Is water investment the petroleum of the 21st century?

Welcome to Finance and Fury, the Furious Friday edition.

Episode today about a trend over the past decade and moving forward – is water the new petroleum?

A few episodes ago – went through what is more valuable – a TV or water – depends on your perception and what is in demand versus supply – but if you think about it – what is the most valuable thing to us as humans –

I would argue - Air – Water – food – our survival is predicated on these three things – rule of 3 here – 3 minutes, 3 days and 3 weeks – but due to supply – they are seen as having low values – if viewed in monetary terms – we don’t even really think about it most of the time – why would we? Air is in abundant supply – water seems to be everywhere – turn on a tap – even food – especially fast food – if you can call it food is very cheap – this is not so much a concern for most people in western nations

Hard to monetize air – food has already been monetized – but what about water? It has – but is seen as a public good – quite low cost -

A trend has been occurring in the water sector which is accelerating worldwide- appearance of the new “water barons” – the investment of the Wall Street banks and multibillionaires - buying up water all over the world at unprecedented pace since the late 2000s. Banks such as Goldman Sachs, JP Morgan Chase, Citigroup, UBS, Deutsche Bank, Credit Suisse, Macquarie Bank, Barclays Bank, the Blackstone Group, Allianz, and HSBC Bank – plus many others are consolidating their control over water Goldman Sachs: Water Is Still the Next Petroleum Back in 2008 - Goldman Sachs called water “the petroleum for the next century” during its annual “Top Five Risks” conference – was reported that those investors who know how to play the infrastructure boom will reap huge rewards – said a calamitous water shortage could be a more serious threat to humanity in the 21st century than food and energy shortages Goldman Sachs has convened numerous conferences on future public issues - have published lengthy analyses on most commodities - water and other critical sectors like food and energy Goldman Sachs is positioning itself as a massive player in the water business – buying up water utilities, water engineering companies, and water resources worldwide - Since 2006 - Goldman Sachs has become one of the largest infrastructure investment fund managers and has amassed $10s of billion capital for infrastructure, including water. JPMorgan Chase – aims to Build Infrastructure War Chests to Buy Water, Utilities, and Public Infrastructure Worldwide JPMorgan Chase is one of the biggest banks in the world - has aggressively pursued water and infrastructure worldwide – sees this as a global phenomenon and is planning to cash in on water and infrastructure JPMorgan’s own analysts estimate that the emerging markets’ infrastructure is approximately U.S.$21.7 trillion over the next decade In a JP Morgan equity research document, it states clearly that “Wall Street appears well aware of the investment opportunities in water supply infrastructure, wastewater treatment, and demand management technologies.” Citigroup: The Water Market Will Soon Eclipse Oil, Agriculture, and Precious Metals UBS: Water Scarcity Is the Defining Crisis of the 21st Century UBS is Europe’s largest bank by assets – back in 2006 - UBS Investment Research had a 40-page research report titled “Q-Series: Water - Water scarcity: The defining crisis of the 21st century?” – looking at the future of water assets and how to cash in on this Credit Suisse: Water Is the “Paramount Megatrend of Our Time” 2008 - Credit Suisse published a report - urged investors that “One way to take advantage of this trend is to invest in companies geared to water generation, preservation, infrastructure treatment and desalination. Water is likely to become a scarce resource.” recognizes a water-supply crisis might cause “severe societal risk” in the next 10 years and that two-thirds of the world’s population are likely to live under water-stressed conditions – was already happening in South Africa - Allianz Group – has a very interesting take – that Water Is Under-priced and Undervalued They have a has the philosophy that water is under-priced – most of these banks have a Water Fund – Allianz is no different – the co-manager of the fund in Frankfurt - “A key issue of water is that the true value of water is not recognized. …Water tends to be undervalued around the world.” Allianz sees two key investment drivers in water: (1) upgrading the aging infrastructure in the developed world; and (2) new urbanization and industrialization in developing countries such as China and India Between Goldman Sachs, Morgan Stanley, Credit Suisse, and the Carlyle Group – estimated to have amassed $250 - $350 billion allocation to water infrastructure projects globally These investment banks have been preparing and waiting for a moment for years – the rise of water prices - starting to privatize water, municipal services, and utilities all over the world. It will be extremely difficult to reverse this privatization trend in water. Wealthy individuals as well - also buying thousands of acres of land with aquifers, lakes, water rights, water utilities, and shares in water engineering and technology companies all over the world. At this rate – it seems like the consolidation of Water is ramping up and non-opposed by officials at the governmental level The global water and infrastructure-privatization is a natural progression - many local and state governments are suffering from revenue shortfalls and are under financial and budgetary strains. In Australia - 10.4% of Australian water rights are owned by foreigners, says ATO Is this a problem? By itself – not so much - Bottle water versus tap water – in Australia – tap water is fine – but lots of areas around the world you can’t drink water out of the tap – you have to buy bottled water – China, India, parts of SEA – Africa – even parts of Europe – Italy south of Naples, Greek islands, Hungary Bottle water is cheaper over there than here – in areas where tap water is accessible and clean – soft drink is cheaper - On its own – privatisation is not so much of a problem – as long as the same rights are granted to individuals – to become water self-sufficient and not rely on state provided water – which is where things get even more interesting – As an individual - you can trade water rights – there are water exchanges where you can buy water - The Australian Government has put restrictions on how much can be traded and how much must be retained for the environment – with the Murray-Darling Basin – 65% of the water is off limits to water traders - but that still leaves plenty to trade with – valuations are at about A$15 billion of water rights About 8% of the Murray-Darling is reportedly owned by pure water investors And the price has been going up – in past five years - the value of water in the MDB has risen from about A$1000 a megalitre to close to A$2000 You can then lease your entitlements to farmers or people who wish to use it – yields of about 8% p.a. These exchanges offer easy access for investors but the water products themselves – but not all water rights are equal - There are several hundred classes of investible water securities. There’s high- and low-security water, and price can vary drastically by type, demand and geography. Allocation allowances vary from river to river – but can you personally use it?

At the same time – there is a second trend is that is occurring – whilst banks or these trading exchanges allow for the buying up of water at accelerated paces - governments have policies in place that limit citizens’ ability to become water self-sufficient

Where does Australia stand – First have to get the definition of water out of the way – “water” includes water rights - the right to tap groundwater, aquifers, and rivers, land with bodies of water on it or under it Many other things - desalination projects, water-purification and treatment technologies, utilities, water infrastructure maintenance and construction and retail water sector - those who produce and sell bottled water Australia’s National water policy is embodied in the National Water Initiative Agreement - Clause 2 of the Agreement says, “In Australia, water is vested in governments that allow other parties to access and use water for a variety of purposes”. Based around this - the Federal Government claims that rainwater falling on roofs and stored in tanks is vested in governments – however, thankfully this claim is not supported by three state governments- New South Wales, Victoria and Queensland – so the National Water Initiative Agreement may not be interpreted to mean that all water is vested in governments in these selective states However - state governments have abolished common law rights to “naturally occurring” water – Only when water is on or below the surface of the ground, may it be considered to be “naturally occurring”. The policy questions are: is water that falls on a person’s roof “naturally occurring” water - in other words, is a person’s roof the surface of the ground? does a person own the water that falls on their own roof? Vic Government’s position - water that falls on a person’s roof in Victoria is the property of that person has advised that the state’s right to the use, flow and control of water extends to all water in a waterway and groundwater - If water falls on a person's roof, it may, after it has left that roof, become water in a waterway or groundwater. For the period that the water remains on the roof, it is not water in a waterway or groundwater. In other words, a person’s roof is not the surface of the ground in Victoria NSW - Similar to Vic - a person’s roof is not the surface of the ground in New South Wales. But what about water tanks? In QLD - government has advised that, based on the meaning of water in the Water Act2000, water collected in rainwater tanks does not fall within the ownership of the state. Under section 19 of the Act, “All rights to the use flow and control of all water in Queensland are vested in the State”. Also under the Act, “water collected from roofs for rainwater tanks” is not included in the meaning of overland flow water. In other words, a person’s roof is not the surface of the ground in Queensland, and rights to water collected from roofs for rainwater tanks are not vested in the state – due to this QLD has some of the better water rights in Australia for the individual However - South Australia, WA and Tasmania - government claims that a person’s roof is the same thing as “land”. Under section 124 of the Natural Resources Management Act 2004, water flowing over land is surface water, and rights to surface water are vested in the state. The State Government advises that surface water is not owned by anyone, including the state. 2007 – SA government released its “runoff policy” - A “water user” capturing rainwater in excess of 500 kilolitres requires a water licence, and then may be eligible to pay a water based levy if that water is used for commercial purposes - The policy applies to rainwater tanks, on the presumption that water collected from roofs for rainwater tanks in South Australia is “surface water” I have been looking at buying land with water on it and buying the water rights – but it is not that simple – All environmentally protected – the water from a stream on your own land is technically not your own water – or if you build a pond or dam on your land – technically the states – found this interesting It’s a strange world where banks or people with enough money can buy up massive allocations to water – but individuals across certain states are limited on what they can collect on their own private lands So water may be a growing investment sector - But due to the limited supply of water – since 2000s - 20 dams had been completed in Australia - 16 of them in Tasmania, two in New South Wales, one in Queensland and one in the ACT – based around reporting from the Minister for Agriculture, Drought and Emergency Management - states had failed to match water storage with population growth since 2003 - at the current rate, water storage per person will fall by more than 30 per cent by 2030 So prices for water may be set to continue to rise in the future

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