01 Sep 2005
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WATER Ltd.

by Garry Emmons

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In an age of global scarcity, water has become a valuable commodity in both the industrialized and developing worlds. With governments and communities increasingly unable to manage the complexities and expense of water treatment and delivery, the private sector has stepped in, and a global industry has emerged.

Flush, shower, rinse, swallow — fumbling through their first waking moments, most Americans are probably too groggy to see competitive advantage in their early morning routine. But there it is: All the H2O they need — cheap, clean, treated, pressurized, and home-delivered — available at the turn of a faucet. Not so for 1 billion other residents of planet Earth, whose day begins quite differently. With their basic health already compromised for lack of water-based sanitation, those less fortunate must also worry that their drinking water — often requiring several hours each day to collect — may sicken or even kill them.

The ocean-dominated Earth is indeed the “blue planet,” but only 1 percent of its water, the equivalent of one tablespoonful in a gallon, is fresh and accessible. Agriculture and industry are thirsty for that limited supply, too. They consume — often inefficiently — amounts that far exceed residential and personal use. And with the global population skyrocketing, the demand for water to sustain, feed, and employ the world’s people is projected to double by 2025. By that date, nearly half of the estimated population of more than 6 billion will be living in “water-stressed” countries, where either the quantity or the quality of water supplies will have sunk to levels ranging from inadequate to economically crippling. At the same time, another valuable water-infrastructure system, the environment, is in steep decline because of human mismanagement. All these competing forces lead some experts to believe that water will replace petroleum as the 21st century’s core commodity, with nations rich in water enjoying enormous social and economic advantages over those that are not.

In an age of global water scarcity, with governments scrambling to create new water systems or repair deteriorating ones, there is money in water. Already a big business attracting major corporate players such as General Electric, Siemens, ITT, Suez, and Tyco, water is a $400 billion global industry. While just 15 percent of U.S. drinking water is delivered by for-profit, or “investor-owned,” entities, with the remaining 85 percent operated by municipalities themselves, the Environmental Protection Agency says that the U.S. water industry needs $500 billion of infrastructure investment over the next twenty years. All this portends opportunity for private companies and for investors, who’ve sent water-related stocks soaring 113 percent over the last five years. As replacement costs for old facilities and equipment combine with increasingly stringent and expensive regulations, more and more communities are also contending with municipal budget squeezes and tax-averse citizens. Turning over water operations to private companies that can offer economies of scale, financial resources, expertise, and efficiency is an attractive option.

Privatization, however, troubles some consumer advocates and other activists. Critics argue that water is an essential human need and should not be subject to the vagaries of profit-driven management or the potential manipulation of markets. But it is these same market forces that could well drive crucial changes in water use. In theory, when water becomes expensive, it will be used more efficiently.

“The really important point is not whether public or private providers deliver the service but the efficiency, quality, and cost-effectiveness of that service,” says Jeremy Pelczer (AMP 162, 2002), president and CEO of American Water. “We agree that water is a human and social right and understand that it deserves special public protections and oversight. Because it’s scarce, it has an economic value, but that value must be affordable to the communities we serve.”

Based in New Jersey, American Water is part of the British multinational RWE Thames Water, which operates in 25 countries. American Water is responsible for water services and wastewater treatment for 17 million people in 1,800 communities in the United States and Canada. American Water typically owns and/or operates the municipal water system in a community, while the community continues to “own” the local water supply. The company agrees that it will provide necessary capital investment and expertise, treat and deliver drinking water, and bill and collect revenue. Treatment and quality standards for that water, how much of it can be extracted, and how much the company can charge are all determined and regulated by public authority. Compared with other developed countries, U.S. consumers pay relatively little for water, mostly because of public subsidies. But as demand and infrastructure needs grow, public authorities may decide cheap water can no longer be justified.

Another major opportunity in the water business lies in the industrial sector. From 2003 until earlier this year, Doug Brown (MBA ’85) was CEO of Ionics, Inc., a company based, aptly, in Watertown, Massachusetts, that specializes in water treatment and desalination. Brown points out that many diverse industries (e.g., food, pharmaceuticals, computer chips, electric-power generation) require purified water that is treated to much higher standards than drinking water. He observes, “In North America and around the world, industrial customers are increasingly interested in how water quality affects the economics of their manufacturing operations. They’re willing to outsource water treatment because of its increasing complexity and strict regulatory requirements. Industrial water treatment is a capital-intensive industry, so that tends to drive it into the hands of large multinationals.” Indeed, Ionics itself was purchased last February for $1.3 billion by General Electric and its CEO Jeff Immelt (MBA ’82). GE has announced its intention to reach $10 billion in water-business sales over the next decade.

Worldwide, as water becomes increasingly precious, it is often predicted that more conflicts will arise as several nations compete for the same limited source of water. Indeed, tensions have emerged in such situations, as is the case with the aquifers of the Middle East. But water strains can also breed cooperative efforts, such as the Nile River pact involving some ten countries. As it happens, water fights are just as likely to be intranational, between sectors within countries, as international.

Agriculture will need ever-greater amounts of water to feed growing populations, even as burgeoning cities — with their greater wealth and political clout — typically draw off more water for their residents, industries, and power plants. With their huge populations, China and India (where groundwater supplies in Delhi are expected to run dry by 2015) are especially susceptible to these water stresses. Dry nations will increasingly abandon agriculture because of water scarcity, as is now happening in the Middle East and North Africa, and will turn to the water-rich countries for grains and other foods. This trade in comestibles — flowing from lush lands to parched places — has earned wheat, rice, and other crops the sobriquet “virtual water.”

For most water-stressed or water-scarce countries, essential steps, along with conservation, are more efficient and productive use of water in irrigation and industrial processes. A primary aspect of this is the upgraded and expanded treatment of industrial wastewater and sewage water, which can then be reused for irrigation and industrial applications. Currently in the developing world, some 90 percent of sewage and 70 percent of industrial wastewater are untreated, frequently finding their way into the usable water supply. As Doug Brown observes, “Water infrastructure in the developing world is generally inferior to that of the industrialized countries; in addition, many of those nations now view water as a strategic asset. So for them, making unusable water usable again is in effect making a valuable product. The technology, capital, expertise, and managerial know-how to accomplish this is required all over the developing world, thus offering an array of opportunities for water multinationals.”

The municipal water sector in Third World countries is also in need of support. The World Bank, which advocates privatization, reports that a third of public utilities in developing countries lose up to 40 percent of their water due to poor infrastructure and mismanagement. That’s one reason why communities outside the United States, Brown notes, have been more inclined than their American counterparts to outsource their local operations.

Seeking new sources of supply, many coastal regions are turning to desalination technology. General Electric, for one, says it will be opening several “desal” plants a year worldwide, costing up to $300 million each. “Seawater desalination provides the ultimate answer for water-supply problems because its source is effectively limitless,” says Brown. “Its drawbacks are that even though technology is rapidly reducing costs, it still remains the most expensive way to produce usable water. In addition, water is not economically transportable from coastal to inland areas. Right now, for agricultural and industrial use, it’s more cost-effective by half to recycle municipal wastewater.”

Equitable and efficient use of the world’s water is becoming an ever-more urgent issue and one that inevitably will mean increased involvement for the private sector. Says American Water’s Jeremy Pelczer, “On their own, or working with NGOs, or in public-private partnerships, investor-owned companies have a role to play in managing the world’s water. But at the end of the day, it starts with governments implementing the correct policies, not just regarding water reform, but in matters such as poverty alleviation, environmental regulations, and so forth. We need to focus on the UN Millennium Development Goals of halving the number of people without water and sanitation by 2015. The essential element is leadership from the public sector.”

Doug Brown agrees. “Water issues are addressable, but they require a commitment of resources and capital. That people drink water downstream from where waste is disposed of is completely avoidable. Water issues can definitely be fixed. The technology, experience, and management expertise exist. What’s required is the will to do it.”

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