World water markets: High investment requirements mixed with institutional risks

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Over the next few decades, investment in water infrastructure as a whole will have to increase to satisfy growing demand – something that will require rapid, determined action by governments and financial cooperation with the private sector, write Eric Heymann of Deutsche Bank Research, Deirdre Lizio of the Robert Bosch Stiftung and Markus Siehlow of the Dresden University of Technology in a June report.

The following contribution was authored by Eric Heymann, Deirdre Lizio and Markus Siehlow.

''The world's water markets are confronted with major challenges. The growth of the global population goes hand in hand with a rise in demand for food, energy and other goods. This means that demand for water will increase accordingly – in the face of a limited supply of this vital resource.

Usage conflicts are inevitable, and will become more acute on account of wasteful use and pollution. Scarcity of water is a humanitarian problem and it can curb economic growth. Climate change will amplify many water-related problems and create new ones.

We put the annual investment required in the global water sector at about EUR 400-500 bn. Measured by this yardstick, the sector is a picture of under-investment, especially because water prices in many areas are subsidised and thus too low. As a result, there is a lack of incentives for necessary investments.

The prices do not reflect the scarcity of water as a resource; wastage is encouraged. Corruption and the absence of ownership rights compound the problems. To turn the tide, water prices in many countries would have to be boosted. The need to incorporate social considerations in the process greatly reduces the scope for making such increases in practice.

Governments will not be able to raise the funding needed to cope with the upcoming tasks on their own. While there is considerable disquiet about private firms investing in the water sector, the public sector is simply unable to meet all the challenges single-handedly. For this reason, we believe it makes sense for governments and the private sector to cooperate more closely.

Makers of 'water technologies' stand to benefit from huge sales potential over the next few decades – despite the risks cited. There is likely to be a particularly sharp increase in the demand for efficient irrigation technologies, seawater desalination and sewage treatment facilities, technical equipment (e.g. pumps, compressors and fittings), filter systems and disinfection procedures.

We have used a scoring model to rank the attractiveness of various countries for investments in the water industry. The Top 20 include many countries from the Middle East that are rich due to their oil deposits, located in very dry regions and relatively stable politically. Two big industrial countries, Germany and the US, and the world's two most populous nations, India and China, are also among the Top 20 in our ranking. In principle, though, all countries require a substantial amount of investment in the water sector.''

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