Dieter Küffer of SAM Sustainable Water fund talks to Tomas Hirst about global supply and new technology.
Q. There is no absolute shortage of water, how can we explain scarcity?
A. The definition of water scarcity is having less than 1,000 cubic metres per person per year. There are areas in China, India and north Africa that fall some way below that and face significant scarcity. Other countries, however, such as Brazil, have an abundance of freshwater that exceeds their needs. While we would agree that globally there is probably enough water, the problem is ensuring that those who need it can get access to it.
Q. What are the areas that need to be developed to address this concern?
A. The problem is linked to infrastructure but there can also be geographical barriers. If it becomes economically advantageous to invest money into water efficiency and new technologies then people will do it. Water utilities are dependant on government policies, but on the technology side industry plays a big role. Huge amounts of water are used in industry, particularly in the energy and agriculture sectors.
Q. What measures are governments looking at to deal with the problem?
A. In China there is the South-to-North water diversion project, which it is estimated will cost around $60 billion (£39 billion). The concept is to transport water from rivers in the south of the country to the drier population centres in the north. In Singapore, which is a leader in Asia for water technology, the government announced that 2% of its supply is recycled. Their target is to reach 30% over the next few years and they have the technology to achieve it.
India used to subsidise energy for pumping ground water but people pumped too much and the water table started falling. They subsidise micro irrigation technologies, which helps save water. Israel has also been investing in agricultural water use efficiency. (article continues below)
Q. Is desalination a realistic prospect for producing a sustainable source of freshwater or is it likely to remain too expensive and inefficient?
A. Without subsidies it costs about $1 per 1,000 cubic metres of freshwater produced. There are products in the pipeline that might help reduce these costs but it’s likely to benefit households more than industry, although it depends on the industry. If you’re dealing with a thermoelectric power station it might be able to absorb the costs but for low margin industries like agriculture they would struggle to afford it.
Q. Are there policy risks to investing in this area with governments able to renege on commitments?
A. The water industry as a whole is quite regulated so the state does have a lot of impact. Our approach is to look at suppliers of technology rather than simply at water utilities, which make up a maximum of 20% of the portfolio over a cycle.
In the US market investment is driven by municipally-owned water utilities. Most of these are financed by municipal bonds, also known as water bonds, and although the market for these hit problems in 2008 they have recovered well. One exception, however, has been California, which postponed its water bond issue.
In Asia, China is the major market. There is talk of a five-year plan and they expect a tripling of environmental spending over that period.
On the technology side, most listed water companies already have products and earnings. This means that they are not a speculative bet on potential new technologies.
Q. Has water efficiency become a priority for companies?
A. The increasing use of micro irrigation in agriculture allows farmers to use water more efficiently, which has both cost and environmental benefits. Water providers have also been moving to avoid waste. Manila Water, a water and wastewater services provider in the Philippines, has reduced its leakage rate from around 70% to 14%. The key driver of this is cost. Water prices are moving up in countries such as China and so they should have the motivation to keep spending in this area. In Europe the opposite is happening and prices are falling, but they’re ahead in terms of technology.
Q. How has the SAM Sustainable Water fund performed since it was launched?
A. Since inception in September 2001 the fund has gone up 43%. Over the crisis the fund corrected more than the MSCI World index because of our exposure to Asia but it rebounded strongly in 2009, outperforming the index.
Q. How big is the fund and is the investor base largely retail or institutional?
A. The fund is €1.1 billion (£900m). Most investors in the fund are private and retail investors, but we also have a couple of institutional investors. The latter tend to view water as an asset class that has a historically low correlation to equity markets and so can be included within a portfolio for diversification.