Shrewd investors are calling it "blue gold". It's better known as water. Will the world's unslakeable thirst eventually make it the hottest investment opportunity on the planet? Peter Bartram weighs up the evidence
Already there's not enough water to go round. Today, more than 470 million people live in regions with severe water shortages, according to the Water Supply & Sanitation Collaborative Council, a United Nations-mandated body which aims to help drought-hit areas. By 2025, the number could have risen to three billion, it predicts.
On the face of it, that could create a massive opportunity for private investors. Except that, at present, 90 per cent of the world's water infrastructure is owned by public authorities, according to water specialist Dr Stuart Downward, senior lecturer in the school of earth sciences and geography at Kingston University.
Investment bankers Williams de Broë estimate that there are fewer than 200 listed companies worldwide that earn more than 20 per cent of their profits (before interest and tax) from water or water-related business. But that's all about to change. Around the world, more water authorities are being privatised—as they have been for many years in Britain.
In fact, global water privatisation has reached such a pace that investment bankers Lehmann Brothers estimate that within 10 years, the number of people who get their water from privately owned sources will have risen by around 500 per cent.
But it isn't only water supply companies that could see a boom in business in the future. Firms selling technologies, such as filtration and desalinisation which make unusable water drinkable, or services, such as metering and leak control, that regulate consumption, could also do well.
One of these is Spice, which floated on the AIM stock market three and half years ago following a management buyout from Yorkshire Electricity. Since then its stock price has soared from 115p to around 565p. Today, £70m of its £310m turnover comes from water-related activities.
Simon Rigby, chief executive, says that this year the company will install 130,000 new water meters and replace 50,000 old ones. Its leak control business is growing steadily. "As water becomes more precious, then naturally people are going to want to conserve it and use it more efficiently," he says.
"The worst performing water company in Britain loses 25 per cent of all its water in leaks. There is a lot of work to be done." And a lot of money to be made by those companies that develop a strong reputation for delivering water-related services.
So how does the canny investor pick the winners? Choosing among individual companies is always a risky business without knowing the full investment story behind each. But investors can limit the downside risk by putting their money into water-based exchange traded funds (ETFs)—essentially a unit trust-type investment that is tradable on a stock exchange.
In the US, established ETFs include the Power-Shares Water Resources Portfolio, a tracker fund which follows the Palisades Water Index, which tracks firms active in the global water industry. Another major league player is the First Trust ISE Water Index fund. The ISE Water Index tracks the 36 top listed US firms that derive significant revenue from the potable and wastewater industries.
In Europe, the iShares S&P Global Water 50 fund, launched by Barclays, follows an index made up of 50 of the largest traded water-related companies around the world. And Williams de Broë is waiting for regulatory approval of its Lyxor Enhanced Global Water fund, that will invest in eight water funds which themselves invest in companies that derive at least 20 per cent of their earnings (before interest and tax) from water or water-related activities.
But given that water is a necessity of life, is it right that private investors and companies should seek to make money out of it? "I think profit motivation is a very good motivation to get people to do things efficiently," says Kingston University's Downward. "As long as there is good regulation and equity in the way the markets operate, I have faith in them."
Not everyone shares that view. Vicky Cann, campaigns policy officer of the World Development Movement, which campaigns on the underlying causes of poverty, is a critic of global water industry privatisation. "The evidence clearly shows that water privatisation has been a disastrous policy for poor people around the world," she says. She cites the example of water privatisation in Dar es Salaam which ended in a bitter legal wrangle between the Tanzanian government and City Water Services, a subsidiary of Dorking-based Biwater.
"The World Bank insisted on imposing water privatisation in Tanzania in return for much needed debt relief. Ultimately, privatisation led to a fall in the standard of service and City Water Services failed to meet targets set in its contract," Cann said.
But with essential water investment of trillions of pounds needed in the next two decades to prevent a global drought, it seems inevitable that private money will have to play a greater role. And if the money is invested wisely both water and profits should flow.
Posted 25 June 2008 : Director.co.uk
