Big Data Pumps Life into Water Investment
By Scott T. Rickards
In our data-rich financial universe, a fundamental economic question remains unanswered: at what cost is it economical for the world's largest cities to bring additional water supply online?
The oil industry will tell you that $100/barrel oil is the value below which capital allocation can earn a return. Given its critical importance in our lives, why does the water industry not have a similar fast answer to the question? Is the 'global water crisis' a resource crisis or perhaps a capital crisis?
Precisely because of its critical importance, the water industry has been given a pass on cost transparency by everyone from politicians, to Wall Street, to economists due to the unimaginable consequences of not having an abundant supply of fresh water. As a result, the subject of water production costs remains largely unexplored and water has taken a back seat to virtually every other resource in the battle for private investment dollars.
The large scale and non-uniformity of water financial data is also a major challenge to creating a precise water finance benchmark; no two water enterprises publish comparable financial statements. Water volumes, interest expense, energy costs, and capital expenditures must first be extracted from unstructured data sets often thousands of pages in length. Then, hidden costs and subsidies must be interpolated and modeled alongside the available information. Complex data challenges such as these are the main barriers to a successful and precise global water cost index.
To be clear, the subject of water scarcity has not been ignored. Indeed, there are a number of benchmarks and even exchanges which value the scarcity of physical supply. Chile has an electronic water exchange as does Australia and several other important water-short regions. Others have attempted indices which measure the scarcity value of physical water supply.
What's missing in these marketplaces and valuation metrics is an accounting of the massive capital spending required between the raw resource and the production of 'finished water' at your tap. Ugandais endowed with widespread and plentiful natural water resources, yet 93 percent of the country does not have access to piped water in their home. Facts such as this lead one to believe that the 'global water crisis' is in fact, to a significant degree, an investment crisis – and a grand challenge in Big Data.
To that end, the Water Cost Index being developed by IBM and Waterfund seeks to shed light on exactly what it costs the world's major cities to produce a unit of 'finished water' by applying IBM's Big Data expertise to the volumes of unstructured information about water that exists today. Accounting for big-ticket items such as capital expenditures, debt service, and energy costs, how much does it really cost for Los Angeles, Jakarta, Singapore, Dubai and other cities to deliver water to homes?
Once complete, the index can be used to ring-fence and manage risk exposure to major water infrastructure projects. To take one specific example, the Jordan Red Sea Project seeks to intake and desalinate water at the Red Sea and deliver it via pipeline to severely water-stressed Amman, Jordan and the Dead Sea. The geopolitical upside of a successful outcome to this project is obvious, but total project costs run upwards of $25 billion dollars. Billions have already been pledged by major governments and the World Bank has recently given its seal of approval.
However, private investment will certainly be required. If the index could be used to create insurance to underwrite the investment exposures of private financiers in situations such as the dire one faced in Jordan, so enabling the investment to take place, it would be a valuable tool in changing how business gets done in the water industry and in extending and revamping the world's water infrastructures.