Water Part 2

The Business of Water

The securities industry in Canada has begun packaging a variety of products that would allow investors to profit from the anticipated growth of companies in the water business. There is little doubt that the private sector has a crucial role to play in solving challenges facing a world that depends on water. But is this the investment opportunity of a generation, or a sector with so many ethical questions, social predicaments and environmental risks, that investors are better off staying far, far away? The answers may lie somewhere in between.

Now nobody wants Coca Cola, for instance, to own the local source of water (think of the outrage from Pepsi drinkers). But in the strategic planning sessions at Coca Cola, I really doubt they are discussing how to corner the global supply of clean water, or for that matter the local supply, as this would seem to be a good way of having angry mobs with pitchforks run your business out of town. That kind of response from your customers is definitely bad for the bottom line.

But many communities around the world are desperate to upgrade old infrastructure – pipes and valves, pumps and taps, and wastewater treatment facilities and the like. Others are looking to install new infrastructure where it has never existed before. The private sector is well suited to these tasks, but much of their record so far is littered with debate, retreat, and in some cases outright failure.

As far as companies profiting from the supply of my water is concerned, I generally don’t have a problem with it. Actually I don’t think that I pay enough for my water. If your company makes the most efficient and cost effective taps for instance, or can build the most ecologically sensitive wastewater treatment facility, then I will happily buy your product, or expect my municipality to purchase it and bill me accordingly, and like any business I wish to support and encourage, I don’t begrudge you making a profit from your efforts and expertise. But please don’t abuse your position as a monopoly water provider in my community by arbitrarily raising prices, or cutting corners on the quality of water you provide. And if your company has an international reputation as one that puts profits before human rights in the provision of water, then I will get on my soapbox and call you out. I’m sure the execs at Coke are quaking in their boots now.

While there are hundreds of companies active in the water business, CIBC was the first Canadian firm to offer an investment broadly based on the water industry. Late last year they introduced their Water Growth Deposit Notes, whose return is based on the performance of ten global companies. They are: Suez SA, Veolia Environnment, Danaher Corporation, United Utilities PLC, ITT Corporation, Kelda Group PLC, Geberit AG, AWG PLC, Pennon Group PLC, and Aguas de Barcelona SA. (see www.cibcppn.com). Some of these companies have avoided raising the ire of citizens and activists, others have not. A consortium led by the Canada Pension Plan Investment Board recently purchased the Anglian Water Group, AWG PLC, who along with United Utilities PLC, Pennon Group PLC, and Kelda Group PLC are fairly inoffensive water utilities based in the UK. The freshest dirt to be found on this bunch is the Cdn$20 million fine being levied by the UK government against United Utilities for favouring certain higher cost sub-contractors, and then passing these costs along to consumers. This represents the type of monopoly-fuelled abuse that is feared by those who object to private control of water delivery.

Others in the CIBC portfolio such as Danaher Corporation make essential and innovative infrastructure that includes advanced ultraviolet water treatment systems, while Geberit AG makes news for producing extremely efficient plumbing fixtures like combination shower/toilet units. But look more closely and you find that ITT Corporation is an important supplier to the US Department of Defense (night vision goggles and other gear). And Veolia Environnement, the second largest company in this group, has been in the water business since 1853, but was the seed that grew into the disgraced and now reorganized Vivendi Universal. And when it comes to making an appearance on the hit list of global activists, few can match Suez SA, who so totally bungled their opportunity to help connect South America to clean water that they packed up shop, turned tail and went home. Again, not good for the bottom line, and many of these global water providers are now concentrating efforts to upgrade existing infrastructure in North America and Europe, where they can presumably earn greater profits than in the third world, and perhaps with less risk too.
CIBC may be first out of the blocks with this kind of product, but one thing you can bet on is that similar types of water-based investments will see heavy promotion in the years to come.

Prospective investors will have questions and concerns, and these packages should be unwrapped and examined very carefully. Next month I will review the Criterion Water Infrastructure Fund, which is now being heavily marketed here in Canada. This fund is managed by Pictet Asset Management SA, a Swiss investment firm with a history dating back 200 years, and managers of the world’s largest water-focused fund with over $4 billion in assets.