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If rising food prices triggered riots in 35 countries on four continents in 2008 and two years later provided the accelerant for revolutions across the Middle East and North Africa, what magnitude of global upheaval will water scarcity engender? Elizabeth Stephens, Head of Credit & Political Risk Analysis at JLT Specialty reports.

Fresh water is the most precious commodity on earth. It is essential for human life, economic growth and the environment. Yet while we discover new oil and gas reserves, water is becoming scarcer and there are no new natural sources to be found.

Of the two thirds of the planet that is covered in water, only 0.8% of it is fresh. Of this, rainwater, rivers and lakes are renewable while ground water, which is being rapidly depleted by over-exploitation, is not. Declining fresh water resources are coinciding with a time of rising demand. Population growth, rising standards of living, industrial development, biofuels and climate change, put ever greater pressure on supply.

While the earth technically has sufficient fresh water for everyone, water supplies in some regions are too limited to meet local needs, while other regions lack the requisite infrastructure to deliver water to those who need it. Even those countries that are water-secure today will be confronted with challenges to water (and by implication, food security) in the future, due to climate changes and water shortages elsewhere.

Tensions over water resources will become more acute as competition for access to a dwindling supply intensifies. This competition will occur between sovereign states and within nations, as different groups with competing interests battle for control over the allocation of water resources.

Risks to business

Companies that think strategically about the implications of declining water supplies will be far better positioned to manage these risks.

Dwindling water supplies pose one of the greatest risks to business. Interruption to water supply will impact on supply chains, operations and investments and may trigger social unrest and civil conflict. The consequences are more severe than peak oil because, while there are substitutes for oil in many industrial processes, for human survival there is no alternative to water.

Water-intensive industries will be the most adversely affected by a ‘water-scarce’ world. High-tech companies, especially those using huge quantities of water to manufacture silicon chips; electricity suppliers who use vast amounts of water for cooling; and agriculture, which uses 70% of global freshwater will be hardest hit.

Companies will be forced to invest in new technologies and water-saving initiatives to reduce water consumption in industry, agriculture and power generation. Operating costs will rise as governments force companies to pay for the true cost of the water they use and a higher value will be attached to ‘virtual water.’ Ethical questions will also be raised about the allocation of scarce water resources to commercial ventures, particularly those pursued by foreign investors, during times of drought
or poor harvests. This may pose a reputational risk to foreign businesses implicated in such practices.

The water–scarce world

Newly industrialised and developing countries

SHORTFALL IN WATER AVAILABILITY POOR MANAGEMENT

Newly industrialised China and India are facing a shortfall in water availability, as are the developing states of Pakistan, Uzbekistan and Turkmenistan. Poor water management is a significant cause of water shortages in these territories.

Drawing of excessive amounts of water from basins is gradually leading to physical water scarcity, while water pollution is reducing the availability of clean water. Many of these territories lack the

institutional ability to manage water resources, including the construction of adequate water storage facilities and transit infrastructure.

Gulf States

PHYSICAL WATER SCARCITY EFFECTIVE CAPACITY & MANAGEMENT

Oil-rich governments in the Gulf states have used their vast financial resources to meet the challenge of physical water scarcity. Bahrain, Qatar, Kuwait and Saudi Arabia top the table of water-stressed countries as these states have high levels of water consumption and comparably low levels of natural water resources.

These states have demonstrated effective capacity and management by investing in large–scale desalination to meet the demand for domestic water consumption, importing virtual water in food and other products and leasing land in wetter countries for agricultural production.

Sub-Saharan Africa

NATURALLY ABUNDANT WATER POOR CAPACITY

Water resources are naturally abundant in many Sub–Saharan African countries, particularly relative to water use, and it is economic water scarcity, rather than physical water scarcity that is the cause of inadequate water supply.

Poor capacity to manage water in human, institutional and financing terms, has resulted in Sub–Saharan Africa being home to the largest number of people suffering from inadequate access to fresh water of any region.

World Risk Review’s Water Scarcity Ranking

Top 10 most water–scarce countries

Averting a global water crisis

Attitude

Success in addressing water scarcity is dependent on a change in the attitude of individuals, corporations and governments towards water. Water usage must be viewed as a privilege as opposed to a right. For too long the idea has abounded that because water is precious it should be free or subsidised. We are not protecting this special resource by treating it as something without limits, which is what we do when we insist on paying less for water than its real cost.

Competing interests

The politics of water will become fraught. The potential for conflict between competing interests at state and intra-state level is high. This risk is heightened by the fact that water scarcity is currently most prevalent in developing, non-democratic countries, which often lack the capacity to effectively manage resources and to reach a societal consensus on water usage.

Water as a commodity

Demand for water is not satisfied through the marketplace and it is the only natural resource where consumers refuse to pay the full costs associated with making the resource available. Securing the hundreds of billions of dollars required for investment in the infrastructure necessary to make water available will be dependent upon water being viewed as a commodity.

An investor in water infrastructure needs to make an adequate return to justify the use of scarce capital for this activity, which implies that water will need to be sold to consumers at a price that covers the full cost associated with making the resource available.

Investment vulnerability

A new regulatory environment or government contracts are required to ensure stability and to protect investors and consumers. Infrastructure projects are long-term, capital-intensive investment in a fixed asset that is vulnerable to seizure by a host government. Even in the absence of outright expropriation, government actions, including changes to tariff agreements, royalties or taxes and other infringements on operating contracts, can have a devastating effect on investments.

There is still time to avert a global water crisis. The technology needed to more effectively utilise existing water resources does exist. Problems arise from the deficit of legal and regulatory infrastructure necessary to protect investors’ interests and the reluctance to view water as a precious commodity that deserves to be valued and paid for like any other.