INVESTING IN WATER

It all started with

The Big Short, the book and movie about how über investment genius Michael Burry predicted – and cashed in on – the popping of the US housing mortgage bubble in 2008. This, and the subsequent worldwide economic meltdown, left us with a shaky sense that the things we once thought of as stable are just so much raspberry jelly wobbling on a base of semi-set custard. But, as every seventh-grader, politician or telesales operative can tell you, it’s the person who has the last word who will be remembered. And the last word in that movie was memorable. It was a typed card that said:

‘Michael Burry is focusing all of his trading on one commodity: Water.’

And that got us all thinking. In one sense it’s a no-brainer, but in another sense it’s a really complex issue. Firstly – after air – water is probably the most valuable substance on the planet. If you haven’t had a drink for two days, you’ll eagerly swop your engagement ring – or your car – for a litre of water. So, yes, in that sense it’s a no-brainer. But here’s where it gets tricky. How do you invest in something that simply falls from the sky ‘on the just and the unjust’ – or, to misquote the Book of Matthew, on the wise and the unwise, on the fiscally shrewd and the financially reckless alike? It’s a bit like the old adage that money doesn’t grow on trees, which Douglas Adams so eloquently illustrated in The Hitchhiker’s Guide to the Galaxy:

Since we decided a few weeks ago to adopt the leaf as legal tender, we have, of course, all become immensely rich. But we have also run into a small inflation problem on account of the high level of leaf availability, which means that, I gather, the current going rate has something like three deciduous forests buying one ship’s peanut. So in order to obviate this problem, and effectively revalue the leaf, we are about to embark on a massive defoliation campaign, and – er – burn down all the forests. I think you’ll all agree that’s a sensible move under the circumstances.

Adams’s reductio ad absurdum shows what happens when we attach an artificially constructed value to something that is inherently priceless.

Think of what we have, in fact, done with water – all pretty much as a result of distributing it ‘cheaply’, largely for political reasons and to appease the big users like agriculture and mining. But,  unfortunately, we humans tend to confuse the concepts of ‘price’ and ‘value’ so we assumed that – because it was cheap – we had an inexhaustible supply. Which, ironically, we do, but only if we don’t get silly, and devalue it. Unfortunately, though, as the late, great Douglas Adams inimitably illustrates, humans are actually rather silly.

So, before we start thinking about ‘investing in water’ like one of Wall Street’s hottest hotshots, let’s ask ourselves some pertinent questions:

• How have we valued water in the past?
• What’s changed?
• So now what? How do we actually ‘invest’ in water?

How have we valued water in the past?

In a word, illogically. The one thing on earth that we depend upon most critically is the one thing we squander, throw away and – not to put too fine a point on it – defecate in. Of course, in some places where water is not so available, we have put a greater value on it … sort of. Take Johannesburg – an excellent example of how we really value water. It’s one of the very few cities in the world situated on a watershed, so it’s always been water-constrained. But we value gold more than water (until you haven’t had a drink for two days, of course), so we have gone to extraordinary lengths to obtain sufficient water to keep the city – and the mines – going. Johannesburg gets its water through interbasin transfer schemes from KwaZulu-Natal and – even more so – from the Lesotho Highlands Water Programme, which means that much of the city’s water is imported from a foreign country.

So it seems that we are prepared to pay vast sums of money to get access to water, but once we have it, how do we treat it? Sticking to our example of Joburg, it’s pretty much a case of use, abuse and refuse (the latter is a noun, not a verb). We use it in the mines, and let it stagnate in acid-rich slurry ponds to pollute groundwater; we water crops with it, and allow dissolved fertiliser and pesticides to return to the rivers; we use it in our homes and flush it away into treatment plants that ultimately return it to the sea via increasingly eutrophic rivers. In short, we spend vast amounts of money to acquire access,
expect to pay minimal amounts for it and, after we’ve used it once, we pretty much flush it away.

This attitude, explains water strategist, Anthony Turton, ‘is encapsulated in the paradigm of scarcity. The Dublin Principles, on which integrated water resource management (IWRM) is based globally, tells us that “water is a finite and vulnerable resource”.’

The scarcity paradigm, he continues, ‘has only two tools in the box – getting more by building dams, and using less by managing demand. These are very blunt instruments as the Day Zero saga has shown us.’

The paradigm of scarcity, he explains, ‘exists in a world dominated by the linear economy. We regard water as a stock, to be used once and then discarded, as all linear-process thinking dictates. In this model putting money into water is seen as a cost to be avoided and only spent by government.’

But, as he points out, water is not scarce. It’s only fresh water that is. Actually, even that is not 100% true – it’s only accessible, clean, fresh water that is.

What’s changed?

Well, nothing. And everything.

Nothing, in that the systems in place are still archaically wasteful. And everything, in that the sickly, dehydrated, semi-starved pollution-mutated chickens have come home to roost. Johannesburg has woken up to the fact that acid mine drainage is destroying farmland, causing birth defects, and even poisoning crocodiles way downstream in the Kruger – albeit with a solid cadre of denialists.

And Cape Town – nuff sed. We all know about the Cape Town water crisis, and even though the winter rains have been pretty okay, it’s not over yet. We’ve woken up, and we are – slowly – wising up. But perhaps too slowly. Failure to effectively address the water issue could have frightening consequences
that will inevitably impact on the economy. Turton puts it into perspective: In 2002 South Africa became a water-constrained economy, and in 2015 it became capital-constrained. This means that unless we find policy certainty that attracts both technology and capital back into the water sector, we are doomed to succumb to the slow onset disaster of revolution driven by growing unemployment and fuelled by the anger of the dispossessed.

So, how do we actually ‘invest’ in water?

On the practical side, it’s a good time to consider harvesting rainwater or putting in a borehole or wellpoint. But there’s a lot more to drilling for water than you may think. Charl Marais, CEO of Countrywide Drilling, explains: ‘As well as the physical factors, like where to drill and how to pump, store and deliver the water, there are a lot of legislative and planning issues that require careful negotiation.’ So – just like you want a good financial advisor before you dive into the stock market – you should consult a knowledgeable professional who can guide you through every aspect of acquiring water security. But that’s not investment, that’s just common sense.

So, before we discuss the actual mechanics of investing in water, let’s look at The Big Short quote more carefully: ‘Michael Burry is focusing all of his trading on one commodity: Water.’ There’s the rub. Water is not a commodity.

Michael Burry is not investing in water, as such. He is, he explained in an interview with financial media house, Bloomberg, investing in farmland with good water supply. And that’s wise, because water is not a commodity. It is, according to Turton, a flux. And, while it can – technically – be stored, it can’t be created or destroyed, only circulated. ‘Water’, he says, ‘moves in time and space. Good stewardship is recognising water is not a stock to be consumed once and discarded. If we respect water and treat it as a flux it comes back to us in time and space.’ Good stewardship is not about hoarding; it’s about equitable distribution. So, the best way to invest in water is perhaps to invest in companies involved in water infrastructure – particularly the more sustainable side of infrastructure.  Turton suggests two areas or strategies. The first is the provision of basic water infrastructure where none exists – and this is, anyhow, a basic human right (with profitability just an added bonus). And the second is in the development and implementation of water recovery and storage. This, he says, ‘is likely to become the cutting edge of smart investment.’ But it requires that we embrace a paradigm of abundance based on the known chemistry and physics of water, constantly flowing around the planetary atmosphere and through the biosphere driven by the hydrological cycle. The water we drink today went through a dinosaur kidney 65 million years ago, and a human kidney about a week ago. Water is therefore a flux, moving in time and space, but we manage it as a stock – as something of finite volume in a linear economy. If we change our thinking we now embrace the circular economy, and unlock the known chemistry and physics of water as an infinitely renewable resource.

Strangely, while the above is actually common knowledge – we all learned about the hydrological cycle at school – it’s taken an awful lot of lobbying by environmental and human rights activists for us to start thinking about ways to practically implement this inherent quality of water in order to rationalise our use, distribution and recovery of one of our most strategic resources. And – hey – here’s the good news: it can be profitable.

It is in this circular economic model, Turton explains, ‘where investment happens. Because – unlike in the linear economy where cost is to be avoided – in the circular economy investment yields returns.’ Water is the ultimate economic enabler, he continues, ‘so there are also multiple transactions that drive this yield. So investment into the technology that recovers water from waste, removes salt from the sea and mine water, and recycles water is very smart indeed.’

And all this could be summarised as good stewardship, which makes sense. There’s no point in investing in water if we don’t stop treating it like garbage – that’s about as sensible as burning down all the trees to prop up the leaf exchange rate.