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Consider A Global Watershed Opportunity
Ivy Funds

Ivy Investment Management Co. examines the investment implications of increased global demand for clean water for consumer and industrial use from the deserts of Arabia to the growing cities of China.

Someday the developed world, as well as emerging markets, may kick its century-old petroleum addiction with alternative fuels for cars, homes and industry. In fact, some of the most interesting developments in solar power are now occurring in China, something we have seen there first hand.

There is one commodity, however, that not a single person or business on the planet can live without, and that appears to be in increasingly short supply. It’s also a commodity that the United States generally manages more efficiently than the rest of the world, with some of the most innovative and environmentally friendly technology. It is life’s most essential element — water.

We estimate that the current private-sector global revenue stream of water-related businesses is about $365 billion a year, not including the bottled water business, which amounts to another $85 billion a year globally. It breaks down as follows:

$138 billion for waste and wastewater treatment (filtration projects such as an Orange County, Ca. effort to turn toilet water into drinking water (hear how this is being done at www.npr.org Jan. 25, Morning Edition)
$80 billion for industrial water treatment such as water from nuclear power plants and aluminum factories
$40 billion for infrastructure such as dams, water quality improvement for lakes and drinking reservoirs and flood control measures
$65 billion for values and pumps
$42 billion for residential filtration, piping and water management; testing equipment and other related spending

Compared to most commodities these days, water is still a bargain in the United States. We estimate the average water bill will go up 5 to 7 percent a year through 2010, all things being equal. Compared to the rest of the world, we have a lot of fresh water, and thanks to environmental rules in place since the 1970s, much of it is cleaner than it was 30 or 40 years ago. An example: Lake Erie, one of the Great Lakes.

Current reservoir storage capacity per person (cubic meters of water)

North America	5,660 each for 326 million people
Europe	1,486 each for 729 million people
Asia	353 each for 3.57 billion people
Source: Foundation for Water Resources

It’s a much different story in India, China, the Middle East and emerging countries, where, as a visitor, you would be well-advised not to drink the local tap water. Economic growth has led to water price increases of 15 to 20 percent a year, and we believe this trend will continue through at least 2010. Increasing pollution in China and India simply compounds the problem, making scarce water supplies even more valuable. Asia’s growth demands have stressed its watersheds.

For instance, nearly half of China’s population lives in the rapidly growing northeastern provinces, which has only 14 percent of the country’s water supply. What’s more, just 22 percent of China’s urban wastewater is treated, and fewer than half of the 660 largest cities have municipal wastewater-treatment plans. China intends to spend $125 billion on water-related projects in the next two decades.

India’s current water isn’t much better than China’s. In its most populated state, Uttar Pradesh, water is deemed unfit for human consumption. In 40 years, we believe India could potentially run out of water for residential and industrial customers, and may have to conserve it for strictly agricultural irrigation needs. India loses about 50 percent of its water because of leaks, and plans to spend $5 billion to fix its system and $4.5 billion a year to add new capacity.

Water is an area where the United States retains a competitive advantage. Not only do we have more and better quality water than China and India on a per capita basis, we are more efficient at using this resource than the world as a whole. In fact, China is the most wasteful country on earth when it comes to water. It takes the Chinese over 3,000 cubic meters of water to produce $10,000 worth of GDP (gross domestic product) compared to a world average of $500 and a U.S. average of under $500. (Source: International Monetary Fund). In the US, the average suburban household consumes about 350 cubic meters of water a year. A cubic meter of water is about the same volume as six barrels of oil....