Since then, every three years, the World Water Forum mobilizes creativity, innovation, and know-how around water. Serving as a stepping-stone towards global collaboration on water challenges, the Forum is a unique multi-stakeholder platform where the water community and the policy and decision makers from all regions of the world can work together to find joint solutions.

About a third of the world’s population is currently vulnerable to water scarcity. On the current trajectory, we estimate that by 2025, based on the most recent UN population projections this number is going to increase to about sixty six percent by 2025. This poses a great risk that the future wars will be fought not over oil but over water. Stockholm International Water Institute’s Senior Scientist Ms. Malin Falkenmark coined a term ‘water barrier’ to link the importance of water to the economic development of a nation. Water barrier indicates the level of water below which serious constraints to economic development would arise. She estimates this level to be between 1000 and 2000 people for every million cubic meters of water per year.

Water use is rising at double the rate of global population growth owing to rapid urbanization, more water intensive agricultural products, growing industrialization of emerging markets and the impact of climate change. The supply of fresh water is relatively static or not keeping pace with the growth in demand, thus causing stress. Rapid depletion of groundwater levels in countries like China and India are a cause of concern and could be a major hindrance in development of these rapidly developing economies. If the growth of these economies has to continue, investment in water management is inevitable. This resource problem further compounds as not all natural freshwater, surface water or groundwater is accessible for use. Exploitable water resources considers factors such as the economic and environmental feasibility of storing floodwater behind dams or extracting groundwater, physical possibility of catching water which naturally comes out to the sea etc.

Currently, in many countries around the world the ratio of exploitable water resources to the total water resources is close to 50%. For example, in a country like Lebanon a large part of country’s water resources are hardly exploitable. The groundwater losses to the sea that are accounted for in the assessment of potential yield come out as submarine springs. These resources are difficult to mobilize as the karstic channels in which the water flows are subject to mixing with saline water. Similarly, the floodwater running from the small watersheds of the coastal mountains is lost to the sea with little possibility of putting it to beneficial use. Thus, out of total water resources estimated at 4.8 Km3/year, exploitable water resources represent about 2.2-2.5 Km3/year. This presents an enormous growth opportunity to the companies in water management. Similarly, Supply side of the water equation can be improved by:

Water recycling: According to the World Bank, water recycling makes up just 4% of global supply. The potential is much larger: Israel recycles 80 percent of its sewage, using much of it for irrigation. Companies are moving from traditional water treatment technologies like sand filtration to more sophisticated technologies like membrane separation techniques. Companies like GE and Dow are already planning to increase their presence in a big way in these areas. Other companies having a significant presence in water recycling and treatment include ITT, Danaher, Halma, Pentair and Pall.

Desalination: It presents biggest opportunity in the countries where current water stress is the greatest. Currently, the cost of desalination is prohibitive. Already, there has been a huge fall in the cost of desalination. According to the International Desalination Association, more than 300 million people around the world rely on desalinated water and this is expected to grow eight fold by 2025. Some companies already in this promising sector are Kurita Water Industries, Doosan, Tetra Tech, Acciona Agua and Hyflux.

Water Infrastructure: It may be broadly classified as Dams, Reservoirs and Pipelines. The growth in dams and reservoirs is expected to be concentrated in Asia and Eastern Europe. Fast developing economies like India and China will need to invest a huge amount of money in developing water infrastructure. Countries like India have highly seasonal pattern of rainfall with 50% of precipitation falling in just 15 days and 90% of river flows in just four months. Whereas arid rich countries such as US and Australia have already built over 5000 cubic meters of water storage per capita, India’s dams can store only 200 cubic meters per person.

India can only store about 30 days of rainfall, compared to 900 days in major river basin in arid areas of developed countries. A review of developing nations also provides interesting data about harnessing hydroelectricity vis-à-vis the developed nations. Whereas developed and industrialized nations harness over 80% of the economically viable hydropower potential, in developing nations this figure is around 20% despite the fact that these nations have a desperate need of peaking power. Ageing infrastructure as well as dwindling groundwater supplies, growth in desalination and water recycling are boosting demand for new and replacement water pipelines and related products, such as pumps and valves.

Other Supply side Opportunities:

Virtual Water: The alternative to pipelines is the so called ‘virtual’ water trade, where water rich regions supply water intensive agricultural products to water-poor areas. Rising demand for meat and vegetable oils from developing countries is likely to necessitate this trend regardless of trade barriers. Canada, with 9% of world’s fresh water supply has the potential to be the obvious beneficiary.

Packaged Water: The packaged water industry is roughly worth US$115 billion in annual sales and has been growing strongly (6.2% by volume per annum) over the last decade. The current growth is mainly fueled by growth in China, Indonesia and India but the penetration rate of bottled water is increasing at a much greater rate in other developing countries as well. But the big question of the future will be where the packaged water would company source water in the future. In India for example, Coca Cola had to abandon its bottled water plant in Kerala (one of the provinces in Southern India) because of the rapid depletion of the ground water level.
Improving Agricultural Efficiencies: Reduction of water usage in agriculture may be attained by advanced irrigation techniques like drip irrigation. A lot of research on draught resistant plants has also helped in achieving agricultural efficiencies. There is a huge potential to use these efficient techniques in developing countries like India and China. Only 2.8% of arable land in china and 1.6% in India uses efficient irrigation compared to 100% of arable land in Germany and Israel. Companies like Monsanto, DuPont and Syngenta are investing a lot in the efficient agricultural techniques.

Improving Industrial Efficiencies:The industrial water demand is around 22% of the total water demand. It has risen from being 10% in 1940 to 22% in the year 2000 primarily due to rapid industrialization. But certainly, the rate of increase of the water demanded is not the same as the rate of industrialization. This is because of continuous improvement in efficiencies. As the industries become more mature, the amount of water needed for the production should further reduce.

Role of United Nations: As per a resolution passed by the UN General Assembly in July 2010, Water and sanitation are explicitly recognized as a human right. Later that same year a Human Rights Council Resolution was passed by consensus, confirming that the rights to water and sanitation already exist in international law, as they are derived from the right to an adequate standard of living and also the right to health, guaranteed under Articles 11 and 12 of the International Covenant on Economic, Social and Cultural Rights (ICESCR). In 2013, the UN General Assembly Resolution A/RES/68/157 and the Human Rights Council Resolution A/HRC/RES/24/18 both reaffirmed their recognition of the human rights to water and sanitation in consensus.

As per United Nations, the projected population in more developed countries is likely to remain constant in the next 50 years whereas the entire world’s population growth is expected to come from the less developed countries. This clearly suggests that water and water supply systems are increasingly likely to be a subject of utmost importance to sustain the human population in the future. Where water is scarce, competition for limited supply may lead nations to see access to water as a matter of national security.

A Case for Water Trading: We, at GCI, see water as the next biggest commodity which shall be traded in the world. It may play as big a role in the next ten years as Shale Oil and Oil Sands has played in recent times. History is replete with examples of competition and disputes over shared fresh water resources. Where ever the surface water (rivers, lakes etc.) are shared by two or more nations or even states, it has been constant source of conflict. For example the Nile, Jordan and Euphrates rivers in middle east, the Indus, Ganges and Brahmaputra in southern Asia, and Colorado, Rio Grande and Parana in the Americas. While we do not deny this to be happening in the future, a more plausible option seems to lie in water trading, both in spot as well as future contracts.
The current state of water trading is biased with little information which often leads to uninformed trading. In absence of reasonable market clearing processes, these trading errors cause inefficient prices. One research stream shows that biases in interpreting information leads to overconfidence in incorrect interpretations. Another stream is motivated by behavioral economics, and shows that traders generally account too little for “adverse selection,” which arises when trading in markets with better-informed agents (a strategic interaction between the trading and market-clearing processes). Whatever may be the reason, but inefficiencies in the market often lead to the formation of a clearing house. The same is expected to happen for water. For trading to exist, low switching cost is imperative. In case of water, the switching cost will be low once the infrastructure to transport water exists allowing seamless transfer of water from different suppliers to the buyers. Given the interest which infrastructure companies and the governments are having in this direction, we foresee this happening in the next decade for most developing and developed nations. Water pipelines are already being planned in countries like China and Spain and landlocked countries in Europe and Asia are expected to follow suit. The debate on considering water as a commodity is still on and a lot of countries are still not comfortable with the idea of seamless integration of the market. We anticipate the world market for water to be fragmented in different regional markets, so it is not possible to talk about a world price for water. Although the markets are liberalization all over the world, in many countries water markets are still highly regulated by the governments. As a result of different degrees of market regulation, water prices may differ among countries. In North America, for example, where the market is highly liberalized, prices are expected to be very competitive and respond to demand and supply forces. On the contrary, in the communist regimes like Russian Federation, domestic prices shall be kept artificially low.

Pricing of water may be compared with that of Natural gas. Like Natural gas, water prices may be measured at different stages of the supply chain. At the beginning, there is the wellhead price or price at source. Prices may also be measured for different end-user groups as residential, commercial, industrial consumer or electric utilities. Prices at the wellhead may show high volatility depending on weather and different market factors. Increasing efficiencies in transport, storage and delivery will allow for consumers to reduce the impact of price volatility.

In general, the cost of water would depend on:

• – Wellhead Price Or Price At Source (The Cost Of Water Or Commodity Cost)
• – Long Distance Transportation Cost
• – Local Distribution Cost

If 20th century taught us anything, it was to be cautious of the impossible. Before the advent of internet, nobody could have ever believed of a virtual space where people would be spending their maximum time. Oil trading was never thought of till the time heating oil futures started trading on NYMEX in 1978. The Asia Pacific region, Middle East and Africa are now recognized as the major growth areas for water demand, due to both demographics and the creation of wealth. Oil, gas and electric power currently take center stage for investment in this growing and emerging market. But, this region has an acute shortage/mismanagement of its water resources relative to its expanding needs and will need increased imports from outside the region, particularly from water abundant countries. Coupled with governmental policy changes encouraging deregulation, privatization and foreign investment, the future appears bright; yet risk prevails. Deregulated markets bring with them competitive risks not previously seen. Thus, water risk management rises in importance in such a changing market environment.

Water is still the key for both the industrial and agricultural world. So, it has strategic importance. In fast growing semi-arid regions like Middle East and Asia, limits to supply will eventually be reached despite efforts to reduce waste and manage resources. While price has been a concern in leftist countries which consider water as a human right rather than a commodity, In Pacific region, the overriding concern has always been security of supply rather than price risk. For this very reason, Australia has already established a water trading floor. An online website helps the water license holders to buy and sell water. (Visit http://www.waterfind.com.au for more information) In Australia, the twin engines of deregulation and privatization have helped drive competition and thus help buyers to find the most competitive price. The business as usual approach will no longer work in other regions too as a sharp increase in water dependence adds more price uncertainty and undoubtedly more future price volatility. Like Oil, which exhibits annualized price volatility of 40 to 50% per year, timing would be the key to secure water at the best price.

But, deregulation and globalization of water markets would also bring with it the need for active management of market risks. The markets will become more price sensitive with the rapid dissemination of price and market information. This entails the use of financial tools. The effectiveness of the financial tools is now more established and the knowledge base wider. Companies are regularly trading their risks by hedging in commodity futures. Trading has moved forward from the exchange-traded instruments of the 1980s and mid-1990s to the over-the-counter markets of today particularly in the Asia Pacific region where no viable futures contracts exist to manage large volumes of commodity price risk. However, financial instruments do not exist in a vacuum. They are based on what is occurring in the physical commodity markets. Hence in case of water too, before financial instruments get established, a physical market needs to exist. However, the innate conservatism of the water industry has demonstrated a reluctant and slow acceptance of the risk management tools of the world financial markets. This process of market acceptance is now underscored by the deliberate and yet incremental development of water trading market in Australia. The change in the water trading markets will be brought about by underlying developments in the physical markets in the water scarce regions, including new and planned water treatment projects, growing industrial capacity, rising electric power needs, development of a water pipeline infrastructure, and a movement away from a high degree of government regulation of the water sector in many countries. Capital flows to these water scarce countries in the coming decades will be substantial as Greenfield water management projects proliferate. But this move towards deregulation will follow an Asian model of Oil trading and will not be a rapid transition to open markets but a gradual process. In effect, a controlled deregulation process is already underway in many countries.

The importance of the fast developing economies in Asia Pacific region in terms of world water demand and cannot be understated. This area will soon eclipse other regions of the world as the primary region of world water demand due to humungous population and rapid industrialization. Most of this increased consumption will be sourced from the water rich countries like Canada and Brazil. Growing commercial ties between these economies and Asian consumers seem inevitable, especially as the giant US companies like GE and Dow shift their focus from traditional revenue streams to increased dependence on water related investments. This increased dependency on imported water presages an era of continued price volatility and the growing need for more risk management instruments to be developed and utilized in the water trading markets. Many countries in Africa, Europe and Asia already have a high dependence on imported surface water and their needs continue to grow. With all of the world’s population growth projected to come from less developed nations, rising water demand in agriculture and industrial use driven by rising industrial growth, the need for managing water price risk seems poised for explosive growth over the next several years. However, it may take an inordinately long time to get started in these regions particularly because of the more protectionist governments and economies.

Water storage requirements for countries are another area impacted by deregulation, but they are also a growing area for risk management. Many storage expansions have been announced throughout the region. China and India have already announced the plans to undergo more storage capacity increases.

Challenges to Change:

One of the biggest issues facing the development of the water trading markets involves government regulations and NGO’s which still fail to recognize water as a commodity. This is not an insurmountable obstacle but will take time to overcome. But, the financial collapse of one major developing economy for the lack of water can affect the market significantly. Also, the proliferation of state owned water infrastructure inhibits competition at the present time. But the status quo is changing. The privatization and deregulation of these water related infrastructure that will be coming in the next few years should hasten the development of paper trading in the world. At present, many of the physical market makers are said to be chasing the same business, but this is true of many immature markets. While the countries like Australia are already centered on security of supply rather than price risk management, the other markets are just beginning to emerge as the next opportunity for growth for the water trading. It seems likely that at the present time it is only the beginning of the change to a more physical rather than financial orientation in water trading. But once the physical trading of water internationally becomes established, financial trading is bound to follow.