Water & Economic Growth, a ‘Green’ Equation

To expand on Federal Reserve chairman Ben Bernanke’s expression about prospects for recovery – you can’t have “green shoots” without water.

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By Steve Hoffmann

To expand on Federal Reserve chairman Ben Bernanke’s expression about prospects for recovery – you can’t have “green shoots” without water. The metaphor is firmly rooted in reality, as water is essential to economic growth. Water, like energy, is a key input in a nation’s microeconomic equation. The case can be made regardless the path global recovery takes, the water industry is positioned to benefit from the many socioeconomic crosscurrents just beginning to unfold.

The water infrastructure, especially in developing countries, must keep up with and support underlying trends of urbanization and industrialization that go hand in hand with economic growth. Water availability (with respect to quantity and quality) must then accommodate rising income levels by adjusting to higher caloric intake, a shifting mix of water-consuming manufacturing, and energy production. In developed nations, water systems face corrective and replacement measures – central to advancing regulatory mandates and technology-driven sustainability initiatives.

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Chart 1. Green Stimulus Theme Allocation (US$480 billion)

Economic stimulus packages globally have targeted water and wastewater infrastructure for exactly these reasons. But those in the water business know suggested funding levels, particularly in the U.S., represent the proverbial drop in the bucket (although any help to SRFs is beneficial). The environmental dimensions of economic stimulus plans account for about $480 billion in spending, of which 18% (or $86 billion) is targeted for water (see Chart 1). Climate change, in the form of reduced greenhouse gas emissions, garners most of the environmental fiscal stimulus and drives the mantra for “building a green recovery.” But a low carbon economy and sustainable management of water resources are explicably linked through their respective biogeochemical cycles.

There is, therefore, another perspective to the global economic crisis, and calls for an eco-recovery, with extraordinary significance, albeit subtle, for the global water industry. In addition to direct governmental expenditures in water (and the multiplier effect on private investment) is the enormous potential impact from institutional reform. The current global crisis is a catalyst that will usher in an era, possibly decades long, of significant institutional transformation.

Change is well under way with respect to global financial institutions and is beginning to spillover into the prospect for multilateral environmental institutions. Water will be a significant component of institutional transformation because of its linkage with climate change, ecological sustainability and economic growth. For example, the United Nations, with its transnational political and economic institutions, is entering a new organizational phase in response to the global financial crisis. This institutional structure is being called upon to assume a greater role in regulating global initiatives, one of which is water resource sustainability. Comprehensive water policy, integrated management and holistic regulation are increasingly seen as transnational or interregional institutional activities. The possibilities going forward are unlimited, with professional trade organizations such as WEF and IWA integral to the credibility of the formation process.

Institutional change is a prerequisite for fully realizing the investment potential in water – by enabling the transition from managing water as strictly a public good to viewing it as a critical resource in sustaining social, economic and environmental well being. In developing countries, water institutional reform envisions a move away from funding in the form of conditional aid to investment in the form of subsistence; a modality that works for private sector participation and against the existing NGO scheme. A more cohesive institutional framework for water governance is likely to accelerate remission of NGOs that have created a patchwork of agenda-laden water policies to the detriment of valid institutional oversight. In developed countries, water institutions must deal more effectively with resource allocation and omnibus regulation than managing resource development.

Institutionalizing the nexus between water and economic growth portends the enormous potential associated with investing in companies engaged in the nascent global water industry. Any acceleration of this process embedded in the broader global recovery initiatives is viewed as extremely positive for the long-term fundamentals of the industry.


About the Author: Steve Hoffmann is the author of Planet Water: Investing in the World’s Most Valuable Resource [May 2009: John Wiley & Sons]. He is also the cofounder of Palisades Water Index Associates LLC, the developer of the Palisades Water Index and the Palisades Global Water Index that serve as tracking indexes for the PowerShares Water Resources Portfolio ETF (PHO) and PowerShares Global Water Portfolio ETF (PIO), respectively. Contact: steve@watertechcapital.com

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