How Big Is the Universe?

Like many other questions fraught with theoretical perplexity and limited practical application, an estimate of the global cost of clean water does, nevertheless, serve a purpose. In analogous fashion to inquiries into the size of the universe, the sheer scale of the global water industry is the greatest impediment to deriving an answer; it is simply too extensive to be viewed in a composite manner. (Indeed, this is the basis of the notion that the water “industry” is somewhat of a mythological construct.)

So, what is the cost of clean water? For our purposes here, clean water refers to the costs associated with the full spectrum of water, wastewater, stormwater, recycled water, and so on, and all related activities and applications. Subsequent discussions will generally differentiate by sector or subsector in order to isolate the costs, needs, spending, or market size and thereby achieve greater precision in the analysis of investment opportunities; for example, spending on desalination, the cost of the arsenic regulations in the United States, the size of the market for ion exchange resins, rehabilitation infrastructure needs, and so on. But from this initial high-level perspective, cost is equivalent to the introductory requirement that water is both a prerequisite for life and for living. And, obviously, costs on one side are revenues to the other. Therein lies the motivation for investing in water.

The Global Cost of Clean Water

The process here reminds me of a project that I was assigned in a high school physics course. The exercise was to calculate the number of grains of sand on Earth. Clearly, the lesson was not in the answer but in the process. And that exercise instilled in me the notion that anything ineffably large can still be estimated. But, of course, the outcome of extrapolation is sensitively dependent on the accuracy of the initial conditions. It must be emphasized, therefore, that the approach used to present the magnitude of the global cost of clean water is not based on independent empirical research but gleaned from a survey of the literature.

The total cost of clean water is derived through the combination of major reports on global water conditions. The Organisation for Economic Co-operation and Development (OECD) provides cost estimates for global water infrastructure and water-related services in the update to its Infrastructure to 2030 report.¹ However, it includes total projected needs only for the 20 OECD members plus Brazil, Russia, India, and China (the BRIC countries). The total cost of clean water in the OECD and BRIC countries for the period 2008 through 2025 is projected to be $14.8 trillion. (Many water industry analysts provide longer time horizons of questionable worth. The convention for our purposes will extend to 2025.) As noted, the OECD report intentionally does not include non-OECD countries other than those specifically added to the calculation.This excludes portions of Latin America, South America, Central Europe, Asia, and Africa and the Middle East completely. Granted, with the inclusion of the BRIC countries, a significant gap is filled. But the plight of other developing countries with much less means is a critical part of the global water equation and cost.

The World Health Organization (WHO) prepared a study² that estimated the costs of attaining the water supply and sanitation target of the Millennium Development Goals (MDGs). The MDGs are geared to developing countries where waterborne diseases are epidemic and a major heath issue. The WHO study provides a phenomenally detailed baseline of cost estimates that can be added to the OECD numbers. Target 10 of the MDGs is to achieve, by 2015, a 50 percent reduction in the proportion of the global population without “sustainable access to safe drinking water and basic sanitation.” The two key components of the study contained in that mission statement are the halving of the proportion and the equivalence of “people without access” to “developing countries.” Thus, the study estimated water and wastewater spending required to meet the target in developing countries, which WHO summarizes into 11 developing country subregions comprised of about 160 countries.Another unique feature of this report is that it explicitly accounts for the costs of maintaining existing coverage levels, thereby quantifying total costs rather than focusing on marginal costs, incremental expenditures, or spending gaps, as most clean water cost estimates do.

The OECD and WHO reports have some inherent overlap. The OECD report includes Russia, India, China, and Brazil, countries that are non-OECD and subject to the MDG target. The WHO report, however, is structured by developing country subregions and can include any country (OECD or non-OECD) in the subregion, whether or not it is currently meeting the MDGs. And it is clear from the WHO numbers that the “big” (BRIC) economies are included in the cost estimates since approximately 90 percent of the projected population of non-OECD regions is represented. Taking these factors into account, adjusting for full attainment of the MDG target, and utilizing a more likely WHO scenario above the base cost case, yields an incremental cost to the OECD study of about $1.1 trillion for the period 2008 through 2025. Adding the two estimates, the magnitude of global water costs beginning with 2008 through 2025 is projected at $16 trillion.

The purpose of the lengthy description of the derivation of the global estimate of aggregate water spending requirements through 2025 is twofold: (1) to convey a sense of the magnitude of our water challenges and the institutional interest in providing quantitative tools to evaluate them as a call to action, and (2) to somewhat desensitize the reader to large numbers such that sector and subsector market size or spending/cost estimates will take on added precision from an investment perspective.

Given the shorter time frame (18 years) and the rigor of the underlying studies in accounting for not only future incremental needs, but also the costs of maintaining existing coverage levels (i.e., the cost of operating, maintaining, monitoring, and replacing existing infrastructure and facilities), the estimate of roughly $16 trillion ratchets the cost of water up further. This figure equates to about $830 billion per year, indicating a significant gap between current water industry revenue estimates and what, at a minimum, must be spent on water. I say minimum because there are significant areas where water cost estimates fall woefully short of reflecting the reality of water in the twenty-first century.These categories could easily add a multiple of 1.15 to the global water cost estimate above. And, ironically, as the emerging dialogue in water, these categories actually represent some of the areas of greatest investment potential, which should become apparent from subsequent discussions. Based on a “developed” versus “developing” country dichotomy, the following are examples of critical omissions in most cost estimates.

Developing Countries

• Marginal cost of new water supplies

• Distribution and storage systems

• Low estimates for the next BRIC countries (i.e., the LAACE regions—Latin America, Africa, and Central Europe)

• Financing costs

• An accumulating spending shortfall

Developed Countries

• Marginal cost of water supply (scarcity)

• Impact of advanced regulatory phase

• Integrated water resource management (sustainability)

• Financing costs

• An accumulating spending shortfall

In addition to critical omissions in many global water cost estimates, and less than robust simplifying assumptions, there is often a great deal of confusion with respect to time horizons.While there is an unavoidable lag in data collection, analyses, and projections, the accuracy of time series data presentation with respect to stationarity assumptions is an increasingly relevant problem, especially in relation to the overlay of climate change realities.

Stationarity refers to a foundational concept in water resource engineering and planning relative to managing the natural variation in hydrologic variables. Critical variables such as annual stream flow, snow-packs, or flood peaks are assigned a probability density function based on historical experience. Anthropogenic impacts on the hydrologic cycle usurp the accuracy of established stationarity assumptions and can radically alter both the cost of all stages of water infrastructure spending and regulatory compliance.

The benefit side totally defies comprehension. While education, income generation, health care savings, and productivity gains are quantifiable, the value of human life (deaths averted), human dignity, and ecological sustainability render objectivity impractical.As a proxy, investors can acknowledge the WHO cost-benefits report³ that estimates, depending on the region of the world, that economic benefits can be valued in a range from $3 to $34 for each dollar invested in improved drinking water and sanitation.According to the report, the return on investment is highest in developing regions where substantial benefits are derived from the time saving associated with improved access to water supply and sanitation.

From the Whole to the Parts

Given the enormity of the expenditures required to meet the demands placed on water resources, it is constructive to examine the costs associated with individual aspects of the provision of water. Dissecting the costs associated with global water requirements indicates that investors need to take advantage of the dynamics of the water industry.There are four points to be made as the global water costs are dissected:

1. No matter what type of water estimates are involved (global, country, technology, function, product, service, regulation, etc.), there is always some strategic investment information contained therein.

2. It is important for investors to understand the implications of the way that costs are broken down.

3. Assuming that ultrafragmentation of the global water industry is an inherently inefficient structure, the way that costs are unbundled and then consolidated will drive many water investment themes.

4. The presentation of specific cost breakdowns forms the investment framework for judging the relative potential of water companies that operate in various segments of the industry.

Costs by Needs

According to the Environmental Protection Agency (EPA),⁴ the documented investment needs of publicly owned treatment works (POTWs) in the United States is $202.5 billion. These needs constitute the capital investment necessary to meet the wastewater treatment, wastewater collection, stormwater management, recycled water distribution requirements, and all related appurtenances of POTWs. A POTW is owned by a state or municipality. The nomenclature is particularly important here. The term publicly owned does not equate to publicly held in this context.⁵

The delineation of costs in this particular report focuses on the United States, municipal utilities, the wastewater segment, and documented needs. Accordingly, investors can see just how large the costs are based on one very narrowly focused analysis.The requirements outlined in the needs survey are categorized as shown in Table 4.1.

Table 4.1 POTW Spending Needs by Category

As an example of how these reports are used to drive investment decisions, it should first be noted that spending on wastewater treatment in the United States is increasing faster than drinking water treatment. In addition, while the number of people served by facilities with secondary treatment increased only moderately, the portion of the population provided with advanced wastewater treatment increased dramatically. While somewhat anecdotal, in addition to reinforcing the relative investment weight to be afforded to treatment companies, it further refines the search to wastewater and points out several niche—but growing—markets in stormwater management and combined sewer overflow (CSO). Stormwater expenditures reflect the implementation of the National Pollutant Discharge Elimination System (NPDES) Stormwater program. Further, CSO-documented needs comprised the single largest category at 27.1 percent of the total. CSO expenditures accentuate the additional treatment capacity for handling wet-weather flows, a particularly timely category in the advent of climate change. The new category of recycled water distribution points to the need for greater recycling and reuse in the tool kit of alternative water supplies.

Regulatory Costs

No matter how it is expressed, the regulatory cost of providing clean water is staggering, and the financial ability of water suppliers to comply with stringent standards has created mounting public concerns over water quality. That the cost of providing clean water will rapidly increase is not the issue.The challenge to the water industry is to determine how the economic shifts resulting from increased water prices can be minimized.

The Total Maximum Daily Load Program. An example of the cost of a specific regulation is informative. Because the EPA is very proactive in publishing cost data, this illustration is based on U.S. regulations. The Total Maximum Daily Load (TMDL) program is designed to accelerate the achievement of water quality for the 40 percent of water bodies in the United States that do not meet the standards that have been set for them, even after point sources of pollution have been controlled to the minimum levels required. The EPA indicates that this amounts to over 20,000 individual river segments, lakes, and estuaries.These waters include approximately 300,000 miles of rivers and shorelines and approximately 5 million acres of lakes polluted by sediments, excess nutrients, and harmful microorganisms. According to the EPA, 218 million people reside within 10 miles of these impaired waters. Section 303(d) of the Clean Water Act requires that a comprehensive list of impaired waters along with its pollution limits (TMDLs) be prepared.

A TMDL is an analysis that specifies the maximum amount of a pollutant that a body of water can receive and still meet the applicable water quality standards. Because a TMDL sums contaminant wasteloads from all point sources (industrial and municipal dischargers) as well as nonpoint sources (agricultural and urban runoff), they are increasingly becoming critical watershed planning tools. As such,TMDL regulations dovetail with broader water resource management, source water protection, and stormwater management goals. Further, these calculations enable watershed-based permitting under the NPDES, which governs wastewater discharges.

The TMDL program is an important, yet very specific, part of the Clean Water Act’s institutional framework. Even with such a targeted initiative, the EPA estimates that the cost to develop a cleanup plan for all impaired bodies of water will cost $1.04 billion. On top of that, fully implementing the program (installing preventative and treatment measures) will cost up to $4.3 billion annually. These costs will be borne primarily by dischargers. The beneficiaries will be the water resource engineering and consulting firms and wastewater treatment companies that will find in the TMDL program another application for their technologies. As a note, this $4.3 billion is a tiny fraction of the current expenditures for clean water in the United States.

The Transition from Cost to Price

Any time there is a structural change in an industry caused by shifts in the economic fundamentals, there is a huge potential for corresponding economic gain.We can look to other economic transitions for guidance in the future: the rationing of health care, leading to overcapacity in hospital beds, resulted in massive consolidation of the hospital management industry; increasing commercialization in the biotechnology industry has generated substantial promise; regulatory upheaval and oversupply in the natural gas industry led to the unbundling of services; information technology represents the merging of previously distinct technological industries; and more. The inevitable upward adjustment in the cost, and therefore the price, of water is one catalyst for change in the industry. It is this promise of change that creates the unprecedented investment opportunity of the twenty-first century—the business of water.