Water is the new oil, says CIBC
ROMA LUCIW
Globe and Mail Update
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. Some British Columbia residents remain under a boil-water
advisory that first came into effect Nov. 16 when heavy rainfall triggered
mudslides and caused runoff into the Vancouver region's reservoirs. There
are fears that the water is contaminated with E. coli, the bacteria that
killed seven people 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 that 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.
