Water – The New Gold

In areas like the Middle East, a combination of huge wealth and cities booming well beyond their capacity is creating volatile new markets for this precious resource. As with any resource, dwindling supply and increased demand is a recipe for volatility. The question has to be asked: “Are we heading for a watershed moment?”

The new gold?

Various experts and industry analysts have touted fresh water as the “new gold” in recent years. But what exactly does this mean? Gold is the foundation for the world’s economy, as well as being recognised as a resource that holds a special intrinsic value in most people’s minds.

Surely, though, as the building block for life, water has an even higher inherent value for populations across the globe – but should it be viewed as a commodity or a basic human right?

Human right or commodity?

Ziad Abdelnour, President and CEO of New York-based private equity firm Blackhawk Partners, has written on the market prospects for water trading, throwing Blackhawk’s support behind water as a sterling investment opportunity.

Abdelnour believes that various factors – ranging from climate change to swelling global populations and industrialised agriculture “have increased the global demand for clean water and in turn, have pressured free market economists to suggest that wealthy market players are the most efficient solution to addressing water issues.”

But not everyone supports the use of market forces to solve water issues. The United Nations and various international NGOs and other organisations oppose placing economic restrictions on water.

In a discussion paper at the second World Water Forum in The Hague in 2002, these entities emphatically stated: “Water is the common heritage of mankind and should not be negotiated as a commodity.”

Furthermore, there have been accusations levelled at various international trade agreements and international economic institutions such as the International Monetary Fund (IMF) and the World Bank of trying to privatise a basic human right to turn it into a commodity.

According to Abdelnour, however, this fails to take into account a number of factors: “Today, most water goes through a complicated industrial process that begins with its extraction and ends in a complicated process involving pipes, dams and other sorts of unnatural facilities… In general these considerations involve the use of land, labour and capital thereby replacing the notion of a common resource into a value based product.”

Global Water Intelligence (GWI), which provides high-value business information for the water industry, sees the emergence of private equity investors as a catalyst for change in the water rights market, as well as highlighting the fact that recent environmental concerns “have created a market for acquiring and retiring water rights,” using Washington State as a particularly pertinent example of this trend.

GWI also sees biofuel and bio-ethanol production as creating a new demand for water rights, and pinpoints those who potentially stand to benefit from a privatised American water sector: “The main sellers of water rights include farmers who can see that selling water is more profitable than selling produce; municipalities with surplus entitlements; native American tribes; bankrupt businesses; and decommissioned industrial users such as power plants and mines.

International water trading

Abdelnour believes that in recent years international law has laid the foundations for the future trade of water, saying “50% of World Bank loans issued in 2002 to developing countries contained a clause that requested privatisation of water services,” continuing, “In addition to international institutions pushing for privatisation, trade agreements in the 20th Century have also created the legal framework for allowing the sale of water.”

In 2006, Aline Baillat a PhD candidate at HEI – the International Law section of the Graduate Institute, Geneva – prepared a paper entitled “Trade in Water and International Water Law International Water Markets: Solutions to Water Conflicts?” for that year’s International Studies Association (ISA) convention in San Diego.

In her paper, Baillat posits the need for a broader view than purely economic: “Economists’ proposals to create water markets along international watercourses often neglect the fundamental questions over water ownership and the definition of property rights. The creation of international water markets should be studied in the context of international water law and international trade rules and not in a legal vacuum, as is often the case.”

Liquid gold – water and conflict

The International Association for Water Quality (IAWQ) – a collective of students, scientists and business people raising awareness over potential future water industry challenges – foresees water disputes as being central to future developments in water trading, particularly in the developing world. The association cites China’s political crackdown on Tibet – where 10 major rivers either flow or originate – as well as disputes over clean water in Nigeria, as possible indicators of future conflicts surrounding water resources.

Contrasting with most economists analyses of the field, Baillat argues that international water markets are no easy solutions to water conflicts, adding that, “The major obstacles to international water markets and transfers are political rather than economic or technical.”

Baillat sees a vital need for a centralisation of decision-making processes, saying, “Water markets will be successful only if there is a central authority in charge of the common good and responsible for the monitoring of the ‘reasonable and equitable utilisation’ of the international river.”

Recent trends in water markets

Baillat argues that there are some preliminary steps that are crucial for establishing sound international water markets, such as “the initial allocations of water rights, the definition of a property regime of the shared international watercourse as well as the creation of a central authority”.

Baillat states that economists have been advocating the implementation of water markets for decades, because, from an economist viewpoint, “Scarce resources are best allocated through the market.”

She adds that, “In the case of water resources, water markets are supposed to improve water resources management, increase water allocation efficiency and calm tensions among users,” but that water market outcomes vary significantly depending on factors including the definition of water rights; transferability rules; the geography and existing infrastructures or storage capacities; enforcement and monitoring systems; and the access for all users to information.

The future for water trading

Abdelnour cites investing mogul Warren Buffet’s 2009 buyout of water treatment provider Nalco Holdings Company, in addition to other water-related investments, as an indicator of where the market is headed: “The move sent ripples through the investing community: a clear signal that investing in water is an untapped opportunity.”

While water markets have been implemented in countries such as Chile, Spain, Brazil, Australia and the USA, Baillat points out that, for now, water markets remain very localised, although “it is increasingly argued that water should be traded across borders as well”.

Abdelnour concludes that emerging markets – where per capita consumption is low and pollution levels are high – are ripe for water industry growth, particularly areas like the Middle East where significant wealth and population growth are fuelling the need for water.

As greater stress is placed on water as a resource, these markets will become ever more influential. Abdelnour claims that water use is rising at twice the rate of global population growth: “The supply of fresh water is relatively static; hence, the rapid rate of demand growth is, not surprisingly, causing some stress. “

The reasons for this include urbanisation, more water-intensive agricultural products, the increasing industrialisation of emerging markets and the impact of climate change. In relation to the latter factor, Abdelnour says, “Climate change affects everything from the food cycle, to manufacturing, to drinking supplies … (and) is expected to account for about 20% of the global increase in water scarcity in coming years.”

In light of these and other issues, it seems that rather than oil – the ‘black’ gold – it will be the ‘blue’ gold, water, and the contentious debates surrounding its position as a basic human right or an exploitable commodity, that will play a central role in shaping global markets in the decades to come.