Water Industry Executives Optimistic About Market Outlook

I had the pleasure of attending a Water Executive Forum on April 5-6 in Philadelphia where leaders representing public utilities, investor-owned water companies, equipment manufacturers, consultants and the financial community shared views on key developments in the North American water industry.

May 1st, 2005

I had the pleasure of attending a Water Executive Forum on April 5-6 in Philadelphia where leaders representing public utilities, investor-owned water companies, equipment manufacturers, consultants and the financial community shared views on key developments in the North American water industry. There was general consensus among the speakers and the audience that the outlook for this industry is promising, both from an economic and social perspective, with new advances being made in the way water is being managed.

Most of the speakers were in agreement about the forces that are driving this industry, those being a growing population, an aging society, growing consumer awareness, water scarcity, declining water quality, deteriorating infrastructure, and the terrorism threat. These forces are, in turn, driving the need for tighter environmental regulations, higher water fees and smarter ways of doing business.

Tom Joyce, president of Hach Company, spoke about the impact that environmental regulations are having on driving growth in both the analytical and treatment markets, especially the upcoming microbial/disinfection byproducts rules and the ground water rule. He also noted that the Urban Waste Water Treatment Directive and European Drinking Water Directives were making for a strong market in the European Community and that similar regulations were driving the markets in China and India. He reported that Hach’s business in China has grown over 50% in each of the last three consecutive years.

Jack Hoffbuhr, executive director of the American Water Works Association, acknowledged that most of the new drinking water regulations are coming from areas where little science exists, notably organic contaminants such as herbicides, pesticides and disinfection byproducts as well as trace organics like endocrine disruptors.

Advances in technology and the ability to detect contaminants, once unmeasurable, is also driving the demand for greater treatment, noted Bob Ayers, president of ITT Industries’ Fluid Technology. His company, accordingly, has expanded its traditional pump product offerings to include comprehensive treatment capability, including membranes, ozone and UV. New areas of concentration will include finding ways to optimize use of sludge and provide desalination and water reuse solutions. The company is also bullish on decentralized wastewater treatment, especially in the developing world.

Desalination was a topic of interest among several of the speakers, including Ian Barbour, general manager of Dow Liquid Separations and CEO and president of FilmTec. He observed that demand for pure water was increasing by orders of magnitude from every part of the world with supplies becoming more scarce. Dow has been doing desalination since 1961, he stated. Due to advancements in membrane efficiencies and with the cost of reverse osmosis and nanofiltration decreasing 2-3 times over the past 10 years, seawater RO is no longer cost prohibitive, according to Barbour. Knowing what to do with the brine reject stream, especially in inland waterways, remains a problem, he acknowledged.

George Oliver, president and CEO of GE Infrastructure Water and Process Technologies, sees desalination as one of GE’s biggest opportunities. He predicted that the $5 billion market today is likely to grow 9% each year, making it a $9 billion market in the next 10 years. Of the $360 billion worldwide water market, GE views $50 billion as being attractive, broken down accordingly by size and growth potential: equipment ($13 billion - 8%); membranes ($10 billion - 8%); chemicals ($14 billion - 4%); desalination ($5 billion - 12%); and international services ($8 billion - 13%).

Dr. Roger Radke, president and CEO of USFilter, is also bullish on the market, noting that the fundamentals for long-term success are in place and that the industry is moving toward a traditional oligopoly structure. He observed that today’s consolidators - like GE, Siemens, Danaher and ITT - possess key attributes that differentiate them from their predecessors. These include having a solid understanding of the industrial markets; having a global perspective and operating platforms to effectively project their acquisition into the global water market; and having well-established track records of operational excellence, financial discipline and strong corporate cultures of excellence.

Those companies that can leverage their acquisition on a global basis, combine technology and services to improve customer loyalty and profitability, and stick to a disciplined business strategy will be the successors of tomorrow, he opined.

While each spokesman had a different view on how to most effectively penetrate the global water market, each shared a common view on the outlook for funding to meet higher water standards, provide new sources of water, and replace the decaying infrastructure.

“It ain’t gonna happen,” proclaimed AWWA’s Jack Hoffbuhr when discussing the prospects of a national water trust fund. He advised the audience that “we need to urge Congress to maintain or increase assistance for the state revolving fund (SRF) programs,” noting that these funds are a self-sustaining and important source of financial assistance for the industry.

Dick Fox, president of CDM, agreed with Hoffbuhr’s assessment that “there is no way in hell that a trust fund is going to happen!” He added that it’s a local problem and that by raising rates 2-3% above inflation, a community will be able to finance most anything. “They just need the political will to raise the rates,” he remarked.

Debra Coy, senior research analyst for Stanford Washington Research Group, said she was starting to see the political will to raise rates and make the necessary investments. On the matter of a national water trust fund, she agreed that “there is no support for it by the White House and it’s going nowhere.”

While most of the views espoused at this event were encouraging about the future of the water industry, it will be interesting to see whether this rhetoric will turn into reality by next year’s Water Executive Forum. WW

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