At the very least, 2012 has been a challenging year for Spain, whose economy continues to suffer due to ongoing fallout from the financial crisis. While the country’s construction industry has been at the heart of this crisis — contributing to, and weighed down by, the bursting of the real estate bubble — few people know that Spain’s construction businesses are responsible for some of the world’s most advanced water-treatment strategies and technologies.
The Global Water Industry
In 2011, Global Water Intelligence estimated a global market size of US$316 billion, of which approximately US$203 billion is accounted for by industrial and utility water-related expenditures, (excluding energy and labor). The water market can be subdivided into several distinct components.
First, waterworks companies provide water and wastewater utility services (e.g., water utilities, wastewater/sewer utilities and regulated and utilities services). Second, water-technology and infrastructure companies provide products and services that support municipal water and wastewater utilities, industrial customers and residential water treatment. These first two categories combined account for about 50% of water revenue, according to Snet Global Water Indexes. Third are the providers of technical equipment (21%), ranging from basic infrastructure (e.g., pumps, pipes and valves) to measurement (e.g., meters) and treatment (e.g., chemicals, activated carbon and ion exchange). And finally there are the service providers (26%), from engineering and construction to consulting, drilling, water-rights trading and storage and bottled water.
In addition to France’s Veolia and Suez, the global water-services market is dominated by Spanish companies, including Acciona Agua, Sacyr/Valoriza, Aqualia, Cadagua, Cobra and Tecnicas Reunidas. Spain’s leadership in global water dates back to the 1970s, when the government and large infrastructure companies “bet on membranes,” as Alejandro Jiménez, commercial director of services for Acciona Agua, noted. At a time when the global-water sector was still focused on basic exploration of ground and surface waters and energy-inefficient treatment of wastewaters, these firms were investing heavily in early osmosis desalination technologies that would prove to be pioneering. These technologies today are used in 70% to 80% of existing desalination capacity and close to 100% of new projects.
The reason for this innovating move can be found in Spain’s own complicated water landscape. The northern regions — such as the Basque country, Galicia and Asturias — have a temperate climate with abundant rainfall and fresh water. On the other hand, the center and south of the country are arid regions, suffering from frequent droughts. Furthermore, the explosive growth of tourism in the coastal regions and the Balearic and Canary Islands increased demand significantly for fresh-water resources in these areas. Because transporting water from the north to the disparate dry regions was out of the question in most cases, generation of “new” fresh water through desalination became a clear priority for Spain.
The substantial investments in desalination and wastewater-treatment technologies, and the osmosis membranes that followed, have lowered the fixed and variable costs of water generation over time. Thus, these technologies are employed widely today and have the potential to mitigate future water shortages. According to research estimates, by 2025, desalination will account for 11.5% of water generation compared with an installed capacity of only 1% in 2007. This will require important infrastructure investment projects, both public and private, as reflected in the Millennium Development Goals (MDG), which foresee US$280 billion in public-water infrastructure spending.
Private water-service providers, such as the Spanish infrastructure companies or France’s Veolia and Suez, project annual spending of approximately US$37 billion in Asia, US$25 billion in Europe (both up from US$15 billion in 2010) and US$18 billion in the rest of the world (up from US$7 billion) by 2016. Spanish infrastructure companies are well placed to take advantage of these developments.
The Spanish companies have been keen to develop business abroad, driven by the flagging economy at home where they have suffered from the collapse of the construction boom, the resulting downturn in new business for water operators and managers, and a deterioration in desalination margins. A recent list of prequalified bidders for a prestigious project in Ghubrah, Oman, was almost exclusively Spanish, even as the Middle Eastern market had previously been the domain of the French environmental infrastructure heavyweights, Veolia and Suez. Jiménez commented that the Middle East was a growing focus for the company but that it was also winning concessions in other parts of the world.
Given the relative cultural and linguistic proximity, South America, in particular, is looking to become a strong market for Spain’s water firms. Sacyr will build its first desalination plant in the sub-continent for mining company Mantoverde in Chile. At the same time, Acciona has been active in the region for several years, constructing Venezuela’s first reverse-osmosis desalination plant, carrying out a technical-support and maintenance contract for the Arrudas WWTP in Brazil and constructing the Peravia drinking-water plant in the Dominican Republic and a water-treatment plant in Colombia, among other projects.
Water Scarcity — a 21st-century Problem
Economists agree that one of the most critical examples of price variation for a specific product occurs when the product suffers from an imbalance between its supply and demand. What is not so evident, however, is the fact that, due to continuous population growth, contamination of sources and inefficient utilization of available resources, water — perhaps the most important resource for mankind — is facing an ever-increasing supply/demand imbalance.
It is important to note that increasing demand is not the only explanation for water scarcity around the world. According to the United Nations (UN), there is enough fresh water on the planet for six billion people. However, this water is distributed unevenly, and too much is wasted, polluted or managed unsustainably. Although there is no global water scarcity as such, an increasing number of regions are chronically short of this critical resource.
The problem of uneven distribution becomes obvious when we compare countries rich in water sources (such as Colombia and Canada) to areas suffering from severe scarcity (such as North Africa and the Middle East). According to the UN, approximately 1.2 billion people (or nearly a fifth of the world’s population) live in areas of physical scarcity, and another 500 million are approaching this situation. Projections show that, by 2025, 1.8 billion people will be living in countries or regions with absolute water scarcity, and two-thirds of the world’s population could be living under water-stressed conditions.
The problem of water being wasted, polluted or managed unsustainably has become a serious issue in the last century, as water use has been growing at more than twice the rate of the increase in population. The UN estimates that water production lost due to leakage, theft and inadequate billing practices ranges from 10% to 30% in developed nations and from 40% to 50% in developing countries. By 2050, untreated wastewater could contaminate a third of global annual renewable freshwater supplies. Including those who currently do not live in areas of physical scarcity, 1.6 billion people face economic water shortages, where countries lack the necessary infrastructure to make water from rivers and aquifers accessible. At the same time, agriculture alone utilizes 15% to 35% of its water in excess of sustainable limits.
According to Jiménez, agriculture illustrates the classic case of water mismanagement, where potable water is often used for purposes that could be served by other types of “reutilized” water, preserving the premium water for more vital purposes (i.e., for drinking or personal hygiene). This problem extends beyond agriculture, given that many parts of the world use the same premium, potable water from the faucet to flush toilets.
Finally, there is also a growing need for investment in infrastructure to deliver water to the end users and to transport wastewater back to treatment plants. The vast network of pipes in developed countries is deteriorating quickly and is in urgent need of repair. The situation is even worse in the developing world, where basic infrastructure is still lacking, particularly for wastewater treatment. In many parts of the world, poor urban residents still buy water from trucks because there is no piped tap water for their homes. Jiménez stated that people often do not realize how costly it is to bring water to their taps and that the prices they pay in water tariffs do not reflect the full costs associated with the processes.
Water scarcity is a complex and challenging problem, especially in light of ever-increasing global demands. Jiménez, however, pointed to the continuous investment in searching for new sources of water, such as desalination technologies, as one of the few foreseeable solutions.
Originally published by Knowledge@Wharton January 2, 2013 as part of The Lauder Global Business Insight Report 2013: Building Blocks for the Global Economy.