Can't Beat the Real Thing: Water
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It is becoming a fashionable investment thesis the deeper we plunge into the 21st century that securing adequate fresh water for expanding economies and their middle classes will be a challenge. This increased demand is putting enormous pressure on the water delivery models that have existed for the past century in which water has been viewed as a basic human right secured by government decree, regulation, subsidization and transmission.
The problem is as widespread in the developed world as it is in the developing world. In the U.S. water, for the most part, is a governmentally-regulated resource, with state and municipal water suppliers charging a politically-driven rate for water as opposed to its production price. Since if you subsidize something you get more of it, water usage in the U.S. is obscene. Price controls always create shortages and distorted images of demand. In Southeast Asia the driver is tied to the infrastructure costs versus the size of the population. And yet, the percentage of the population with access to improved water has risen dramatically over 20 years. The arguments surrounding fresh water production always leave out the price component.
The World Can No Longer Afford Cheap Water
Arguments against private production of water always fall back on the cost to the poor. The poorest people should not have to pay the real price for fresh water as it is a basic human right, it should be subsidized in some way by the local or national government. The commoditization of water is anathema to the bourgeois left who themselves have never in their lives had to think about water and assume self-righteously that no one else has either.
To that I say, “Go to Phnom Penh. “
Last week the Cambodian stock exchange began trading its one listed company, The Phnom Penh Water Supply Authority (PPWSA). The PPWSA may be the greatest single example of what one of those individuals, Ek Sonn Chan, that dares to change the world can do. I profiled this story when the IPO news broke back in March. I recommend familiarizing yourself with the story. The take away is that by instituting market reforms within the PPWSA and pricing water freely based on usage, they were able to transform Phnom Penh’s water supply from one of the worst in the world that served 12% of a population of 600,000 for less than half the day in 1993 to one that served 100% of 1.7 million 24/7 by 2010; surpassing much of the developed world in terms of price, quality, revenue collection, loss rates and, most importantly, profit. That profit has allowed them to expand into areas of the city that never had water service as well as now providing sanitation and wastewater treatment.
If they can pull it off in one of the poorest countries in the world, why is change so difficult in the richest? One word: politics. They have proven that the issue is not one of ideology but one of management. And in Phnom Penh the poorest people are ecstatic to pay their water bill.
Because, unlike the detractors of commoditized water, they understand just how precious it is and what it’s worth to them to not have their children drink filth.
In Chile, they have a commoditized system that allows any property owner to buy and sell the rights to the water on their land for whatever price they can negotiate. The result is a constantly adjusting price as the water available is put to its most productive use. Price regulates use and demand.
The Mekong River is the single most important resource in Southeast Asia and is as important a source of conflict as the South China Sea’s oil and gas reserves will be. Vietnam is 60% dependent on water flowing in from Laos, Cambodia and China, most of it through the Mekong. As Laos and Cambodia develop, that will create conflict over how the Mekong is utilized for water and power generation.
The Bottled Water Solution
While I would love to turn on the tap and have spring water gush forth, the reality is otherwise. The rise of bottled water in the U.S. to the status of #2 beverage consumed is often attributed to the health craze that has gripped an unhealthy population. That is just one aspect of the demand. Anyone who lives off a private well knows that clean water is not free. I have friends in places like Florida where digging a well will produce anything from the highest quality spring water to a hard, sulfurous, bacteria-rich concoction that one associates with volcanoes. Treatment solutions are thousands of dollars per household. Reclaimed and chlorinated municipal water is of very variable quality.
Drinking bottled water when traveling, while no guarantee of better quality, does grant the security of a particular level of quality. It is on that point that the beverage companies built their business onto which was grafted all of the up-market innovations into flavors, additives, and the like.
Critics of bottled water cannot offer up a reason as to why Americans are willing to spend up to two thousand times more for bottled water per gallon over tap water that does not fall back on evil corporate scare tactics or uneconomic appeals to fantasy about how to use other people’s money.
While one can debate water quality in places around the U.S. and Europe, in Vietnam it’s not an option. The freshwater supply in Vietnam is decreasing at 1% per year while the demand is rising at 1%. The price for fresh water will necessarily have to rise. Water treatment infrastructure has been under-invested and ODA grants for 2012 will reach more than $4 billion. Water treatment spending will likely grow at 6-8% per year for the foreseeable future.
In the developing world where upfront costs are large and require loans from the international financial community, the beverage companies with their expertise in building distribution networks have created potable water markets more efficiently than the local community could in many places, paving the path based on market opportunity. This has led to a huge market for them across Asia and Africa.
Coca-Cola (NYSE: KO), Pepsi and Nestle have a near monopoly on potable water in this part of the world because the local water supply is so poor versus their ability to bring known quality. Coke reported earnings last week and Asian growth dominated with sales rising 12%, twice as fast as their total revenue. Nestle owns nearly 80% of the Vietnamese market with their “La Vie” brand of bottled water.
Asians are very brand conscious and those who truly improve their lives will retain customers even in the face of competition. The vacuum created by mismanagement of the local water supply has allowed the multinational beverage companies to practically own the potable water market in some emerging markets. And once in place there is a disincentive to compete with them.
Some see this as sinister or anti-democratic, but in reality it is just practical. I brought up Cambodia earlier. Before the PPWSA’s turnaround, the price for a liter of dirty, unsanitary river water from the local water runner was more than what Coke sells a bottle of Dasani for. It was more than an average Cambodian earned in a day. Is Coke or Nestle evil for moving on that arbitrage or are they life savers?
What will the response then be? Will other nations begin to see the problems as they are and move towards adoption of Chile’s approach to marketable water rights and prices based on supply and demand or will the public goods model continue to languish in the face of competition from multinationals providing a solution at a price people are happy to pay?
Peter Pham has no positions in the stocks mentioned above. The Motley Fool owns shares of The Coca-Cola Company, and PepsiCo. Motley Fool newsletter services recommend PepsiCo, and The Coca-Cola Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.