Bridging the water gap 

By 2030, one third of humanity will live in areas where water demand exceeds supply by more than 50 percent. This is not only a challenge to basic human rights; water scarcity is already fueling conflict and contributing to the pace of urbanization as more people relocate to cities in search of secure sources of potable water.

There are certainly signs that more effort and political will is being put towards solving the urban water challenge. All around the world, we have seen shiny new water treatment plants being built, adding more capacity to the system.

But while this may be a good sign for the future, the reality is that many – if not most – jurisdictions and urban areas are largely ignoring the bigger challenge that lies right under their feet: inefficient networks. Indeed, water leakage has become an endemic problem for many countries. In Brazil, almost 40 percent of water is lost through network leakage, Hong Kong loses more than 25 percent, while Singapore – widely viewed as possessing one of the most efficient water systems in the world – wastes only around six percent.

Indeed, there is a strong argument to be made that many of the world’s urban water challenges could, in fact, be partly solved by improving the efficiency of existing networks and reducing both physical and administrative losses. Interestingly, there are signs that the recent global financial crisis has concentrated minds towards doing just that. Facing scarce financing for new (and expensive) water plants and a general reluctance on the part of governments to outlay more capital on big-ticket infrastructure items, many water utilities and urban governments have started to focus their efforts on bringing more efficiency to their networks in order to increase overall capacity and improve service to end users.

Tied to this is the growing trend towards waste water reuse. Whereas just 10 years ago, the overwhelming majority of sewage tended to be treated and discharged unceremoniously into lakes, oceans and deserts, an increasing number of jurisdictions are now actively capturing waste water and treating it to alleviate some of the pressure on resources by reusing it mainly for agriculture or industrial purposes. In many urban areas, treated waste water is being sold to industrial users, thereby reducing the demand for potable water and providing new sources of revenue for water utilities. In 2009, over 40 million cubic meters of sewage was already being recycled daily, with some locations – such as Windhoek (Namibia) and Singapore – even utilizing treated waste water for direct or indirect potable re-use.

Another encouraging development over the past few years has been the improved efficiency gains within many of the plants themselves. Desalinization facilities, for example, which have traditionally been seen as a technology of last resort in water-scarce regions due to the high cost of operations and environmental impact, have become much more efficient and, as a result, much more popular. Indeed, desalinization plants are now starting to pop up in non-oil producing countries where the cost of operations is multiplied greatly.

Of course, the enduring challenge of water tariff mismatches persists in most markets around the world and will continue to distort the economics of water provision. Simply put, until the true value of not only the water being used, but also the capital costs of operating and maintaining water systems is reflected in urban water tariffs, the sector will continue to struggle to fund and finance the type of capacity change that will be required by our burgeoning cities. So while eliminating water subsidies may be extremely unpopular (particularly in traditionally water scarce countries), the reality is that governments and utilities will never be able to achieve the right balance between cost and demand while this mismatch continues.

With user fees barely covering operations and maintenance costs, most governments have been forced to either fund or underwrite the development of new plants and facilities by dipping into their budgets and tax revenues. In the developing world, this burden has largely been picked up by some of the multilateral development funds who are striving to solve both the water scarcity challenge and the public finance challenge through long-term loans and risk financing.

We have also started to see an increasing number of Public Private Partnerships (PPPs) emerge in regions with particularly unreliable or non-existent water infrastructure. In these cases, private industry (such as mining operations or manufacturing plants) have contracted with private developers to build and operate a local water and wastewater system capable of meeting and sustaining their water consumption levels.

There is little doubt that water will continue to be both a critical imperative and a significant challenge for urban governments going forward. Much will depend on not only the ability of administrators to bring greater efficiency to the system but the willingness of politicians to allow tariffs to reflect the true cost of what is clearly a scarce and valuable resource.

By Bastien Simeon, KPMG in France

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