“Nothing is more useful than water; but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.”
Renowned father of economics, Adam Smith, identified the diamond-water paradox in 1776 and economics graduates to this day have revered it. Yet the modern day investor may find some cracks in Smith’s proposal.
Water, it seems, will purchase almost anything.
It is the ultimate commodity, currently underweight, and with the investment potential to provide financial and social return beyond that of your conventional resource stock.
Its value proposition is the ever-widening supply and demand imbalance and the lack of a comparable alternative. Unlike diamonds, water is not ‘forever’ and its finite supply is set to send prices soaring. Thirsty global investors should look no further than to the tides of the Asia Pacific for big business.
Water as an emerging asset class
Climate change, population growth and increased food production are all placing undue stress on water supplies and it is diminishing quickly relative to demand. Consider that over the past century, while the global population has tripled, water use has increased six-fold. In fact, the OECD estimates that by as early as 2030, 47 percent of the world’s population will be living in areas of high water stress unless new policies are introduced.
Governments alone can’t fix the problem, and business will need to be part of the solution.
Thus, the concept of Business Water is born: water that does more than just quench your thirst. Savvy global investors are already buying up what has been labelled ‘blue gold,’ and in a most unexpected location.
The land down under
Hydrogen two parts, oxygen one, and Australia the key ingredient. It may sound ironic that the earth’s driest inhabited continent has spawned the world’s most sophisticated water market – yet statistics show the market is positively raining returns.
In 2009, $3bn worth of water rights changed hands in the land down under.
Aside from having access to clean water, Australia’s water market whets investment appetite for a few key reasons.
It is one of the only countries to have a formal water-trading system, offering players in the space the opportunity to engage in what is effectively water brokerage. The ability to monetise the resource is certainly attractive.
Various intermediaries can buy and sell water from one another in the form of water access entitlements, governed and distributed by the government. The trading system, in theory at least, enables water to be allocated to the highest value user. Introduced in 1983, the market effectively unbundles title to land and water. The marketplace is diverse and includes small, unconnected water markets as well as large, linked systems such as the prized Murray-Darling Basin.
And it’s working well. Jopson & Snow note that in 2009, $2bn worth of water trade took place in New South Wales alone, making the state’s water market equal to the total value of the country’s wool exports.
Government buy-backs are integral to the market’s effectiveness. In times of drought, the Federal Government repurchases water from farmers, effectively inflating the price by reducing supply. Most recently in 2009, the government bought back $1bn worth of water as droughts hit. Since the scheme was introduced, the price of water has jumped from around $900 a megalitre to over $1,200. Forget rising house prices; this ‘liquid gold’ is often worth more to a farmer than his own land.
The Australian market is also attractive because foreign investment is virtually uncapped. Not surprisingly, the national water market is predominantly controlled by foreign interests. Around $80m worth of entitlements are owned by the likes of US firm Summit Global Management through an Australian subsidiary; by Singapore’s Olam International; and by Tandou Limited which has considerable foreign ownership.
Investors also trust Australian water management. Years of perfecting the art of water cultivation in a dry, arable climate has resulted in a country recognised for expertise in demand and catchment management, trans-boundary water-resource management and urban water supply.
Philanthropic water
‘Business water’ also represents a new and emerging space at the intersection of money and meaning, falling into the Impact Investment category and offering good-Samaritan investor types with a torrent of ways to create value.
Impact investment, which is investment geared toward generating social and environmental benefit, was recently recognised by JP Morgan and the Rockerfeller Institute as a new asset class tipped to be worth between $400bn and $1trn in the coming decade.
Water may be the final frontier of socially motivated investment. It is a unique commodity; unlike gold or oil, we simply can’t live without it. Like a diamond, it is multifaceted and has many sides to it. It is at once an issue of health, gender, security, education and economics. Access to safe water is still a pressing development issue, with The World Health Organisation (WHO) estimating that 80 percent of all sickness is attributable to unsafe water and sanitation.
Yet when the market discovers a problem, Smith’s ‘invisible hand,’ generally guides it toward a solution. Water as a development issue has produced a number of market based responses which investors can tap into and potentially achieve triple-bottom line returns.
The market is also being utilised to set the standard and direction of good governance policies. Initiatives such as the CEO Water Mandate and the concept of ‘corporate water stewardship’ promote best practice around sustainable management. Locally, Westpac Banking Corporation is leading the pack, as signature to the CEO Water Mandate and with a staff-community partnership focused on funding water and sanitation projects in East Timor.
Impact investment opportunities exist close to Australian shores, with two thirds of those without access to safe water living in the Asia-Pacific.
How to get in on the water game
Creating a splash in the water market is relatively easy and there are a number of investment options.
For the risk-averse investor, trading access entitlements is probably where the water flows strongest. Capital growth return is estimated to be around three or four percent plus dividends. The much anticipated revised Murray-Darling Basin Plan is set for release this year and will present a number of business opportunities. Furthermore, more government buybacks are on the cards with climate specialists predicting less rainfall in the region over the coming years.
Ambitious investors may be interested in large-scale desalination, water recycling and agricultural irrigation projects that are currently being implemented Australia wide. The Australian Government Department of the Environment, Water, Heritage and the Arts (DEWHA) assists in co-ordinating public and private sector opportunities and may provide a good starting point for interested parties.
Water funds and investment into water via superannuation is touted to be the next big thing, although the number of service providers offering exposure is still low.
The market for trading local water stocks is relatively illiquid. Generally, there is very little movement in price, with stocks trading in narrow bands and underperforming the market in the last few years. This is likely the result of an Australian business community slow to recognise its own strengths coupled with a market dominated by foreign interests distorting competition. Australian asset management firms have been quick to note the emerging trend of water but few are willing to take an equity position for fear of wading into a market that is still too shallow. At a macro level, investment in local firms cannot hurt, provided the investor enter with a long-term horizon.
Water Credit is one option for impact investment. This branch of microfinance involves the provision of small loans to those removed from traditional credit market. It is seen as a culturally-sensitive method of financing that allows local communities to develop water systems best aligned to their own needs. According to WaterCredit.org, a provider with the majority of its operations in Asia, such philanthropic investments stimulate commercial lending.
Similarly, investors seeking equity positions in development projects can look to AUSAID, which increased Asian development assistance by $300m from 2008-11. The government body has actively stated its desire to partner with foreign investors.
‘The value of water flows upward, towards money’
By the time you’ve finished this article, the value of the glass of water next to you may well have risen. Your liquid gold is set to become an increasingly important asset and bargaining tool in both economic and political circles, as supply is evermore constrained.
They say money doesn’t grow from trees, but it very well may come from the seas. Further to offering potentially lucrative financial returns, water as a socially responsible investment gives credit to the use of business as a creative response to poverty. And this is rare; few resources can be spoken of in both banking and international development circles. The multi-faceted appeal of water has both crowds bullish on the resource.
It may be ironic that the world’s driest inhabited continent has the most lucrative water market. Yet, perhaps Smith got something right when he asserted that the price of water is highest in the desert. If only he knew how scarily accurate he would be.
