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"The Water Is Not Going to Be There:" A Risk for Business · C-Suite Perspectives

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  Welcome to C-Suite Perspectives, a signature series by The Conference Board.
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  I'm Steve Odland from The Conference Board and the host of this podcast series.
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  Today we'll explore how water scarcity is rapidly shifting from
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  a local environmental issue to a global structural business issue.
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  Joining today is Dr. Alex Heil, senior economist at The Conference Board.
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  Alex, welcome.
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  Hi, Steve.
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  Thanks for having me today.
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  Our conversation is going to be based on a couple of papers
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  that you've written recently.
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  Why did you do these papers and how can our listeners find them?
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  Last week turned out to be World Water Day and we took that as an occasion to freshen
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  up our research on water supply issues.
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  We have a global water resource paper that was published yesterday.
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  We have one paper that focused on US issues in the Southwest of the US
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  and then there's one that's coming next week on corporate water use.
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  We felt it's in many cases an underreported issue but it's certainly
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  one that is of growing importance.
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  And people can find this at The Conference Board website, they can look for
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  energy, infrastructure, and environment and the papers will be posted there.
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  This is not a new issue.
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  Particularly in more arid areas, but in developing areas, water's
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  been an issue for a very long time.
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  But it's counterintuitive because as you look at the Earth's surface, 70%
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  of the Earth is covered by water.
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  But we're not talking about salt water.
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  We're talking about fresh water.
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  And that's a lower coverage.
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  Right.
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  If we're looking at just the breakdown, 97% of all water
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  is contained in the ocean.
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  If we're talking about fresh water, we're down to 3%.
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  And then we're taking out glaciers, we're talking about inaccessible options.
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  So really only half a percent of all global water is
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  somewhat readily accessible.
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  Hence the growing urgency when it comes to dealing with
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  droughts and scarcity in general.
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  Yeah.
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  And it's key to life, not only humans but all forms of life,
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  including all of our food supply.
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  In the paper you coined the term "water bankruptcy." We've moved from
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  water stress to water bankruptcy.
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  Tell us what that means.
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  This is actually a term that I believe came out of work by the UN.
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  Let me just make sure I don't take too much credit for it but it
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  resonated with me as a term that really is describing what's going on.
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  We're dealing with a situation where 25 countries in the world right now
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  are characterized by water stress.
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  If we're defining water stress, what does that mean?
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  That means 80% of their available water resources are essentially
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  already used or spoken for.
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  If we're looking at this from the point of view of their water supplies,
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  it's a much more immediate concern.
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  One of our papers tries to break down what is the level of water urgency globally.
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  It doesn't appear uniformly across us across all countries but it's
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  certainly something that for some parts of the world is much more immediate.
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  What also appealed to me about the term water bankruptcy was it is a
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  growing business and financial issue.
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  Going forward it is certainly-- and you're right, it's always been a concern.
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  It's always been a planning issue-- but I think it's going to become an issue that
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  is going to have financial repercussions in many countries around the world.
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  We sit in the US and we take water for granted.
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  In most developing areas is the same thing.
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  You could argue we have plenty of water in the US but that's only true
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  depending on where you're sitting.
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  It is really a local issue, isn't it?
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  Yeah, that's true.
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  Water is managed for the everyday consumer, residential or
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  business, by the local utility.
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  They are the ones that operate the infrastructure, the pipes, the treatments,
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  the distribution, and then ultimately, on the reverse side, the collection system.
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  It is something that everybody uses, everybody takes for granted.
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  And to not forget that point, I spent 10 years in the water sector at some
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  point in my career, and the one issue that I really took away from that is
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  that water is consistently underpriced.
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  The price we pay for water does not adequately reflect the
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  scarcity that comes along with it.
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  And certainly in many cases also does not adequately reflect the cost of producing,
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  of treating, of delivering that resource.
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  And certainly then that's a big issue.
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  Spoken like an economist.
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  Yeah, that's one of these issues that we're talking about,
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  scarcity, and scarcity usually comes along with issues of price.
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  In many cases, water prices are so low that there is no or there's
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  little incentive for conservation.
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  There's little incentive for reuse and recycling.
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  And, as a result of that, we're running into a resource constraint.
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  That's an interesting part of your paper.
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  You're talking about water as a critical supply input.
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  That's more from a business manufacturing standpoint and so forth.
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  But let's level set.
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  Where is water used?
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  How is it used?
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  And where are the biggest stress points?
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  The use is really widespread.
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  There is the residential, the household level.
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  There's businesses, there's industries-- some of which use more water than
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  others for cooling, for processed water.
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  But really where the greatest demand is in agriculture.
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  If we're doing a survey of regions around the world, the percentage varies but
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  it's certainly true that in almost all cases, more than half-- in many cases,
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  much more than half-- of total water consumed is a function of what is used for
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  agriculture, in particular, irrigation.
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  I recall, Steve, we had this conversation at some point, maybe
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  a couple years ago when we first revisited this topic of water.
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  But irrigation practices are inefficient in many cases.
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  The way that water is used in industry is inefficient.
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  But if we're just, without talking about necessarily the operational
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  aspects there, talking about the quantities of water consumed, a lot
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  of it is an agricultural problem.
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  It is, and so much of it evaporates in the course of transport from
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  supply to fields and on and on.
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  We need to continue to improve technology and investment in
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  infrastructure here, don't we, Alex?
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  Oh, that's absolutely true.
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  That's true for the way that water is used, both in agriculture and as
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  well as in other industries where it's used for cooling and so forth.
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  But also just on the infrastructure side of the delivery aspect of it, the average
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  water pipe in this country has a design life of 80 years and is 120 years old.
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  As a result of that, you have a lot of leakage, you have a lot of inflow, you
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  have a lot of costs that are incurred that are recovered from users but
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  they're not directly caused by the actual water that is being delivered.
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  There's lots of inefficiencies that could be ironed out even outside
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  of these problems that we have with just the resource availability.
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  Your point is that you're 50% over the life but you also
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  are using outdated piping.
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  A lot of lead is being contributed and so are heavy metals and so forth because
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  of the pipes that are 120 years old.
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  There's infrastructure needs, even if it's working, in order to ensure safety.
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  Oh, that's absolutely true.
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  We can talk a lot about the fancy aspects of smart metering.
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  We can talk about the issues of how water rates are calculated and applied
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  to different consumers and to shorten the period during which consumers
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  are sent the signal of how much their consumption is actually worth and
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  what price they should be paying.
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  Those are all issues that lend themselves very easily to the
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  application of better economic practices.
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  That's all true.
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  But on the engineering side, we have vast gaps when it comes to just the quality
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  of the infrastructure and certainly the delayed and deferred maintenance
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  that a lot of these systems need.
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  If we're going to parts of the world that don't have developed water systems
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  yet, or they've never gotten to the point where they have this defined
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  water infrastructure in place, they have massive needs to build water delivery
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  and then sewer collection systems.
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  And those are overwhelming in financial dimensions.
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  These are vast costs we're talking about.
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  Yeah.
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  And these pipes are leaking too.
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  Your scarce supply, a lot of it's going right into the ground and being
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  leached off just because of all of that.
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  A lot of work needed here.
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  In the paper you talk about water being framed as a macro critical risk.
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  I don't think that most companies, in their enterprise risk management
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  (ERM) processes, think about water.
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  They just take it for granted.
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  And you're saying, "No, that has to change."
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  Absolutely.
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  It's really important to take two issues and relate them to each other.
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  There's, on the one hand, the supply chain in general and the supply chain
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  that a business monitors closely and optimizes for cost, logistics,
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  anything along those lines that also comes with exposure to water.
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  Because it is true that if you follow your supply chain to the
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  origin of an input material, those businesses and those suppliers, they
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  have water demands and water needs and water constraints themselves.
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  You are indirectly exposed to what their constraints are.
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  That is something that is not as transparent, not as easily planned for,
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  but it's something that is very real.
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  When you're talking about this sort of macro, global strategic issues,
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  there are certainly parts of the world that have much more exposure to these
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  kinds of water risk, where investments are not just in water delivery but
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  also in additional technologies like desalination, more advanced technologies.
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  Taking this all together, water becomes an issue that should be thought of in a
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  much more comprehensive and macroeconomic context, rather than as a very narrowly
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  defined input to your business operation.
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  We tend to think of water as an issue for beverage companies.
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  For example, Coke and Pepsi, and for human consumption.
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  If you're in the tech arena, you go, "Okay, that doesn't affect me.
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  Who cares?" It actually does because all the way up the supply chain in
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  tech, you've got chip manufacturing.
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  This is just one example that you talk about, Alex, but it's really important.
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  Chip manufacturing takes a lot of water and data centers take
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  a lot of water for cooling.
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  If you're in the tech industry, which is huge and growing, you are vulnerable.
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  Oh, absolutely.
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  The numbers are staggering.
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  We looked a little bit into the water needs of data centers.
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  Everybody's talking about data centers these days when
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  it comes to their electricity needs, their impact on the grid.
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  We have documented a lot of this.
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  But if we're just looking at a large data center that may need 5 million gallons
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  per day of water, that's equivalent to the consumption level of a small town
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  of, let's say, 25,000 people or so.
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  We're just extrapolating from one data center-- and currently there
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  are hundreds of billions of dollars that are invested in that particular
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  technology to grow applications such as AI and other processing needs.
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  There are competing needs that will be at the forefront of a lot of
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  planning and risk management for a lot of business entities going forward.
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  Now you've got a convergence here of many risks throughout infrastructure.
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  You touched on this a little bit but you've got geothermal,
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  you've got hydropower, you've got logistics, water transport.
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  You've got convergence in risk, contributed to by water-- not strictly
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  due to water-- but contributed to.
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  With ERM, you have to be thinking about what happens if the canals go
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  down and there isn't enough water.
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  You can't transport goods.
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  You start thinking about all of these things.
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  It goes beyond even the use of water in manufacturing and consumption.
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  Oh, absolutely.
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  From a business perspective, if we're trying to assess
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  this all sounds overwhelming.
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  There are a lot of issues.
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  There are several steps, essentially, that businesses can take in order
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  to address some of these, in some cases, pretty immediate concerns.
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  Have to have a sense of what your exposure is to some of these water
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  risks, and not just your immediate consumption but certainly risks that
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  are embedded within your supply chain.
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  Risks that are embedded outside of your actual place of operations but in the
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  water basin, in the watershed, in the region in which you're operating, and
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  in which your suppliers are operating.
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  Transparency and accurate assessments of these are very important.
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  Keying in and trying to get a better sense of supply chains and their
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  respective risk is important, too.
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  From an economic angle, it's also important to be aware of the
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  economic value, the economic prices.
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  So what are we actually talking about here if we built in all these costs?
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  One cost in particular is the cost of becoming more resilient to some
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  of these risks, resilient to be able to respond if there are these kind
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  of constraints that are materializing in a much more immediate way.
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  That's important.
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  And resilience is both important from, " What is this going to cost me?" as
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  well as, "How can I shield myself from some of these operational downsides
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  so that I can keep my business going?"
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  We are talking about water scarcity and shortages and its
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  impact on business and economy.
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  We're going to take a short break and be right back.
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  Welcome back to C-Suite Perspectives.
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  I'm your host, Steve Odland from The Conference Board, and I'm joined
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  today by Dr. Alex Heil, senior economist at The Conference Board.
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  Okay, Alex, this whole notion of pricing water.
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  Again, you're an economist.
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  You price to try to govern the amount of imbalance, supply and
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  demand, and the amount of usage and conservation and all of that.
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  You've talked about how it's systematically underpriced, you
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  mentioned that earlier in the podcast.
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  What would change if everything was priced in balance and
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  priced into capital allocation?
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  What would happen to the cost structure of American business?
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  Just the natural extension of saying, oh, water's underpriced, that if
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  we were fully pricing it, some of these costs would certainly go up.
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  But it's also fair to say at the same time that if costs, and as actually I should
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  say, if prices were aligned with some of the more immediate use characteristics.
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  And just to give an example to the audience, there's a big difference between
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  indoor water use and outdoor water use.
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  Filling up your swimming pool or watering your lawn should essentially
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  come at a different price point than using the toilet or taking a shower.
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  The same applies to certainly business operations when we're
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  talking about businesses with varying degrees of demand peaking.
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  In other words, there might be a business that simply turns on the
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  tap and runs water 24 hours a day and others that have peaks and valleys.
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  They have spikes in their demand.
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  So the utility needs to provide capacity to accommodate those peaks.
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  But then that capacity is idle for many hours during the day.
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  Just incorporating pricing with those kind of demand characteristics
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  could bring cost recovery for them in line with how much it actually costs
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  to provide that kind of capacity.
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  That would be a good way to create more transparency for users on how
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  much the resource is actually worth and how they could be cutting their costs
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  by implementing greater efficiencies.
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  Bringing this sort of point of use closer to the point of payment
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  would help with that as well.
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  Okay.
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  Now, if anybody is still awake after all that.
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  I'm sorry.
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  I spent 10 years in the water sector, I get all carried away.
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  No.
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  It's really important.
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  You wrote a paper called Running Dry: The US Southwest Water
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  Crisis, which is really important.
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  That seems to be the nexus of our current water bankruptcy in this country.
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  You talked about the water situation along the Colorado River.
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  Talk about that.
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  Anybody who's been out west in the US has encountered the Colorado River.
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  It is a main water resource for what is called the Upper and Lower Basin states.
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  That's Colorado, New Mexico, Utah, Wyoming-- the Upper Basin.
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  Arizona, California, and Nevada-- the lower basin states.
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  The agreement between the states is from 1922.
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  Not surprising, the quantity of water flowing down the river essentially
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  has been falling because of drought, because of greater heat waves, more
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  volatility, less snow pack, various issues have contributed to that.
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  But the allocations have not necessarily changed.
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  They were revised a few times downward to reflect some of this.
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  We're really talking now about a system in which seven states have
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  greater water demands than what the river can actually provide.
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  In part, this has induced a much more immediate management of efficiency.
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  For instance, it's not an issue of residential growth.
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  Las Vegas doubled its population but actually lowered its total water
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  consumption because of efficiencies and what they're allowing, what they're
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  requiring users to do, and what kind of constraints they're placing on water use.
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  But at the same time, again, coming back to agriculture, a lot of
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  agriculture is the main draw here.
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  We've all bought strawberries from California and those are the ones that
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  directly depend on Colorado River water.
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  That's going to be much more difficult to sustain going forward.
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  A related factor is the Colorado River is a river that actually never
• 18:06
  empties out in the ocean because by the time it gets to the ocean, it's dry.
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  That used to be a seasonal issue and it's now structural because of what you said.
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  It gets used up.
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  There's nothing going through.
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  But it then creates not just a topical environmental, social & governance (ESG)
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  kind of risk but it's a core business risk in that entire region for, as you
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  said, agriculture, mining, manufacturing.
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  People are trying to put chip foundries there and there's no water.
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  You have to think about all these things.
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  What is resonating most with people are the two big reservoirs.
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  If you're taking, for instance, Lake Powell and Lake Mead,
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  water levels in those reservoirs are currently at 25-35% full.
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  That's going to be a problem because, at some point, there's
• 18:50
  not going to be sufficient water anymore to operate the turbines to
• 18:54
  generate electricity at the dams.
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  That's the condition called power pool.
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  If this gets worse and the water continues to drop, at some point there
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  isn't even enough water anymore to make it over the dam, essentially right?
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  Through the system of passages inside of the dam for water to run down river.
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  At that point we're then looking at really an entire water-based economy
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  in those seven states that is going to be severely questioned just
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  because there won't be any water.
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  We've talked about a few industries that are most impacted.
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  Just run down your list of all the industries that
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  should be thinking about this.
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  The way to think about this is there's water consumption,
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  there's water withdrawal, right?
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  Withdrawal basically means if you have cooling needs and you extract
• 19:39
  water from a water body, and then you discharge it again into the
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  water body, you might have high withdrawals but very little consumption.
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  Consumption means a brewery that fills bottles with beer based on water.
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  That has much higher consumption.
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  What we're seeing is water utilities certainly have high
• 19:57
  consumptive rates because they are delivering water to consumers.
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  We have a lot of, in some cases, tech businesses that draw on water
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  resources for cooling and the water evaporates and actually doesn't make
• 20:10
  its way back into the water body.
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  So that can also mean high consumption.
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  And I think there are some businesses, you know, water processing in
• 20:19
  heavy industry and so forth.
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  We need to be aware that there are differences.
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  But water delivery itself is certainly the largest consumptive
• 20:28
  category when it comes to water use.
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  And that also then, by extension, includes water that is used for agriculture.
• 20:35
  Those are really the main users of Colorado River water in that case.
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  Our listeners are probably saying, why doesn't the government deal with this?
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  And it's complicated, as you've written.
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  You've talked about the interstate negotiations.
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  There are federal rules coming up this year that are expiring.
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  You've got multiple layers of environment going on.
• 20:55
  You've got policy changes probably down the road here, which then
• 21:00
  creates volatility for businesses and uncertainty for businesses.
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  How should businesses think about and plan for this possible change in policy?
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  It's a complicated situation that is based on a very simple problem and the
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  simple problem is that in the years when the compact between the states was agreed
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  upon, the river levels were much higher.
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  So the allocation agreement that was agreed upon was based on
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  more water than even in years following, almost immediately after.
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  That's just gotten worse over time.
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  For businesses that are operating in and around the Colorado River, there are
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  concerns that the federal government is going to step in and broker a solution.
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  That solution will have to take water allocations away from some
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  users and allocate it to others.
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  All in all, what this is going to mean is that the overall level of
• 22:01
  water is falling, the availability is diminishing, and so one really
• 22:05
  needs to think about efficiencies.
• 22:07
  One needs to think about reuse, and think about what kind of water
• 22:11
  demand am I placing and can I really sustainably do that going forward?
• 22:15
  Because ultimately the water is in all likelihood-- if climate
• 22:19
  projections, heat projections, drought projections are correct--
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  the water is not going to be there.
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  Now, you could also look at what we've been talking about in terms
• 22:28
  of risk mitigation and year end and all those types of things.
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  But you can also turn it into a competitive advantage and you
• 22:33
  talk about that in the report.
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  There are businesses in certain parts of these user states and these
• 22:39
  stakeholders have really taken and played this up to their advantage.
• 22:43
  Like I said, some of these efficiencies, some of these reuse practices that
• 22:48
  both municipalities as well as businesses have enacted, they have
• 22:51
  really shielded them to a certain extent from some of these constraints.
• 22:55
  That's been helpful.
• 22:56
  Despite the fact that water use, from just a visual observation, is high in a place
• 23:02
  like Las Vegas, they have been very crafty in making sure that their per capita
• 23:08
  water consumption is continuing to fall.
• 23:11
  By positioning yourself with those strategies in mind and actually
• 23:15
  acting upon that could be an advantage for some of those businesses that
• 23:18
  are better suited at doing so.
• 23:22
  Any final thoughts?
• 23:23
  Anything we missed from your papers that you wanted to bring out?
• 23:26
  Water is such an integral issue, an importance to life that, unfortunately,
• 23:31
  it's frequently overlooked.
• 23:32
  I think these issues play out slightly differently.
• 23:36
  If we're talking about the Southwest of the US, if we're talking about
• 23:40
  drought in other parts of the US in Europe, if we're talking about water
• 23:45
  infrastructure, availability, certainly, in some developing world countries.
• 23:50
  Ultimately this all comes down to the same issue of the scarcity
• 23:55
  of water is materializing in various forms, but in more and
• 23:59
  more critical and immediate needs.
• 24:02
  As a global community, we just have to find a way to
• 24:05
  comprehensively deal with it.
• 24:07
  And these papers can be found on our website, Alex, TCB.org,
• 24:13
  and then click on the Economy, Strategy & Finance Center, right?
• 24:16
  Yes, they're all there.
• 24:17
  You can also look me up on the TCB website and as part of my bio and
• 24:22
  background, all my papers are to be listed there and these water papers
• 24:26
  also feature there prominently.
• 24:28
  Wonderful.
• 24:29
  Dr. Alex Heil, thanks for being with us today.
• 24:32
  Thank you so much, Steve.
• 24:33
  And thanks to all of you for listening to C-Suite Perspectives.
• 24:37
  I'm Steve Odland, and the series has been brought to you by The Conference Board.