Water, water, everywhere, nor any drop to drink

21 Mar 2018

Chris Hills

Chief investment officer

Coleridge’s famous lines from the Rime of the Ancient Mariner ring very true today, despite being written back in 1798.

Recent images of the floods in Texas and Florida in the aftermath of Hurricanes Harvey and Irma do not suggest any shortage of water. This sits in direct contrast to the dystopian vision highlighted by David Barker in his recent book Blue Gold, which portrays a future in which terrorists and governments vie to commandeer the shrinking resources of water.
In this article, we examine the long term trends in water consumption, fuelled by strong population growth as well as the trend towards urbanisation to which we drew attention in an earlier edition of Vision, and consider how the world will manage its response to such demand increases.

1995 Global Freshwater Stress
2015 Global Freshwater Stress
First, we look at demand and explain how it is divided (in the main) between agriculture, industry and domestic applications; second, we examine the resource itself, which is of course finite, and discuss how it can be recycled; third, we look at technology and its impact on both usage and purification in the replenishment phase; finally we consider how pricing policies might be implemented in future, both for users of the resource and those who might be responsible for the cost of its recycling.
Could a war be fought for the control of water? Perhaps that seems far-fetched, yet many people in the developed world take access to water for granted; meanwhile the geographic imbalances between where potable water is available and where it is needed have never been greater.
The idea that water is becoming such a valuable (and limited) resource to prompt both governments and terrorists to seek to control its supply is not implausible
Population growth, urbanisation and dietary change are magnifying such trends. Additionally, in a world where growing economic inequality is driving international conflict, the idea that water is becoming such a valuable (and limited) resource to prompt both governments and terrorists to seek to control its supply is not implausible. As is shown by the maps, large tracts of the continents are predicted to move from small shortages of water to much more significant shortfalls in less than a generation.
To illustrate the imbalance between “supply” and “demand”, consider the following: North America has about 30% of the world’s supply of freshwater, but represents only 5% of the global population; by contrast Africa and Asia account for 76% of the world’s population, but have a mere 42% of the global resource.
Water scarcity is one of the most important issues facing the world and the gap between availability and demand, at a global level, at a country level and within individual countries (especially the larger ones such as the US) is getting bigger. A report prepared for the World Economic Forum in Davos in 2012 concluded that the livelihood of as much as one-third of the world’s population would be affected seriously by water scarcity within 20 years. In that time frame the supply shortfall could, without change to the current paths of supply and demand, be as much as 35%.
Demand for water continues to grow; according to the Organisation for Economic Co-operation and Development (OECD) global consumption will increase by around 55% over the next 35 years, of which about half is accounted for by population growth and the remainder by rising usage per capita, driven by long term secular trends such as greater urbanisation, more use in energy production and changes in diet.
Water consumption by sector
Consumption per head varies widely between countries in the developed world and those in Africa and Asia; the composition of that consumption by sector (domestic, commercial/ industrial and agricultural usage) is also very disparate as can be seen in the accompanying chart. More than half Europe’s water usage is in industry, especially in areas such as power generation, whereas in Africa industrial users account for only 7%.
Changes to eating habits should not be underestimated as a driver of additional demand for water: each kilo of beef consumed requires more than five times as much water to produce it as the equivalent weight of vegetables or pulses, according to a recently commissioned study for UNESCO.
Given that water is a finite resource, what happens to it after use is extremely important, both in terms of who pays for the treatment to restore it to a standard for human use and in terms of its re availability. Wastewater treatment varies dramatically, with more than 70% of it being treated in advanced countries, but only 8% across the emerging world.
While water treatment simply returns treated wastewater to the water table, water reuse takes the process one step further; it takes effluent from industrial and municipal sources and treats it to a standard of purification that enables reuse at least in agriculture and industry.

Proportion of waste water treated in developed countries
Proportion of waste water treated across the emerging world

The flow of money: Chris Hills, Investec Wealth & Investment's chief investment officer, examines how the demand for water is affecting economic growth across the globe.

Those parts of the world which have less plentiful water, but do have money and/or access to technology, are in the vanguard of this particular trend – Australia for example reuses 20% of its wastewater whereas the US reuses less than 4%.
Other than reuse, an alternative route to improving availability through technology might be desalination: this refers to a range of technical procedures and processes to remove salt from water and is most widely practised in the Middle East (which – together with North Africa – represents almost half of global capacity). Although some of this technology has been around for more than half a century, the scale of desalination capacity has blossomed in the past quarter-century, multiplying by more than four times in this period.
There are now over 18,000 plants around the world, which collectively produce 1% of the world’s drinking water; it does come at a cost however, in that desalination is power-hungry, so that these plants use over 0.4% of global electricity consumption in the process. 
Expenditure on industrial water treatment and recycling is expected to grow by close to 50% over the next five years. More broadly a recent study by McKinsey estimated that the world’s annual investment to deliver sustainable water and sanitation services should average $500bn annually until 2030.
The OECD estimates that countries, especially those in the emerging world, will need to increase their expenditure on water infrastructure
This encompasses a broad span of requirements such as meeting World Health Organisation guidelines on drinking water, extending access to water and sanitation services across a greater proportion of the global population and improving wastewater treatment as well as innovative technology such as smart metering and real-time data monitoring.
As can be seen from the chart, the OECD estimates that countries, especially those in the emerging world, will need to increase their expenditure on water infrastructure over the period 2015-2025. Only in the US of the countries shown in the chart does the OECD believe that an increase will not be necessary; in Brazil, by contrast, the proportion of GDP earmarked for water infrastructure is predicted to rise almost tenfold.
Although Brazil has almost 12% of the world’s freshwater resources, its distribution throughout the country is remarkably uneven and the modern aspects of sewage treatment and full access to water will require substantial capital investment. Similarly the South-to-North Water Diversion Project (China’s principal civil engineering scheme) is estimated to cost as much as $60bn during its construction over the next 30 years.
Rather more modestly the UK’s £4.5bn project to drive a new 16 mile super sewer beneath London will be the first major overhaul to Joseph Bazalgette’s original designs of around 1860 – since when the population of London has more than doubled.
Projected expenditure on water treatment
The construction will take seven years, finishing in 2023, and the main tunnel of 24ft diameter should enable overflow discharges of raw sewage into the Thames to be reduced by as much as 90%. Many would argue that access to water is an inalienable right given its essential nature to life and should not be regarded as something to be bought like any other consumer item. However users can easily become wasteful if a commodity is free.
Unlike other utility costs such as electricity, gas and telephony, consumers historically have rarely considered their water consumption and taken delivery for granted. That is changing; water meters have been installed automatically in the UK in all houses built since 1990 and adoption, including houses where meters have been fitted retrospectively, has now reached just over 50% of all households.
It is materially higher than that in the south of England but much less in other parts of the country. Internationally, and especially in the developing world, water meter adoption is expected to grow at a more rapid rate, potentially around 5% annually for at least the next five years.
There are many implications for investors amongst these themes; the water resource challenge is emerging as a very real economic issue for governments of many developing countries and, if not tackled, could inhibit forecast GDP growth from being delivered. Thus investors attracted by the allure of rapid economic and corporate growth across emerging markets might be disappointed.
By contrast, within the huge amount of both infrastructure spending and technology applications designed to deliver more flexible and resilient water systems around the world, there should be opportunities for investors to benefit accordingly.

Download the Vision 2018 Brochure

Book one

Book two

Book one

The first of a series of three Vision 2018 books, covering three key topics - War, Water and Investor Behaviour.

Book two

The second of a series of three Vision 2018 books, covering personalised medicine, the great taskmaster, and the price of data

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