Water scarcity. The key challenges in meeting the demand.
There's plenty of water on Earth. Indeed, it covers 70% of the surface. The problem is, not much of it is useable. Freshwater – safe for us – accounts for as little as 3% of the entire world's water. With demand still growing, governments and the private sector need to act.
Water use has more than tripled since 1950s. According to forecasts, the demand for water will continue to grow at a fast pace. Meeting this need will be a huge challenge, given ageing or poor-quality infrastructure, growing population, and climate change. Around two billion people worldwide currently lack access to water, and by 2030 we can expect a 40% supply-demand gap.
How does climate change affect water?
The frequency and severity of natural disasters and weather extremes have increased significantly in the 21st century. We are experiencing an increasing number of devastating floods, droughts, heatwaves, cyclones, hurricanes, and fires. Globally, the number of droughts is up fivefold since 1950 while the number of floods has risen by 15 times. Both floods and droughts are fueling water scarcity.
Higher temperatures and more extreme, less predictable weather conditions are affecting availability and distribution of rainfall, surface water (snowmelt, river flows, and lakes), and even the sustainability of large and ancient groundwater aquifers.
Another issue to consider is the rise in sea levels, which are projected to increase by between 60 and 200 centimeters this century. Even if we manage to keep global temperatures from rising to 2 degrees Celsius by 2050, at least 570 cities and some 800 million people will be exposed to rising seas and storm surges.
What drives water demand?
There are three key factors driving water consumption: population growth, urbanization, and the rise of the emerging middle class.
Overall, urbanization helps improve access to water in developed and emerging countries. However, it can also result in negative side-effects. In the US, for example, residents in Reno use 1,166 liters per person each day, while in rural Africa the average daily water use is 20-40 liters per person. As these statistics seem to indicate, improved access might induce consumers to take an overly liberal approach to water use.
The rise of the emerging-market middle-class could lead to water challenges if these consumers adopt consumption patterns seen in countries with higher GDP-per-capita levels. These include a shift from grain-based diets (low water intensity) to protein-based diets (high water intensity), as well as increased consumption of water-intensive non-food products, such as fashion items and electronics.
What is the true value of water?
While water is an essential part of life, consumers pay heavily regulated and subsidized prices, distorting the long-term economics of project finance. Currently, the average price for water and wastewater is USD 2.06 per cubic meter, which falls well short of its true capital cost. Global Water Intelligence estimates that water tariffs need to increase by 5.9% every year to achieve the UN Sustainable Development Goals by 2030.
The price/value mismatch is most evident if the true environmental cost is incorporated. Research by Trucost estimates the unpaid environmental cost of water consumption by global primary production and processing business sectors at USD 1.9 trillion, or around 2.5% of global GDP.
Moreover, when we compare so-called leakage rates with water prices, a clear negative correlation appears. In Mexico, for example, where prices are lowest at USD 0.49 per liter, the water leakage rate is highest at 44%. So, not only do higher water prices make the economics of investing in new water infrastructure more attractive to external capital providers, but they also seem to result in improved investments in existing infrastructure.
Can the private sector close the water investment gap?
Water infrastructure is extremely capital-intensive and underinvested, with estimates ranging from USD 7.5 trillion to USD 23.1 trillion needed for additional global water and sanitation infrastructure by 2030.
Looking at private sector investments in emerging markets, it is clear that investment in water has been lagging behind and is reliant on public funding. Over the past 30 years it has averaged USD 1.6 billion, while transport and energy investments averaged USD 14.9 billion and USD 20.5 billion, respectively. If this trend is to change, the private sector has to be involved. That will include public-private partnerships, as well as innovative financing that matches capital markets with specific projects through green and blue bonds.
Governments and the private sector need to act
Given the water-related challenges, we see a significant need for the world's governments to increase their focus on issues such as the alternative protein, circular economy (i.e. systems aimed at eliminating waste and the continual use of resources), and the raising of awareness among consumers as to their impact on water stress.
Nonetheless, as water scarcity is an increasingly global problem, we anticipate that water infrastructure will be a growing investment theme for the private sector.