Water
Opportunities in the water markets are driven by the increasing scarcity of freshwater over broad swathes of the developed and developing world (including India and China). Demand for water continues to escalate at an unsustainable pace, driven by population growth, urbanization and industrial expansion. Meanwhile, the world’s limited fresh water supply is dwindling due to pollution, draining of underground aquifers and climate change. In the developed world, additional investment opportunities are arising from the need for substantial capital investments in order to maintain and expand the necessary drinking water and wastewater treatment infrastructure. Water infrastructure expenditures are also being heightened by increasingly more stringent global water quality and safety regulation. The U.S. alone has an estimated backlog of $300 billion to $1 trillion of infrastructure replacement/upgrade that according to Goldman Sachs, should drive year over year growth of 3% to 5% for the next decade. In developing countries such as China and India, the water sector has been projected to grow at 10% plus per annum as these countries build out basic water and wastewater systems.
Worldwide, annual revenues in the water industry are estimated at approximately $425 to $700 billion. Water businesses are traditionally less cyclical (as there is no substitute for this natural resource), with key risks primarily related to execution, M&As and regulatory compliance. Growth in the water markets will be driven by capital requirements to fund projects that increase the supply of fresh water, enhance distribution management, enable more efficient demand management and facilitate wastewater treatment. These drivers can be broadly categorized as follows:
- Supply-Side Solutions involve technologies that aid in the recycling and reuse of wastewater (i.e. distribution from source through recycling); purification and desalination to increase the water supply and membrane technologies that enable non-potable water to be cleaned for use as drinking water or for industrial use.
- Distribution Solutions covers a variety of areas, ranging from capital intensive improvements of aging infrastructure to technology that enables point to point flow measurement designed to highlight areas where water is being ‘lost’ in the system. With improved measurement and monitoring of flows, combined with upgraded infrastructure, water utilities can better address the efficient management of their water resources by using load balancing solutions similar to those implemented in electricity markets.
- Demand-Side Solutions include market mechanisms to affect water reallocation; solutions that decrease water usage for given activities and those that enable better metering and measurement at point of use.
While water utilities are currently most associated with this sector, they will not necessarily be the principal source of investment returns. The sector will be increasingly focused on companies that: offer technology-based services from desalination to wastewater recycling; and similar solutions and services to utilities which help in better managing resources. Companies that provide inputs to water infrastructure, such as pipe companies; that provide water system management services to developing nations under a build, own operate & transfer model; and those that address issues associated with efficient use of water by consumers, industry and agriculture should perform well.