Turning the tap on: Water as a business model

World Economic Forum – Future Global Agenda series

Too many people in the world don’t have access to safe drinking water in their homes. This month’s meeting of the World Economic Forum’s Global Agenda Council in Dubai could be the first step to changing that.

How do we explain the fact that just 43% of the world’s population can turn on a tap at home and expect to get clean drinking water but 96% of the world’s population now have access to a mobile phone connection? It doesn’t seem to be just about poverty: mobile phones are more expensive to run than taps.

It doesn’t seem to be that people don’t need or want clean drinking water as much as they want mobile phones. You can tell they need clean drinking water from the fact that water borne disease still accounts for 3.4 million deaths each year. You can tell people want clean drinking water because of the burgeoning market for extortionately priced bottled water.

It doesn’t seem to be for want of investment. The money would be there if the opportunities were available.

The problem for water is that its business model has failed.

Three unique qualities of water set up this failure. It is a basic human right, a capital intensive service, and a natural monopoly. You can’t deliver the basic human right if you can’t pay for the capital intensive service. The natural monopoly angle means that there is a reluctance to allow entrepreneurial solutions to the problem.

Developing a new economic model for water access has been one of the key items under discussion at this week’s Summit on the Global Agenda. It is not an easy task, but there are three strong reasons to be optimistic that the meeting will prove a turning point.

Turning points

The first is that there has been a big change in attitudes towards performance. Rapid urbanization and global warming have focused attention on the failures of urban water services as never before. It has squeezed out some of the ideological issues that got in the way of solutions in the past. The private/public debate that dominated the water sector in the 1990s and the first half of the 2000s has given way to a much more practical concern about whether or not the system delivers.

The second big change has been the blurring of the distinction between humanitarian aid and capitalism. The growing importance of private philanthropists in the aid sector means that business-based solutions to social problems are gaining currency at the expense of the traditional aid model. This is significant because the water sector has been a big recipient of traditional aid, and as a state monopoly has had little space for entrepreneurialism. A greater focus on creativity and incentives could make a real difference in terms of closing the access gap.

The third reason to be optimistic that a new model for water can be reached is the growth impact investing. This is one of the fastest growing sectors of the investment market (JP Morgan reports it is growing at 19% per year). Family offices and high net worth individuals are increasingly willing to make a smaller return on their capital in exchange for having a larger social impact. Water infrastructure is the single largest potential market for impact investor (it could happily absorb $5 trillion without being over invested). More to the point impact investors will help change attitudes within the water sector to accepting private capital. There is a strong bias against private investment in water because of fears that private businesses might exploit the fact that water is a natural monopoly. Such an approach would be self-defeating for impact investors. The presence of “friendly” impact investment funds could help diffuse some of the political barriers to attracting private capital into the water sector.

In many ways these changing attitudes – the increased focus on performance, the spread of entrepreneurialism into the world development space, the interest in balancing the social and financial returns from investment – are all examples of the kind of cross fertilization of ideas between the public, private and NGO sectors that has been at the heart of the work of the World Economic Forum since its inception in 1971. With these trends in mind isn’t too ambitious to expect the beginnings of a solution to water in next month’s discussions in Dubai.

This article features in the World Economic Forum’s Outlook on the Global Agenda 2015, published November 7.

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Christopher Gasson is a member of the World Economic Forum’s Global Agenda Council on Water