Britain, as the rest of the world, is facing a water crisis, leading some experts to predict that by the end of the decade H2O will be traded on financial markets like other finite commodities such as crude oil, or iron ore.
Although the Environment Agency says the past six months have been the wettest on record, summer hosepipe bans remain a possibility, partly because of historic inconsistencies in infrastructure investment. However, changing weather patterns and rising demand for water resources spell a potentially more nightmarish scenario within the next 20 years.
Britain is not alone in facing what could become a catastrophic deficit in fresh water. Unless radical steps are taken to ensure the global economy has enough water to meet all our needs then draconian measures such as rationing cannot be ruled out in the future.
Globally, the problem of water scarcity is growing at an alarming rate. By 2050, experts predict a 55pc increase in the amount of water required to meet demand from rising populations, food production and industry. To avoid serious shortfalls the world will need to invest an estimated $1.8 trillion (£1.05 trillion) over the next 20 years that could ultimately deliver $3 trillion in benefits for the global economy, according to estimates by the United Nations.
Markets can play an important role in providing future water security. The City can help to fund vital water infrastructure and the creation of a futures market to trade water would help to create a baseline pricing mechanism against which regional water tariffs could be fairly set.
Traditionally, the main concerns surrounding water resources have focused on rapidly developing regions in Africa, Asia and the Middle East but supplies in developed nations such as the US and UK are now coming under similar stresses.
The World Economic Forum has warned: “The future security of fresh-water resources around the world is of increasing concern. Because of our interlinked global economy, water scarcity in many parts of the world could harm the global economy in ways we hadn’t thought of. Shortfalls in crop yields and more variable food prices could be an early impact.”
“Water will become something that is traded, there will be a market for it and this could happen in the next decade,” said Usha Rao-Monari, chief executive officer of Global Water Development Partners – an affiliate of New York-based investment giant Blackstone, the world’s largest private equity firm with a reported $280bn under management.
As the draw on natural water supplies from industry and agriculture intensifies then the amount of clean drinkable water that will need to be produced by sea-water desalination will increase exponentially, further pushing up the cost. In such a scenario, the creation of a futures market for water would work more effectively than government-controlled regulators such as Ofwat to protect consumers and prevent the formation of pricing cartels dominated by countries and regions that have a surplus of water resources.
The fear is that water scarcity could eventually see water-rich countries form into a group similar to the Organisation of Petroleum Exporting Countries (Opec) even though water isn’t a commodity that can be easily traded across borders at this point.
“Water will become a commodity – but a very different commodity because it is also a basic human need. If you track economic growth and you agree that water is a vital input then it will eventually become a commodity,” said Rao-Monari. Set up in March this year, Global Water Development Partners is aiming to provide investment for water projects around the world.
“Although people are realising that water is a finite resource, they are reluctant to put a price on it,” Rao-Monari observed. “We need to get real money – large money – into this sector otherwise we’re going to hit a wall.”
English farmland presents a golden investment opportunity
The value of farmland in the UK has continued to rise and now ranks alongside gold as one of the best long-term investments over the past decade.
According to Knight Frank, land values have increased by an average of 208pc over the past 10 years, compared with a return of 254pc for gold, which has been one of the hottest assets for investors over the same period.
Spurred on by growing interest from foreign investors and pension funds, farmland values in England continued to rise in the second quarter, a survey by the estate agent has revealed.
Knight Frank said average values for English farmland rose by 3pc in the second quarter to £7,515 per acre but that fewer landowners were placing estates on the market than a year earlier.
“Potentially there could be more pension fund and institutional buyers in the market,” wrote Tom Raynham, head of Knight Frank’s agricultural investment team. “There are some good deals happening off market.”
The agent said that the acreage which has been advertised this year for sale publicly has fallen 17pc but anticipates that values will increase by a further 6pc over the next 12 months.
Despite concerns over the outcome of the Scottish referendum, land values also grew by 2pc in the first half north of the border.
Coal
The latest cost for British investors from green taxes kicked in last week when the profitability of coal-fired power stations fell below natural gas burning plants. A near doubling of Britain’s carbon price floor in April and a 25pc drop in the wholesale price of gas since the first quarter has hit coal-fired generators.
The UK depends on coal-fired plants, which are approximately 2.3 times more carbon intensive than natural gas for generation. Broker Macquarie says: “If this trend continues, UK baseload coal-fired generation could fall significantly later this quarter and in turn have a negative impact on thermal coal demand in Europe’s second-largest thermal coal importer.”
