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How good is WRI’s water-risk mapping tool?

A screen shot of the Aqueduct atlas launched by WRI

Though water is the gold of the future global corporations are finding themselves in a rather sticky situation at present because of the double-edged sword that the commodity is. Water offers itself as the best bet for growth and investment if you know how to use it. It is like there is a huge scope to make money with it if you know where the water is and how much, ONLY if you know that. And we are not talking merely about water-service companies or water- related equipment manufacturing  companies but all other sector players that depend to a large extend on water to run their machines and manufacturing processes.   Global giants have realised this late, or rather have been slow in taking an initiative in spotting the availability of water in various regions and continents for the mutual interest of their bottom lines.

Global giants like Coca-Cola, Goldman Sachs, Skoll Global Threats Fund, Dow, Bloomberg and Tallisman Energy are funding World Resource Institute’s (WRI) project Aqueduct that measures and maps water risk. The global map data is supplied by Coca Cola, the company directly involved in water products.  A team of experts specialised in various areas of financial management of resources are handling the project funded by these corporations. “The risk maps generated by the Atlas will help companies understand the intricacies of water risk, and in turn manage their exposure to such risk,” says the WRI website.

The tool enables one to explore the quantity as well as quality (with respect to purity) of water in some of the biggest basins of the world. As of now, they have included the Murray Darling, Yellow River and Orange-Senqu River basins on the map. But the intriguing feature of the map is that it allows local communities to add information as the team believes that information obtained from people working on the grassroots is more accurate than researchers working in laboratories. So in reality, it is the corporations roping in social workers and governments for the benefit of their business. The Netherlands Ministry of Foreign Affairs is indeed a funder of the project.

While these organisations have attempted to align profit-making with safe and responsible management of water, critics are arguing users would not necessarily use the tool responsibly. There are high chances of other organisations exploiting the availability of large amount of water and playing short-term irresponsible bets. Lori Pottinger, an Africa campaigner at International Rivers NGO told Reuters, “The risk is that the concerns of local people are left behind in the rush to secure access to water and reduce risk for companies.” This would not be good for companies themselves are it would be just a few players hogging all the economic benefits of the financial tool.

The other drawback of the water risk atlas at the moment is that it is incomplete. Aqueduct is still adding more basins to it and relies on communities to make the database as detailed as possible. The efficiency of the tool, if utilized morally by financial corporations, depends on the accuracy of data provided by major corporations like Coca-Cola (information has to be updated from the time it was recorded) and the communities working at the grass root level.

You can use the tool by clicking here. Refer to instructions on the youtube video below  if needed.

– Mitali

HERE’S WHERE TO INVEST

 

 

In my previous post I illustrated how water is a safe haven, the next question is how to invest in it? Water may be the most underrated commodity in comparison with gold, oil or agricultural products but the reason why it attracts little investment is fair too. Like other commodities, one cannot buy or sell water directly or in its original form. For example, if you buy a futures contract of say sugar you would receive sugar at the end of the term on the contract. It is not possible to do the same with water.

What retail investors can look at are individual company stocks, specialised water funds and ETFs. While looking at individual stocks, of course it is essential to follow Warren Buffet’s famous advice, “Buy companies and not stocks.” However, in the case of water the overall risk of loss is already at a low as the sector as a whole is guaranteed to grow. While the total annual returns on the MSCI Global Equities Index rose over 20 per cent in 2010 compared to a decade ago, the Janney Water index, the global index for water equities, shot up more than 60 per cent in the same period.

Hence investors can consider general factors like how well managed the company is, the consistency of its profits and earnings, future investment plans and how strong the balance sheet is. Water is a quite a diverse sector so within the industry institutional investors can look at the famous soft-drink and bottled water companies, water technology companies that manufacture equipment, water recycling and sewage companies and suppliers. The colas are a money maker for sure but do not underestimate the equipment manufacturers too. The Organisation for Economic Cooperation and Development (OECD) expects investment in water infrastructure and maintenance to increase 7 per cent every year for the next twenty years. The European companies have been under pressure in the past couple of years due to the Eurozone crisis but will do well once the tide subsides.

There are a few funds focussed on water but if time is a constraint for retail investors they could rely on these professionally managed water funds better than others. These are the companies (with a general company profile) and investment opportunities in water that offer investment opportunities:

Companies

5-year stock price history of Veolia Environment and Suez Environment
Source: Bloomberg

Veolia Environment

The French giant that comprises the world’s largest water company Veolia Water along with Veolia Energy and waste-management services. The stock price and revenues of the $17bn corporation has been declining recently due to the Eurozone crisis and high oil prices globally. This hasn’t discouraged fund managers from investing in it and experts from recommending it. The financials of Veolia Water are strong even though the subsidiary is not separately listed on any stock exchange.

 Suez Environnement

The international company based in France again divides its operations 50 per cent into water and waste management each. This year, it recorded € 12bn revenues and €2.1bn EBITDA.   Net income has been declining sharply but the companies strategies seem promising enough to deliver good results after the financial turmoil in Europe and globally. The company’s CFO James Boursier says he is targeting a balanced mix of investments in European and international markets. The company is also focussing on value-added services.

Saneamento Basico do Estado de Sao Paulo 

Source: Ycharts.com

The Brazilian utility company (BRL 2500m) mainly offers environment sanitation facilities including water sanitation services. The only problem with it is that about 70 per cent of the company is owned by the government thus heavily regulated and the floated stocks are limited. But Brazil being a BRIC economy offers great growth potential in utilities.

Pentair Water

The company with $2 billion in sales provides services and products for the movement, storage, treatment and enjoyment of water. Their pumps, filters, systems and solutions are used by residential, industrial, commercial, agricultural industries and the municipalities in several regions of the world.

United Utilities

Stock price history
Source: Bloomberg

The companies revenues rose to £1.56 bn from £1.51bn in a year despite cutting its prices by 4 per cent due to policies imposed by the England and Wales government. The company along with other water players in the UK are bound to benefit from the easy and cheap loans offered by the European Investment Bank, according to Financial Times.

ETFs

PowerShares Water Resources, the $852 m largest water ETF is based on the NASDAQ OMX US Water Index. It invests at least 90% of its total assets in common stocks that comprise the Underlying Index.

ETF Securities’ Janney Global Water Fund that tracks a 60 companies’ S- Network Global Water Index. The diagram shows the mix of companies it comprises.

Source: Company website

Guggenheim S&P Global Water Index: The nearly $2bn fund is the first US listed global water ETF. It tracks the equity index S&P Global Water NR Index and maximum assets (at least 90 per cent) in American Depository Receipts (ADRs).

First Trust ISE Water Index

Source: FIW

The fund with $63m invests to correspond with an index called the ISE Water Index. Some of its top ten holdings include American Water Works Co Inc ORD,  Companhia de Saneamento Basico do Estado de Sao Pa (a stock we have recommended above),  Aqua America Inc ORD, Lindsay Corp ORD and  California Water Service Group ORD.

-Mitali

 

 

WATER – A SAFE-HAVEN

Turnover in the water industry

In England and Wales

(£ billion,2000-01 PRICES)

DATA SOURCES:
FIGURE 1 – Ofwat (1999), Future Water and Sewerage Charges 2000-2005, Final Determinations, Office of Water Services, Birmingham
FIGURE 2 – QFinance report on water industry trends, Lux Research of the United States

Capital investment in water in the UK

The investment in the industry has grown substantially and consistently
DATA SOURCE:
FIGURE 3 –Ofwat and Water UK

Going by the massive capital investment, huge returns must be expected? Let’s compare returns with other industries

The investment Vs returns of the whole water industry is lower than that of manufacturing and service companies of other sectors

Data SOURCE FIGURE 4 – Water UK, National Statistics and Ofwat

Yet water utilities are expected to attract huge investments over the next eight years

DATA SOURCE: FIGURE 5 – QFinance report on trends in Water industry


The industry will continue to grow at a consistently average speed while other fast-growing sectors might fizzle out after a boom thus making water stocks, bonds and ETFs a safe-haven in the long-term

– Mitali

NEW BILL TO RESHAPE UK’s WATER INDUSTRY

The government has taken its first step in the direction of improving the water industry by introducing the Draft Water Bill in England and Wales this month to make it easier for new players to enter the water market and the existing ones to function faster and flexibly.

The bill proposed on July 10, 2012 suggests that a new entrant must be allowed to kick off business with a single window clearance from Ofwat, the monetary regulator of the UK’s water industry. At present a new entrant must get the approval of about twenty-one existing companies in order to start business. The twenty-one companies include water purification and sewage companies that rely on each other for their independent business in the industry. The bill, if passed, will cut down red tape and make Ofwat the sole mediator. The government aims to incentivise the water recycling industry with the money earned through the proposed measures.

The bill aims to achieves two main things for existing companies – enable mergers of water companies that has been stagnant by obstructive government policies at present, and allow water companies to easily switch suppliers. Efficient companies currently are being restricted by the law to overtake small or medium enterprises that could help enlarge their business. Draft Water Bill includes several reforms to tackle this issue. The second one on changing suppliers would enable speed in case a supplier is not able to meet deadlines.

If passed by the parliament, the act would be a relief to the water industry that had been struggling to meet rising demand from consumers. However, it would still take five more years for the industry to actually turn around. The Department of Environment, Food and Rural Affairs has roughly targeted the opening of the retail water markets in April 2017.

-Mitali

Financing water virtually

Financing of water is usually about money paid directly to get water or to get the means of providing water. But another way of effectively finance water is to pay for goods which needed a lot of water to be produced: By importing so-called water heavy goods, we in effect pay to avoid having to provide the water for the production. The Institute of Civil Engineers is estimating that more than two thirds of the UK water needs are actually met by import. As grain, cheese and beef crosses the border into Britain, the water used to produce those foods – the embedded or virtual water – in a sense crosses with it.

A WWF report on the UK water consumption writes: “While average household water use in the UK is around 150 litres per person per day, our consumption of produce from other countries means that each of us effectively soaks up a staggering 4,645 litres of the world’s water every day. Most of this is in the form of ‘virtual water’, i.e. water that has been used to grow the crops that make the food we eat, the beverages we drink and the clothes we wear.”

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Saudi Abrabia, seeking water in desert

This is the investment opportunity map done by Deutsche Bank Research. We can see that Saudi Abrabia was given a highest score, colored by the darkest blue on map, which means it is believed by DB research deserves most investor attention.

Last September, Reuters published a feature about how Saudi Arabia’s water scarcity is eating into its oil revenue. “Water use in the desert kingdom is already almost double the per capita global average and increasing at an ever faster rate with the rapid expansion of Saudi Arabia’s population and industrial development.”

Saudi Arabia is currently in water crisis.

In April, Dardeer, senior manager for corporate projects says that National Water Co., Saudi Arabia’s state-owned utility, plans to spend $66.4 billion on plants and repairs over the next 10 years. Continue reading

WATER IS THE NEW MONEY, WILL CAUSE FUTURE WARS: A  DOCUMENTARY

Economic and political issues were never two separate things but the makers of Al Gore’s famous An Inconvenient Truth links the fact to water. Participant Media, the company known to produce breathtaking documentary films on environmental issues like Food, Inc and Waiting for Superman is now set to release Last Call At The Oasis focussing on the economic and human devastation that will be cause by the scarcity of water in future. Of course consequences are not limited to the financial losses alone; there are social, political dimensions as well. Perhaps the film will draw the public’s attention to the value of this commodity financially too if Participant Media makes it as provokingly as its other films.

The film will be hosted by Erin Brokovich and directed by Jessica Yu.

Here is the promo

-Mitali

Project financing of water in the UK

As UK and European assets are being snapped up by cash-rich foreign investors, the water sector has seen its bit of the action over the last couple of years.

“The UK water companies are seen as very attractive assets,” says Sakshi Sharma, who covers the water sector for Infrastructure Journal. Many foreign buyers are looking to get into the market, she says, exemplified by last year’s three major project finance water deals in the UK. The biggest, the acquisition of Northumbrian Water in August, saw a Chinese fund, CKI, pay 30% over the odds to gain access to the proceeds from selling water to 4.4m Brits.

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Charts of the Day: Financing water

As Blue Gold blogger Anne-Louise pointed out in an earlier post, global water infrastructure is shockingly inefficient. Governance in managing water resources is poor, particularly in emerging economies, thereby underlining the need for private financing to step in and invest in better water infrastructure. Better oversight would effectively manage the increasing competition for water between agriculture and other uses. Two graphs illustrate this shocking reality, pulled out of a recent report by the OECD.

ImageSource: OECD Continue reading