same time, the concept of virtual water has serious limitations, and may in some cases conflict with other trade or consumer objectives. Because food requires so much more water than most industrial products, international trade patterns in virtual water are essentially a reflection of trade patterns in agricultural commodities. Stronger industrial countries without as much agriculture will obviously tend to be net importers of water in the form of food, whereas less industrialized and more agrarian countries will tend to be agricultural (and water) exporters — regardless of their natural water resources. As a recent issue of GWI put it “you cannot tell peasant farmers in North Africa or India that they should give up their land and become advertising executives or bank clerks because those professions use the least water.” The article added that “perverse” virtual water flows are here to stay, and that what really needs to be addressed — as we emphasized above — is the efficiency of that water use where it is most scarce.
Unfortunately, one seemingly logical approach or attempt to practice more sustainable behavior may often be at odds with another. For example, the emerging “buy local” consumer trend that is emerging in many parts of the United States — as a means of promoting local agriculture and reducing the carbon footprint of large-scale food transportation around the world — may often be in direct conflict with the concept of virtual water. If one looks around many of the major and growing cities in the world, there simply isn’t sufficient water or the appropriate climate to locally grow all the food that may be needed. In summary, one idea or approach may appear very logical or elegant when viewed in isolation, but when it is viewed from a more holistic and integrated perspective, it becomes clear that many different approaches and objectives have to be balanced.
Technological Fixes: As discussed, there don’t seem to be many “silver bullets” out there ready to miraculously solve all our water problems. However, technological advance is ubiquitous, and we can do much better in terms of applying advanced technology and new scientific understanding and breakthroughs to manage and utilize our scarce water resources more efficiently. Just as we have mentioned in each of the last several sections, the broader application of new and advanced technologies also depends on higher prices — as water continues to become more scarce and more expensive, new treatment, distribution and consumption technologies will inevitably emerge.
For example, advances in soil moisture monitoring and new smarter irrigation techniques will contribute to important savings in agricultural water usage. More advanced and widespread residential metering technologies will help us all to be more careful and smarter about the way we use water. Improved infrastructure, and techniques for in-situ enhancement and extension of existing infrastructure, will mean less water loss and wastage — and more water to be put to efficient use. New desalination technologies could provide virtually limitless new sources of clean water, but energy, environmental questions and geographic limitations imply that this technology will only be practicable in certain fairly restricted areas. Mobile sea-going desalination plants may be able to address some of these environmental questions, and provide emergency supplies to population centers that are experiencing droughts or short-term breakdown in infrastructure. In summary, advancing technology can be a strong partner in solving global water problems, but it must be exploited in combination with more careful and conservation-minded attitudes, greater efficiency of use, and smarter policies and management approaches. Technology alone cannot be relied upon to solve our water problems.
Smarter Laws and Policies: Finally, we must begin to critically refashion long-standing policies, regulations and laws — indeed, our whole way of thinking about water. Some of the current regulatory structure, while well-intended, may create conflicts or unnecessary hardships, and may actually not protect us against many of the contaminants and health risks it was designed to avoid. Government subsidies, major federally funded dams and interstate water distribution and irrigation programs over the past hundred years were all undertaken for sound political or economic reasons at the time. However, they have also seriously distorted the workings of local market systems, and have led to usage and allocation decisions that may not be in the best interests of the country now. The whole arena of water resource ownership — the legal framework of both the prior appropriation and riparian water rights doctrines — is coming more and more to the forefront of water resource usage and management, particularly in the West.
Although I have emphasized the local nature of water solutions, there are many broader and over-arching policy questions which we must begin to address in more of a holistic manner at the national and international level:
Does our “command and control” type of regulatory approach protect water resources and human health in the most thorough and cost-effective manner?
Do our current approaches to water usage in the West — “first in time, first in right” — still make sense today, or do they, as many critics argue, lead to inefficiency and wasting of scarce water resources? In much of world, we are moving from an era of water development to an era of water allocation, and again the real debates and issues are often very localized.
Do the interstate and intra-state compacts that were largely devised in the early part of the 20th century need to be revised? Are these compact agreements still reasonable and equitable many decades later — after vast technological and demographic changes? The political wrath and potential explosiveness of this issue was clearly illustrated when John McCain made an apparently offhanded comment during the 2008 presidential election about reopening the terms of the 1922 Colorado River Compact.
Does our whole legal system, as it pertains to water, need to be revamped to fit our modern industrial economy and today’s demographics — instead of the largely uninhabited rural nation that existed when these laws were first devised?
How will these issues be impacted by the potential impacts of climate change?
Is there any practicable political way to make these sorts of changes possible?
This type of broader policy and legal review must be done at the federal level, or even at the international level. However, at the moment, the sheer number of different federal agencies involved one way or another with water tends to make policy coordination or change an almost impossible challenge. Presently, there are more than 20 federal agencies and entities that have authority over water issues — six cabinet departments, directed by 13 congressional committees with some 23 subcommittees and 5 appropriations subcommittees that are in one way or another responsible for water-resource management. Hence, it is no wonder that federal water regulations and policies are sometimes confusing or contradictory. Consolidation of these responsibilities into some sort of coordinated department or commission would make the job of managing water resources easier. Most politicians say such consolidation of power and control is unlikely — but at some point it is going to become critical. A more likely approach might involve White House coordination of partnerships between federal agencies, and coordination with state and local agencies to create integrated water policies as part of a national framework.
Many other institutions, agencies and astute observers have put forth creative ideas and proposals in terms of concrete steps for dealing with water policy and legislation. For example, the Pacific Institute’s Peter Gleick has made a series of recommendations to President Obama, including the development of a coordinated national water policy and the creation of a national bipartisan Water Commission — to review, update and coordinate water policies and regulations, and to promote new and creative vehicles to expand infrastructural investment. Gleick also draws attention to the impact of water-related issues on national security, the growing consequences of global warming, and the scientific and foreign aid role which the United States should strive to play in the deepening global water crisis.
Along a similar vein, the Office of Water in the Environmental Protection Agency has been promoting its “four pillar” approach to a more sustainable water infrastructure and system — better water management techniques, full-cost pricing of water, greater efficiency in terms of water production and usage, and more reliance on watershed-wide approaches to policy. Most of the proposed solutions to the world water challenge reduce down to similar conclusions and types of approaches.
Conclusion
Yes, water frequently falls out of the sky. Yes, three-quarters of our planet is covered with water. And yes, fresh water is abundant in many parts of the globe. But all that water is not always clean, it’s often not where we need it, and it costs the world hundreds of billions of dollars a year to collect it, clean it, and move it around. The world’s population has increased four-fold over the last hundred years, but we don’t have a single drop of new water. These are the simple facts — but they are not yet recognized or understood by the majority of people, and they are typically not reflected in consumer water prices; hence, inefficient use and profligate waste continues. The status quo cannot continue indefinitely.
We need to start thinking about water in a more holistic way. We need to look at our planet like the NASA astronauts were able to do — and view the earth as a self-contained and solar-powered desalination unit quietly floating through space. We need to better understand and respect the natural hydrologic cycle, and remember that we are a closed system — we can neither create nor destroy water. Sure, we can desalinate increasing volumes of salty sea water at high expense and marginally increase the amount of freshwater available for human consumption. And, on the other hand, we can and do continue to over-pollute and deplete some sources of freshwater to the extent that they are virtually unusable. But in the big picture — as viewed by those astronauts — the earth is a closed system. We need to get smarter about water usage, and we need to do it in a hurry.
Water prices will rise, and over time water will come to be viewed more and more as a true economic commodity — one that can be bought, sold, moved around like other commodities. At the same time, the “commoditization” of water obviously has to be balanced by equity and fairness concerns — everyone needs water to live, and there will always be some who will have difficulty affording it. Finding the right balance to this dilemma — water as an economic commodity versus water as a human right — will be one of the great economic and political challenges of this century. And we must develop new and more creative financial mechanisms that will allow hungry investors to put their money to work for the public good — better ways to connect growing investment interest with the huge capital requirements that are staring us in the face.
The facts are simple — water is an essential prerequisite of life, to sustain and improve our standard of living and our modern industrial economy — and we are not going to find a substitute for water. As the global water crisis intensifies, we face numerous and daunting political and economic challenges. The flip side of this coin represents virtually limitless opportunities for creative and innovative firms to help provide those needed solutions.
Steve Maxwell is Managing Director of TechKNOWLEDGEy Strategic Group, a Boulder, Colo.-based management consultancy specializing in merger and acquisition advisory services, and strategic planning for the water and broader environmental industries.
