Roger Bate reviews Planet Water, by Steve Hoffmann.
Water, water, not everywhere. That's why more than 50,000 water-utility companies in the U.S. operate about 160,000 water systems, bringing potable water to cities and far-flung rural communities alike. These utilities don't own the water; the right to use water taken from underground sources, or lakes or rivers, is granted by state agencies and the federal government. The utilities pay about a penny per gallon for the water they take and generally charge consumers a modest fee to cover the cost of treatment, delivery, infrastructure maintenance and waste-water services. About 85% of water utilities are owned and operated by the cities and towns they supply, but even privately owned water companies are heavily regulated and not a source of eye-popping profits for their owners or stockholders. The water business, in other words, is as slow and calm as a lazy river in late summer.
That placidity is about to change, according to Steve Hoffmann, the founder of WaterTech Capital, a private investment company that focuses on the water industry. In "Planet Water," Mr. Hoffmann lays out his rationale for "investing in the world's most valuable resource."
Calling our little corner of the universe "planet water" is more accurate than "planet Earth," Mr. Hoffmann notes. Most of the surface is water-covered, the skies are filled with water-soaked clouds and life on land depends on what falls from those clouds. Yet 97% of the world's water is in salty seas and undrinkable. Of the remaining 3%, the vast majority is trapped in ice caps and glaciers. More than one billion people live without access to clean water, which in any case is rarely priced according to its true value even in developed countries.
Despite clean water's scarcity, though, there would still be plenty of it to go around if we just managed the stuff a bit better. "A water leak just one-fourth inch in diameter can result in a loss of almost 15,000 gallons a day," Mr. Hoffmann reports. Water distribution systems lose a lot of water, at least 15% in the U.S. and perhaps 30% globally, which has far-reaching economic and public-health implications, given the expense of maintaining water systems and the dire consequences of resorting to using contaminated water. Two million people around the world--many of them children--die every year from waterborne illnesses.
In the U.S., old pipes are primarily to blame for domestic water loss, and the situation is worsening--because of the age of some of our hydraulic infrastructure. "Parts of St. Louis's sewer system predate the Civil War. In Los Angeles half of the 6,500 miles of sewer pipe is 50 years old or older," says Mr. Hoffmann.
The rich use far more water than the poor. With the world's population becoming richer and swelling in number--even in its most arid regions, whether the Middle East or the suburbs of Las Vegas--the demand for water will only increase. Mr. Hoffmann does an able job of laying out the basics of water scarcity and delivery, and he presents a persuasive case for water's looming importance, rivaling oil as the most important commodity this century. That's so much boilerplate, though, in writing about water and its place in the world. What's of interest in "Planet Water" is Mr. Hoffmann's advice about water as an investment opportunity.
When he describes the appalling water losses from leaking pipes, for instance, he turns the discussion to the methods being employed to find holes in piping, such as "ultrasonic transducers, cable-based sensors, digital signal processing, ground-penetrating radar, thermography, and advanced software tools." A savvy investor, he says, would examine this sector of the water economy. Right now, he observes, finding an "undiluted" publicly quoted company specializing in applying these technologies is not easy, so it makes more sense to invest companies, such as Halma Plc., that produce the technologies themselves.
But a strong current of the investing advice in "Planet Water" is Mr. Hoffmann's contention that water utilities will move toward privatization and away from government management. Right now that is hard to square with Washington's increasing appetite for running American industries, but the water business operates almost entirely at the local level, and the utilities traditionally offer uninspiring returns.
Private management will make companies concentrate on core competencies to keep efficiencies high; those companies are the ones for investors to pursue, Mr. Hoffmann advises. "Any water utility that is foolish enough to diversity outside its core expertise should be avoided." As for water utilities that remain government-operated, avoid them, too: Their returns are "likely to be lackluster at best, especially related to other growth-oriented sectors of the water business such as analytics, treatment and resource management."
Not that government involvement throws a wet blanket on every water-related investment. Water-quality regulations such as those mandating a reduction of arsenic levels present opportunities even for investors who might chuckle over the brouhaha raised by congressional Democrats when the Bush administration tried to adhere to an allowable-arsenic standard of 50 parts per billion, which had been in place since 1942, rather than the 10 ppb rule adopted by the Clinton administration three days before Mr. Clinton left office. In regulation, Mr. Hoffmann sees an opportunity: He cites a study estimating that lowering arsenic levels to 10 ppb will cost water suppliers $600 million annually, with $5 billion in capital costs. "Arsenic removal," he says, "will be a niche growth market for treatment technologies."
It must be said that reading "Planet Water" is no day at the beach. Mr. Hoffmann is, after all, a financier, not a writer. "Recognize that in the granularity of the present," he says at one point, "you are forging new neurofinancial pathways that will define a post-neo-modern portfolio theory." The book may not be a particularly satisfying read but might well guide some very satisfactory investments, post-neo-modern or otherwise.
Roger Bate is the Legatum Fellow in Global Prosperity at the AEI.