We're In Hot Water

Water quality and quantity issues and problems around the world are beginning to get more exposure in the mainstream media. Expect this trend to continue and intensify in 2007.

In turn, the commercial water services industry, which is geared toward helping solve these problems, is likewise getting more and more attention. Strategic industrial investors are clamoring for a bigger piece of the water “pie”—and players like General Electric, 3M and Home Depot have all made major purchases in the last few years.

As the dollars in private equity funds have ballooned to historic highs, it is not surprising that hundreds of these specialized investors have also looked at the burgeoning water industry—well-known names like Culligan, Water-Pik and Rainsoft are now owned and controlled by private equity owners.

Last, but not least, individual investors are also pouring into the water industry in search of good prospects and gains. New water-oriented mutual funds are springing up, and established players such as the Summit Global Management fund are rushing to put a new onslaught of dollars to work.

No doubt about it—water is hot.

More questions than answers
Nonetheless, it seems safe to say that the water industry still poses more questions than answers. Billions of people around the world still have no access to clean drinking water, or to sanitary sewer and wastewater disposal systems. Almost unimaginable expenditures are required to correct this basic injustice. Mind-numbingly huge expenditures are also required in the more developed world to ensure that water distribution and treatment infrastructure keeps up with population—as much as a trillion dollars may be required over the next two decades in the U.S. alone.

It is unclear, to say the least, where the funding for these issues will come from.

From an industry point of view, this fundamental challenge is driving the business trends and developments shown in Table 1. Many regions are experimenting with forms of privatization of water infrastructure—with varying levels of acceptance and success. There is a growing focus on water conservation and wastewater reuse as raw water shortages become more dangerous. Technologies for water treatment, such as seawater desalination, continue to make incremental advances and decline in cost, and an increasing number of concerned citizens are taking it upon themselves to treat their water right in their own homes.

All of these trends and issues point to a clear and obvious conclusion: We are all going to have to pay more and more for water in the future.

There are bigger issues at work here too. International water disputes are framed in the context of random geopolitical boundaries, whereas logical solutions to water problems should be based on a watershed basin approach.

Huge water diversion projects and massive water contamination problems in China could eventually impact the water situation in all of Asia. And as the phenomenon of global warming is better understood, its implications for the world’s hydrologic cycle are potentially huge—with changing weather and rainfall patterns.

The people of the world face an impending water crisis, and if we don’t rapidly turn our focus toward this problem, severe shortages could begin to occur in the near future in many areas.

However, with more logical watershed-based policies and with a more collective geopolitical effort, there are means of ensuring that water will be available to all in the future. For product and service firms in the commercial water industry, this represents a huge opportunity.

Sidebar

TABLE 1: The water market in a nutshell

Key drivers behind the market:

    Water quality and water scarcity problems are getting worse worldwide;

  • Public awareness and understanding of water problems is increasing;
  • As a result, regulation—and enforcement of regulation—is increasing;
  • Huge economic (and human) capital investments are required.

Resultant trends and developments:

  • Forces toward privatization (public-private partnerships) are still strong;
  • A massive ownership rearrangement and industry consolidation continues;
  • Private equity investors are becoming significant players in the industry;
  • There is more focus on efficient water use, and water recycling and
  • Incremental but inexorable technological advancment continues; and
  • Consumers and residential users will have growing market power.

Inescapable conclusion:

  • Water prices must—and will—rise to higher and higher levels.

Steve Maxwell is managing director of TechKNOWLEDGEy Strategic Group, a Boulder, Colo.-based management consultancy specializing in merger and acquisition advisory services, strategic planning, and market research for water and broader environmental industries. He has advised dozens of environmental services and water firms on strategy and transactional issues, and can be reached at 303/442-4800 or by e-mail at maxwell@tech-strategy.com.

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