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Water is the New Oil

Roma Luciw
November 27, 2006

The colossal cost of fixing crumbling water infrastructure in the developed world has opened the door to government privatization.

Water delivery systems in the industrial world are in “dire need” of repair, says a report released Monday by CIBC World Markets Inc. At least one-fifth of America’s municipal wastewater treatment facilities do not comply with federal regulations and in some U.S. cities, more than half of the water headed to consumers is lost along the way.

CIBC economist Benjamin Tal, author of the “Tapping into Water” report, estimates it will take “hundreds of billions of dollars” to fix dated water infrastructure in North America and Europe.

Federal governments are not rushing to fix the infrastructure and municipalities lack the means to do so. “As a result, governments are now much more open to the notion of privatizing their water infrastructure which, in turn, is providing a substantial boost to the private water industry,” Mr. Tal said.

“What we are witnessing here is a trend that is profoundly modifying water as an investment theme throughout the world.”

Canada has one of the world’s largest supplies of fresh water, but has its own water woes. Nearly a million British Columbia residents were placed on a boil-water advisory eleven days ago after heavy rainfall triggered mudslides and caused runoff into the Vancouver region’s reservoirs, raising concerns about high levels of turbidity. The boil advisory was lifted on Monday.

Water contaminated with E. coli killed seven people and made thousands sick in Walkerton, Ont., six years ago. The bacteria entered the town’s water supply from farm runoff, and residents had to boil or buy their water for seven months after their supply was tainted.

Meanwhile, the business of water is booming.

Mr. Tal sees parallels between today’s water industry and the oil industry in its golden era, before and after the Second World War. “The market is paying attention,” he said. “Capital investment, deregulation, consolidation, and privatization of global water assets and services are advancing at a pace not seen before.”

In the last three years, U.S.-based water companies — as measured by the Bloomberg U.S. water index — have surged 150 per cent, three times the rise seen by companies on the S&P 500, while paying twice as much in dividends. International water players are doing even better, Mr. Tal said, with their stock values rising twice as fast as their American counterparts in the past year alone.

Water is an attractive investment because it is much less volatile than industries driven by economic cycles, Mr. Tal said. Companies that specialize in “water solutions” can range from pumps, pipes and valves, wastewater treatment, to quality testing. European companies account for half of the global water players, while American companies make up 36 per cent.

In Canada, there are few ways for investors to directly invest in H2O. However, the Canada Pension Plan Investment Board recently launched a bid for a British water utility.

In order to attract private sector investment in water, municipalities are allowing the price of water to rise to levels that resemble full recovery costs. “Water prices in many industrialized countries are now rising much faster than inflation, and this trend will only accelerate in the coming years,” Mr. Tal said.

World Bank estimates suggest that outsourcing and privatization in the water sector are set to double in the coming five years to reach a near 40 per cent share of the market.

“If crumbling water infrastructures in North America and Europe provide the private water industry with great opportunities, the potential in the developing world is even greater,” Mr. Tal said.

The water investment theme is being supported by rising demand for clean drinking water. Global water demand is doubling every twenty years and water utilization rates have doubled in the past 45 years. The populations and economies of Asian powerhouses China and India are expanding and the countries are not only consuming more water, they are highly inefficient in their use.

Still, the CIBC report stressed that the world is not running out of water. The problem is that the global water supply is unevenly distributed with nine countries possessing 60 per cent of the world’s available freshwater supply.

“As is the case with any other resources on earth, the main story lies in the developing economies, where water shortage will only worsen in the coming years due to rapid population growth, urbanization, climate change, and the fact that globalization is highly water intensive,” Mr. Tal said.