By Christopher Gasson, Guest ColumnistThe great thing about the 1929-1933 depression was the way it ended. Then newly elected U.S. President Franklin Roosevelt announced a public holiday on the day after he was sworn into office to celebrate the beginning of the upturn, and the misery was over. President Obama will be unable to call the bottom of the market with such certainty. He might have a $1 trillion stimulus package to put in place, but even that won't be enough to silence the bad news. Not least because the parts of the economy which will receive the stimulus -- highways, schools, and maybe water systems -- won't be the same as the parts of the economy that are most hurting at the moment: real estate, automotive, and white collar work related to the financial services industry. This year, 2009 is going to be a year during which there's continuous competition between the good and bad news. The good news will win out in the end, but no one can be sure just how long it will take to prevail.
So, what is the outlook for the water sector in all of this? Here are my thoughts:
1) How will "the stimulus" help the global water sector? - Central government fiscal stimuli (in the USA and elsewhere) seem to be the big hope for the water sector in 2009. I wouldn't expect too much too soon. The problem with the water sector is that it's a very local service, which means that it's difficult for central government to finance effectively, especially if there are a couple of layers of state and municipal government in between. I think that this may delay the impact of a fiscal stimulus on the water sector by 18 months to two years. Until then, there will be a lot of politics.
2) Is this high noon for private water? - On the one hand, we have governments around the world looking to increase their involvement in infrastructure finance . On the other hand, we have private developers struggling to pull together major power and water projects. It doesn't look good, but it isn't all bad news for private water either. We're going to see public finances stretched to the limit over the next year or two (Italy for example may already be there). At the same time, there's going to be increased demand for safe investments which offer steady returns. Combine this with the fact that central governments are inefficient at allocating finance to local utility projects, and there is a very good reason to believe that private water will come bouncing back.
3) Will scarcity continue to alarm? - Water scarcity solutions have made very good business over the past few years, but how much of the growth in desalination, water reuse and water rights trading has been driven by the real estate boom in places such as Dubai, southern Spain and the U.S. West? The pressure that property development exerts on water scarcity will be felt less keenly during 2009, but climate change may play a larger role. We've already seen how climate change in Australia has resulted in a massive increase in water infrastructure spending. Southwest states of the USA could be next. Scientists from the Scripps Institute of Oceanography in San Diego, California, suggest that there's a 50% chance Lake Mead on the Colorado River will be empty by 2021. The capacity of the lake is more than twice the annual output of all the desalination plants in the entire world. That's the scale of the challenge we have on our hands.
4) Will higher regulatory standards be a victim of the credit crunch? -- The three most important regulatory bodies in the world are the U.S. Environmental Protection Agency, the EU Environment Agency and China's Ministry of Environmental Protection. It's likely that they will be more active rather than less active in the future. With a Democrat appointee in charge of the USEPA, we're likely to see much tougher enforcement than was the case during a Republican administration. The EU will be enforcing a raft of old directives that are starting to apply to new members, as well as preparing for the introduction of the big one -- the Water Framework Directive in 2015. We would also expect the strengthening of MEP in China to continue. Rather than fall victim to the credit crunch, expenditure on higher environmental standards may turn out to be a conduit for "the Stimulus."
5) Do lower oil prices mean an end to the water boom in the energy economies? -- The match between countries with plentiful energy and scarce water has been a boon for the water industry over the past few years. One might assume that $40 oil might lead to the reverse of this situation -- where countries which need to spend the most on water, don't have the money. There are two reasons not to be concerned. The first is that the energy economies have large surpluses, and may continue spending until the next up-turn in the oil price comes. The second is that demand for water scarcity solutions is becoming more inelastic as the crisis mounts. Expenditure may need to continue, regardless of the oil price.
6) Where will the GWI Water Index be in a year's time? -- The past year has been a horrible one for investors. The water sector has only narrowly been able to hold on to its reputation for outperforming the main indices. The GWI World Water Index fell by 35% to 64.8, compared to a 42% fall for the MSCI World Index. Water took a dive alongside the rest. Toward the end of the year, we started to see the first evidence of decoupling -- where water utility stocks outperform the market because they offer steady yields. I expect it to continue in 2009. Predicting where the market moves next is a mug's game, but in our office sweepstake, I bet on 82. WWI
Author's Note: Christopher Gasson is publisher of Global Water Intelligence, a monthly journal published by Media Analytics Ltd., with offices in the UK, India, Philippines and China. To send him a message, click here.