Water

NZE thanks Rylan Dobson, MBA student, water enthusiast and all-round superstar, for his insightful contributions on this post . Check out his reflections on Stockholm Water Week 2016 here.

Water. The undeniably universal resource that is so closely connected to every human, yet so complex and nuanced in its usage, management, conservation and supply. The UN summarises water as being “characterized by the fact that all benefit from it, but few understand why, and fewer actually manage it.” Eradicating water scarcity and poor quality will need interdisciplinary collaboration from across sectors and countries. It is an exceptional balancing act, that will required skilful navigation and leadership to unite the diverse interests of water users in order to overcome this global crisis. Yet water supply is essential for humanity to progress and grow harmoniously.

A dry status quo

Especially with the recent South African drought, the relevance of water is unquestionable to most. To paint a more global picture, over 1 billion people currently have no reliable access to water, and the number is expected to grow 30% by 2030. Water scarcity serves to create and intensify existing social challenges, including making its mark on the refugee crisis; by 2025, it is predicted that 700 million people could be displaced due to intense water scarcity. Women are typically the bearers of the water burden, quite literally – collectively, women in West, East and Southern Africa spend 40 billion hours a year collecting water.

A little closer to home, the South African Weather Service reported its lowest rainfall between January and December 2015 since the recording of rainfall began in 1904, with impacts on food security having economic ramifications still being felt.

Identifying the root cause of water scarcity is not a simple exercise. Desertification, or the process of fertile land becoming unfarmable, is attributed to droughts caused by gradual climate change. Often, however, the abuse of resources by humans is at the heart; the recent Indian drought may have been as a result of overuse of water rather than natural shortage. Borehole use has grown exponentially since the 1960’s, which results in water being drawn from the ground faster than it can naturally be recharged. In many instances, the processes and systems that we have developed are either not fit for purpose, or are not resilient enough to accomodate future scenarios of water stress.

Innovations emerging

So where does one begin in solving this complex problem? Looking solely to governments for a solution is not an option  – only three countries in the world currently have co-ordinated drought policies. Brazil, and recently, Malawi, took an insurance approach to drought management, which involved insurance companies providing drought compensation to farmers who had contributed during periods of normal rainfall. Ceara in Brazil reported resilience to its 2012 drought as a result.

From the perspective of entrepreneurship, it appears that there are limited examples of “startup ecosystems” nurturing entrepreneurial innovation in water – especially within developing countries. Developed countries like Israel (read: occupied Palestine) and the USA are tackling the issue at its roots to encourage responsible management and efficient use. This may provide a piece of the puzzle. TaKaDu is an Israeli water management software provider that is currently present in nine countries, working with water utilities to improve efficiency, decrease wastage and improve decision making capacity. Their cloud based computing system allows clients to manage the full lifecycle of water from dam to post use purification. Water FX, a San Francisco-based firm, recognises that water solutions should not be solved in isolation. As such, they have developed technologies that use solar power to desalinate water. Their current focus is to decrease the amount of water that farmers draw from municipal sources by allowing onsite desalination and purification of farm waste water. The use of solar power means that the systems are independent and do not place undue pressure on existing municipal electricity supply.

Economics of a fundamental human right

The economics of water could be one explanation for poor coordination and development. Investing in water infrastructure to improve water services is not as straightforward as you think. The nature of water being perceived as a “public good” coupled with the knock on impacts involved in financing projects that deliver water, sanitation and hygiene (or WASH – for short) impacts on the levels of entrepreneurial innovation in the sector. The term “public good” is a slight misnomer if you were to put this to an economist. In economics, a public good is something that is both non-excludable and non-rivalrous meaning that individuals cannot effectively be excluded from its use and where use by one individual does not reduce availability to others. Water clearly flouts these two principles. However, we wouldn’t describe water a “private good” either. But we digress (spoiler alert – water can be either), what is more interesting is the ways in which innovation in water is funded.

Typically, most capital investments in water infrastructure are funded by governments, specialist global and regional infrastructure and water funds, traditional “Official Development Assistance” and some cases from non-OECD government sources. Meanwhile recurrent revenue for operations and maintenance comes primarily from user charges and government budgets through tariffs and transfers. Where revenue collection systems are dysfunctional, the knock on reduction in water budgets leaves service providers no incentives to ensure long-term investments are made to improve performance. In instances where mandated government entities have the balance sheets and expertise to raise capital, the underpinning revenue collection from the provision of water services will be the asset that lenders value.

However, in countries where poverty rates are high, revenue collection patchy, governance weak and the national fiscus strained, who funds innovation? In many African countries, public sector action coupled with external multilateral and bilateral financing usually fill this gap (and unfortunately: public sector funding + multilateral funding + bilateral funding ≠ an entrepreneurial match made in heaven). In some instances, there are some smaller scale public goods that can also be financed by philanthropic/impact investment (such as from the Bill and Melinda Gates Foundation, the Rockefeller Foundation, etc.) and corporate social responsibility investors (e.g. SABMiller, Coke, etc.).

For example, promoting innovation in the South African water sector is hard even though the country has a relatively well endowed national fiscus. Procurement policy instruments (e.g. MFMA, PFMA and PPPFA) are well-intentioned in that they are placed to safeguard and standardise public procurement procedures whilst maximising transparency. However, rigid policies can lead to unintended consequences. For example, public expenditure tends to be excessively cautious because of the need to comply with financial legislation. This excessive caution results in conservative financial interpretations of legislation, dependence on grants, unwillingness to innovate, an over-reliance on old technology and a short term perspective to investment based on the 3-5 year MTEF (Reference: Technical Advisory Unit, National Treasury). That being said, innovation is not impossible and National Treasury have been working with local municipalities to push the envelope for water where possible (e.g. Ever heard of “in-pipe hydro?” No? Neither had we – check it out here).

Meanwhile other kinds of water services for which users could be expected to pay, such as household, agricultural and industrial water supply, should be able to attract a wider range of funding sources, including commercial loans and equity. An interesting innovation that encapsulates how difficult financing water infrastructure in developing economies can be is the Omni-Processor.

This facility has been built by an American biotechnology start-up, with a significant amount of the research and developed funded by the Bill and Melinda Gates Foundation. The Omni-Processor is currently  being field tested in Dakar (checkout this  video on the tests).  The pilot in Dakar uses the current human waste streams from latrines that are collected through septic trucks (where people have the resources to afford mechanical pumping and removal) or by hand (where people only have the resources to afford a bucket to remove waste and usually discard it informally). The Omni-Processor is looking to provide an efficient alternative to the out-dated and strained processing facilities available in Dakar. The outputs from the Omni-Processor has a number of revenue streams for municipalities/entrepreneurs to tap into to create a sustainable model of service delivery (the water can be drunk or used for irrigation and the machine produces ash which can be used for bricks or electricity generation to power the facility.

However, without impact investors, would the entrepreneurs behind the Omni-Processor have had the run way to field test their facility? Maybe, but probably not. Would field testing of the Omni-Processor be possible without the local government of Dakar? Maybe, but probably not. Will the continued success of the intervention be possible without a sustainable revenue model that makes smart use of Senegalese private and public finance? Maybe, but probably not. That’s a lot of maybes which all make the financing of innovation in the water sector a complicated necessity for development.

We sea opportunity

Any good entrepreneur sees a host of opportunity amidst a sea of problems. The NZE team see the following as key future opportunities for eliminating the water problem – be it forced migration due to desertification, lack of access or increased drought:

  • An opportunity exists, within countries, to integrate water efforts with energy, mining & infrastructure planning – perhaps the private sector could provide integrated planning platforms to assist government with tricky decisions. However, private sector players should take care not to override their authority, but rather support and strengthen, especially where governance is weak
  • It is clear that innovation in the space exists – the question is, does it reach the drought and often poverty stricken countries that need it and at the scale required? An opportunity lies in finding the sweet spot between the Silicon Valley based dreams with the reality of developing nations.
  • Because water is so complex many investors struggle to understand or even value the risk water poses on their investments in the future. There are a few tools out there that try to help them understand this, but there the opportunity exists to create a comprehensive tool that easily communicates and gives assurances to investors on how water related risks will be managed to protect their investments. We need to be careful that innovations, like focus on water use reduction and eradicating inefficiencies, don’t compound the problem. Drip irrigation and groundwater usage encouragement must be used in conjunction with other means to replenish the water table. A systems based approach to innovation is much needed. Government uses economics and business uses financials to make decisions and this is a big disconnect in trying to reconcile the two parties’ positions on water. Perhaps herein lies a potential opportunity to align these two languages.
  • Finally, and probably most notably, how can creative finance mechanisms be used to enhance investment in water-based issues? Should Brazil’s approach of insurance for water problems be deployed on a larger level?

NZE certainly doesn’t have all the answers – but the urgency for global solutions has got us thinking. Comment or shoot us a mail with links to innovations and opportunities you have found in this space

 

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