Cleantech Investor

By Felicia Jackson

Significant institutional, regulatory and cultural change may be required before investment returns in the water sector rival those of energy.

There is increasing concern that the impact of a growing population and increasing agricultural demand, combined with climate change, could result in permanent drought in many regions, and water stress and scarcity are widely on the increase.  Security and integrity of water supply should be driving massive growth in the water sector. And yet…

In 2009 it seemed clear that the water market would be the next investment sector to explode, given the conflation of climate change, energy security and water scarcity concerns. General Electric (GE) estimated that the global market, including water technology and infrastructure, pollution control, water management and treatment was already worth over $400 billion.  Some of the world’s largest companies, such as GE, 3M and Siemens, were investing in businesses which provided monitoring, management and improvement services for the water sector, and government stimulus funding was also set to provide a boost. 

Yet despite increasing focus from some of the world’s largest corporations, and funds from economic stimulus packages ($20 billion in the US alone), return on investment in the water sector seems in relatively short supply.  Even GE appeared to have difficulty in making significant returns, as opposed to its performance in other cleantech areas.  Reporting the performance of its Ecomagination brand, which has managed to grow at around 200% per year and was described by CEO Jeff Immelt as “one of our most successful cross-company business initiatives”, vice president Steven Fludder said that the water industry remained homogenous, with most companies doing pretty much the same thing the same way. He said, "I like water, but I think it could be a bigger and more differentiated business."

The challenges are immense: the need for safe water and sanitation for billions of people without access; the problems of transboundary water security (issues of conflict and cooperation); and, of course, the perfect storm of interlocking issues – water, and how it impacts on health, food and energy.  The water sector, however, seems conservative and there appears to be little political support for real innovation.

There are few markets, with the notable exception of Singapore, which actively encourage innovation. Most water is managed by regulated utilities, and the regulatory environment discourages risk, with change being predominantly incremental and only after long periods of testing. Rapid change is possible, as during the Queensland drought which saw significant and rapid investment in desalination and an entirely new water grid. The real issue is that, without full cost recovery, incentives in the water industry are limited.

The global economic downturn has had a significant impact on investment in the industry. The reality is that most developed economies are facing a combination of aging infrastructure combined with a lack of funding to address the long term challenges of water management. Increasingly stringent pollution and water quality legislation is at war with a reduction in available capital and operational expenditure. However, despite the economic downturn, problems of water use and water scarcity look set to grow in importance, having a direct impact on manufacturing output and freshwater availability for a number of regions around the world.

There are key areas which require significant investment, from infrastructure, demand management, metering, quality control, analysis, even the introduction of low water use appliances for showers, washing machines and lavatories. However, the biggest problem is that, as long as it’s cheaper to extract water than to conserve or re-use it, the challenge of water scarcity is unlikely to be addressed.  In any effectively functioning economy, management of water must ensure an adequate water supply for both industrial and residential use, delivered within acceptable levels of price and environmental impact. That will be effected by the regulation of water rights, pricing of water services, and campaigns aimed at general attitudes to water use or metering in areas of water stress. 

Political reluctance to impose full cost recovery means that the funding required to address the problem is not available, and cultural objections to water ownership and privatisation mean action is slow. All these things are delaying growth in the water market. The real challenge lies in identifying and implementing the institutional, legal and regulatory reforms that are required to alter the price of water supply while retaining the safeguards, both social and environmental, that ensure an equitable supply of clean water. 

What this means is that we need to see a change in the regulatory and legislative environment. Changes in standards, and the regulations governing them, are usually the drivers for additional capital spending on a broad scale.  In order for the much anticipated water revolution to take place, we need to see the inclusion of social, environmental and carbon costs into the economic valuation process for water, a change in institutional resistance to innovation, increased incentives for efficiency and cuts in usage. Most of all we need to see increasing education of the public – in 2008 in Toowoomba, Australia, a referendum voted against the use of recycled water for human consumption. This was despite the area being in the depths of one of Australia’s worst ever droughts. If we’re going to persuade politicians to take action, we must first persuade the voters to support such action.