August has not been a good month for investors in the water sector. It started with the news that Veolia’s first half results were much worse than expected. Veolia shares are down to about $13.4 from their 2007 peak of $65.65. The London-listed Aqua Resources Fund had to announce its net asset value per share had dropped 8.27% in 6 months.
While no one doubts that demand for water is increasing with the rapid urbanisation of the world, increasing population and threats from climate change. This combined with the rise in environmental regulations and increasing scarcity of water resources will require massive investment. The problem is who pays for the investment?
The current debt crisis means that Western Countries cannot take on ever more debt to fund investment, raising prices is an option for those that charge for water but politically very difficult. But in many of the countries were the need for investment is highest, there is no history of charging for water.
Introducing water charging is extremely difficult as the Government has found in Northern Ireland. Many countries just don’t have the systems to collect tax let alone establishing water charging when the infrastructure is in a state of disrepair or non-existent. Politically its extremely difficult, not only is it highly unpopular but also it tends to hit the poorest in society hardest, the very people who need clean water and wastewater the most.
Until there is confidence that the funding mechanisms for investment are realistic the water sector is likely to remain an sector with great promise and need but with significant risk for investors. The key is to look at the specifics of each country and to understand the regulatory and political environment in that country.
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