Business of Water

Reflections on Asia's Speed + Scale

Before matriculating at MIT Sloan, I spent a number of years living in China. Nevertheless, the speed and scale at which Asia is investing in water infrastructure projects continue to amaze me. Before we left for Asia, my co-organizers invited Jim Donnell, CEO of Poseidon Resources, to speak to our class about his company’s experience trying to build the largest desalination in the U.S. Poseidon Resources has been trying to build a desalination plant in Carlsbad, California since 1998. The project has been delayed numerous times by problems getting permits and over a dozen lawsuits from environmental groups, such as Surfrider Foundation and San Diego Coastkeeper and Coastal Environmental Rights Foundation. Posideon Resources is hoping to open its desalination plant by 2013. By comparison, as my classmate Jon Fitzsimmons points out in his blog posting, Hyflux had the SingSpring Desalination Plant we visited in Singapore up and running in two years.

One of the reasons why certain parts of Asia, such as China or Singapore, have been able to move faster than the U.S. is because the political system there brooks less dissent. While we were in Beijing, we visited the South-North Water Diversion Project. The project has taken longer than expected to complete because the Chinese government had to resettle 330,000 people living along the Danjiangkou reservoir in Hubei and Henan provinces. Because the state owns the land in China, the government can force villagers living on that land for generations to resettle elsewhere (with compensation, of course). Even if these 330,000 Chinese didn’t want to move, I’m not too sure what recourse they would have. Would the police allow them to protest the construction of the world’s largest aqueduct? Would the state-owned media publish their stories? If they sued the Chinese government, would a court hear their case? On the other hand, if the U.S. federal government tried to build a similar project diverting water from the Mississippi River or Colorado River to Washington D.C.? Check, check & check.

I’m not saying one way is better than the other. Singapore and China are arguably facing much more serious challenges with providing enough potable water for their citizens. Maybe their governments need to take more drastic measures. Because the Communist Party of China and People’s Action Party in China and Singapore, do not face serious threats when they “run” for election, they are able to approach these problems from a longer-term perspective. As my classmate Neheet Trivedi points out in his blog posting about the Economic Development Board, Singapore is looking forward, not just to the next decade, but the rest of the century. At the same time, subjecting the governments in Singapore and China to more public criticism about some decisions, like investing $62 billion of taxpayers’ money into the South-North Water Diversion Project, may not be such a bad thing either.

Root Cause Analysis

The battle to find solutions to water scarcity and quality issues around the globe has just begun.  Things will get much worse before they get better (if they ever do), especially for developing nations. A 2007 report by the Intergovernmental Panel on Climate Change (IPCC) projects that by 2100 (unless indicated otherwise), due to climate change:

-       Africa

• Between 75 and 250 million people will be exposed to increased water stress by 2020
• Yields from rain-fed agriculture could be reduced by 50% by 2020

-       Asia

• Freshwater availability in Central, South, East and South-East Asia, particularly in large river basins, will decrease by the 2050s
• Coastal areas, especially heavily populated megadelta regions will be at greatest risk due to increased flooding

-       Australia

• Water security problems will intensify by 2030
• Risks from sea level will rise and severity of storms and coastal flooding will increase

-       Europe

• Regional differences in natural resources and assets will magnify
• Water availability and hydropower potential will drop in southern Europe

-       Latin America

• Changes in precipitation patterns and the disappearance of glaciers will significantly affect water availability for human consumption, agriculture and energy generation

-       North America

• Warming in western mountains will cause decreased snowpack, more winter flooding and reduced summer flows, exacerbating competition for over-allocated water resources

 

Many of us participated in a UN Conference on Climate Negotiation simulation this week during our Sustainability Lab class at Sloan.  It was actually quite depressing to see how we were not able to stop global warming and sea level rise until monetary and GHG cap date concessions became practically unrealistic (developed countries cutting total emissions by 2018 and developing countries by 2030, followed by agressive emission reductions).  The simulation tool, developed at MIT, has been used by the US Department of State to understand climate impacts of country level proposals.  It is easy to use and free – you can check it out here.

In closing, unless we all realize the magnitude of the climate change problem which is at most a generation away and get our governments to make swift policy changes, the “business” of water will be very lucrative in the short run in providing band-aid solutions.

Providing Water to Asia's Billions: Role of Water Pricing

Through the coursework leading-up to the tour and throughout our Asian adventure, the role of water pricing in determining the success and failure of water infrastructure projects was continually top-of-mind for me. 

In energy infrastructure, the business model is clear, though not always effectively implemented.  The energy required to light our homes, operate appliances and run our businesses is an economic good.   The financial model for energy generation and distribution projects prices electricity as a commodity that must be paid for by citizens, governments and corporations.  Governments may choose to subsidize –to attract business or promote a certain technology – but there is an expectation that the service comes at a cost to consumers.

One of the most remarkable aspects of the Singapore water system is that they have created this same expectation among their citizens in the water sector.  Through aggressive and pervasive media campaign Singapore has branded water as one of the countries most valuable resources.   There is transparency about the lifecycle costs of providing clean water, and it is well understood (among cabbies, housewives, students and corporate leaders) that one of the nations major vulnerabilities is in its dependence on Malaysian water.  As a result Singaporeans understand that this resource comes with a cost and as a result people accept the full costs for one of the most expensive water systems in the world.

Singapore’s inclusive approach to water pricing comes in stark contrast to the attitude of much of the rest of the world which continues to view clean water as a basic right, from which governments should not be permitted to exclude any of their citizens.  As a result, water projects continue to be largely state-owned and operated.   In cases where PPPs have entered the equation, such as the Veolia project in Chengdu, fixed price take-or-pay structures have proven critical to success of these projects.  In such cases, governments continue to manage the distribution and billing and as a result position themselves to continue to subsidize this resource as is expected by their constituents.   At a small scale such water subsidies can be supported by government budgets; but, as China grows and its pop-up megacities become the norm water subsidies will become increasingly unsustainable for local governments.  As a result, I would argue that China (and the rest of the world) should take a lesson from water-scare Singapore and start on a propaganda campaign to educate their citizens about the value of water, and set a tone for the future that clean water is a economic good that should be valued, priced and managed as a key strategic resource.  

Where are we going? The Singapore Economic Development Board is thinking ahead

Singapore is in a unique place. It’s tiny, measuring only an 700 square kilometers. It gets more than half of its water from its neighbor to the north, Malaysia, but fears that tap could be turned off at any given time. Thus it has created its famous Four National Taps water plan. It only has 3 million locals, and almost 2 million expats living there at any given time. Yet it has managed to turn the tiny island with few local resources into a regional economic powerhouse, with one of the largest port facilities and oil refineries in the world.

But Singapore is thinking bigger: it wants to become a global high-end manufacturing and R&D hub, and the Singapore Economic Development Board (EDB), a semi-independent entity under the Ministry of Trade and Industry, is in charge of turning this vision into a reality.

Being a tiny country in a continent with neighbors hundreds times its size, Singapore has had to find its competitive advantage. We met with three professionals at the EDB focusing on water and cleantech who explained to us how Singapore, through the EDB, is envisioning this competitive advantage.

Due to its small size and relatively higher cost of labor, commodity manufacturing does not make sense in Singapore. To compete against India and China, Singapore has been working to compete in the “high-end value chain” as they put, in R&D and high-end manufacturing in sectors such as bio-medicine, water, and clean tech. As our hosts described, Singapore provides distinct advantages over many of its neighbors: high IP protection, R&D centers, double taxation agreements, free trade agreements, and talent in engineering and science. A number of its agencies and universities have partnerships with foreign institutions, such as Centre for Environmental Sensing and Modeling, Censam, a joint partnership with MIT. And some foreign companies, such as Vestas and GE, already have a presence, developing technologies in the water (GE) and tidal and fuel cell (Vestas) sectors. For others developing solar technologies, they have the benefit of the presence of the semi-conductor industry in Singapore and the prospect of solar reaching grid parity due to the increasing regional price of natural gas.

But there are challenges for cleantech and other emerging technology companies: a lack of institutions with the know-how to finance them. The Asian Development Bank now has program, but not enough VCs or PE funds are in space. EDB is attempting bridge the gap with the International Assistance Singapore. It does not offer funding but provides a network, through the country’s sovereign wealth fund, for example, of potential investors.

Despite the challenges, I was truly impressed with Singapore, as epitomized by our meeting with the EDB. They are looking forward, not just to the next decade, but the rest of the century. The country is exceptionally organized and clean, and I found it welcoming. Not to mention, it was really warm! A nice break from the Boston winter.

Images of Challenge and Opportunity

How does a large multinational consider opportunities within the water sector?  In our visit with GE, we were reminded that opportunities are born as challenges, and advised that the core challenges the world faces with respect to water fall into three buckets: quantity, quality, and energy.

While these challenges surface the world over, it is hard to imagine that their scope is as palpable anywhere as it is in China. 

From the quantity standpoint, China is fast approaching a point where demand for fresh water will exceed supply.  According to a McKinsey report we read in anticipation of our trip, by 2030 China's demand for freshwater could outsize its supply by over 25 percent. The current drought afflicting China’s northern plain presents this possibility in stark relief.

The quality challenge is also evident throughout China, where population and industrial growth burgeons across the country’s watersheds. Even the government’s own assessments (which we were on several occasions told were systematically optimistic) reveal that over 30% of its water supply is unsuitable for drinking.

Similarly, the linkages between water and energy use in China are extensive.  Not only is energy required en masse to move water throughout China’s growing hydraulic infrastructure (consider, as a starting point, the energy required to operate China's South-North Water Transfer Project), but water is also an indispensible component of the steam power cycles used in the vast majority of China’s power plants, not to mention the steel and cement industries, fueling China’s unrelenting urbanization.

The sight of it all left many of us slack-jawed throughout the China portion of our trip. But how to respond? 

Leave it to GE to lead by example.

In the face of supply pressure, GE has brought to market solutions which both reduce demand and increase supply. It works, for example, with industrial partners to optimize water use through process innovations.  Industry uses 20 percent of the world’s water supply (in the US it’s 46%, and in China 25%) and process innovation can free up meaningful quantities while driving attractive cost-savings for customers.

GE also looks at potential sources of “new” water, many of which we saw in action in Singapore: municipal wastewater reuse and desalination.  This serves the basis of GE’s “high tech” play in the space -- pushing the frontier of membrane technology, thermal distillation, and deionization -- affording relatively high-margin opportunities, in the context of the industry.

For quality, it’s about how to reduce effluent and recycle value along the way. GE described to us a zero-discharge technology designed to mitigate the water quality impacts of shale gas production, and extract ‘contaminants’ which in many cases can be purified and sold into industrial commodity markets.

Distilled to its essence, our visit to China was an opportunity to experience, in a visceral way, the magnitude and scope of the global water challenge.  Our visit to GE was a reminder that there are real economic opportunities embedded in the heart of the crisis.  Identifying them is a matter of clear thinking, technological expertise, and, of course, committed execution. 

In GE’s language, “Imagination at Work”.

In MIT’s, “Mens et Manus”.

Chinese Multi National Corporations - an emerging trend

Difficult questions charecterize the Sound Group: In an industry dominated by large state owned enterprises, what role (if any) can a domestic entrepreneur play? Is there a place for an environmental services company in an economic regime that appears to value growth above all else? If every multi-national corporation’s primary agenda is to improve their “China strategy”, why is a Chinese company looking to expand overseas?

As a private Chinese owned and managed company operating in the environmental services sector, the tremendous success of the Sound Group is not what one would have predicted when the firm was founded. The firm was founded with minimal capital as an EPC contractor operating in the industrial waste water sector. Within a span of 15 years the firm has grown into the leading private Chinese environmental services firm. It now provides products and services across the spectrum in industries including: Municipal waste water treatment, Industrial waste water treatment, Water supply projects, Environmental equipment manufacturing and solid waste management. The firm is able to compete across the value chain of these sectors – design, construction and investment capabilities have been built with the group.

Most recently, as the firm’s operations have reached scale within China and the domestic market grows increasingly competitive, the company ‘s management is now actively seeking to win business abroad. The firm recently won a bid to build a water treatment facility in Saudi Arabia, and surely more similar news is to follow. 

It is interesting to observe this transition from a local firm to a multinational entity. Initially, the Sound Group had to compete with multinational entities for business in the domestic markets. I imagine that the MNCs would compete on technology and scale, while the Sound Group competed on proximity to the customer. However, as the company grows abroad, it is remarkable evidence that the firm has been able to develop sufficiently to compete with MNCs in foreign markets.

I believe the story of the Sound Group could be emblematic of a broader emerging trend - for Chinese entrepreneurs who have honed their businesses by competing with MNCs in the domestic markets, it is a logical extension to grow abroad. 

 

Self Reflection

I want to first start out by thanking the organizers for one of the best trips I have ever been on. Not only did the trip go off without a hitch, but also, the team organized some extremely interesting and prominent people to talk with us. I’m not sure if some of the presenters were ready for the depth and breadth of questions they would be asked. The study tour group was one of the most engaged and interesting teams that I have seen at Sloan or elsewhere.

I think this type of engagement was one large part of what made the trip so special. Even though we kept long hours, every moment had a certain energy that could only be captured by the quiet that would sweep the bus for 20 minute cat naps (and of course picture taking with the Sloan flag and sleeping Sloanies). A cheers to the organizers again for selecting a group of individuals who’s backgrounds in water entrepreneurship, civil and industrial engineering, construction, and public policy (to name a few) made the diversity of perspective a highlight of the trip. A toast to the study tour group for never locking into personal background for problem causality or solution (the “financial perspective”, or the “civil engineering perspective”).

The tour was comprised of individuals, who made the trip an extremely rich learning experience and also a lot of fun, which I feel is a common experience here at Sloan. I truly believe that the focus on Action Learning is one of the key differentiators of Sloan and the people here that make such endeavors so engrossing.

Fun Memories:

Oversleeping before leaving - just out of midterms, Cramped coach seats for 19 hours, Allen’s/Everyone’s Singapore Sales Pitch, Jogging in the HEAT, Marina Bay Sands Casino – I mean – “Integrated Resort”, Photos on the green roof at PUB (HEAT), 4 TAPS, Black and Veatch – water strategy in Asia wow!, GE Water, delicious food at the hawker stalls, MIT Alumni reception, Singapore’s gorgeous skyline, the red eye flight to Chengdu, ALICE! (our tour guide) – Don’T Forget her, Pandas, Coke, Texas Instruments, the live fish in the water (see – its on the slide), social events (Jelly Fish Bar), Hot Pot and forming business relationships in China, Beijing, Bullet Train, the ECO city visit (China simply builds new cities and tells citizens and companies to move there), more food, IFC – water projects as a new source of revenue, negotiating with the locals – shoe deals, Nestle, Drip Tech (innovators in drip irrigation technology) dinner – meeting the 2013 Sloanie, Hutons, the Great Wall, coach PLUS on the return flight!, Water Study Tour group withdrawal and the beginning of H2 classes. (and everything else I forgot!)

We Have a Two – Part Water Problem

Water presents a two-part part problem - quantity and quality of water resources.  Going to Singapore and China allowed me to personally see the various issues that governments, companies, entrepreneurs, and research institutions are racing to solve.  From the many meetings and discussions during our trip, I’ve concluded that there are two major issues that countries may struggle to solve:  Do they have enough water? Do they have high quality water?  

In Singapore, the water supply is a matter of national security – and rightfully so.   As a result, the top priority of the government remains to become water independent by 2061 when their last water supply agreement with Malaysia expires.  Meeting with the Public Utilities Board’s Director Mr. Han Tung, it was clear that the sense of urgency to secure a reliable water sources is extremely high.  To some their confidence to achieve self-sufficiency may seem too optimistic, but after spending three days in Singapore I’m a believer.   Singapore has all of the pieces in place to make it happen ahead of the 2061 target.  Singapore is a relatively wealthy nation with an unobstructed access to seawater allowing them to invest in membrane technologies for desalination, and build wastewater reclamation facilities like the NEWater plant.  In addition, the PUB has made huge infrastructure upgrades to increase the efficiency of their water catchment system.  Their goal is to convert 90% of the land to catch rain water and drain into catchment reservoirs. 

These strategies are part of the “Four National Taps” campaign to engage the public in the discussion of water and shape the public’s perception of the value of water.  You can call it propaganda, but it works!  I can’t say that I will ever forget the Four Taps strategy: 1) Catchment 2) Import from Malaysia 3) Desalination 4) NEWater (toilet to tap water).   It is such an effective government-led marketing campaign that we all admittedly drank the NEWater.  Once you get over the fact that NEWater originates from waste water, it’s all good!

 n China, the problem is more complex.  From water scarcity to environmental regulation enforcement, China can be compared to the U.S. in the 1960s.  In one of our great meetings it was said that when you deal with China's water issue, you have to deal with “90 different Chinas.”  Unlike the tiny country of Singapore with a homogenous water issue, China faces a water scarcity in the Northeast and water quality issues in places like Chengdu that are developing at an explosive rate.  The various challenges require the central and local governments to take a multi-faceted approach to addressing their issues.

In Beijing, the problem is being addresses by one of the largest water projects in the world, the South-to-North Water Transfer Project.  In Chengdu, where there are wafer fab and beverage plants ultra-pure water is a necessity for the wafer manufacturing.  The Chinese government is well aware of the challenges they face and have made it a point to address these issues across their expansive country.  As China becomes a more significant economic force they will require reliable clean water in areas like Chengdu, and a reliable water supply in the Northeast.  And guess what? China will address all of their water issues to achieve sustainable economic growth.

China and Singapore have significant water issues, but both countries have the means to overcome their challenges.   Over the next decade it will be interesting to witness the progress that both nations will make in addressing their water issues.  Stay tuned.

Irrigation in Rural China

To be sure, this blog post builds on a post by colleague Jake White regarding drip irrigation, found here.  In it, Jake discusses the need for greater efficiency and improved yields in China’s rural farm base.  He presents drip irrigation (DI) as one solution, and suggests that there are significant barriers regarding the technology’s acceptance, distribution, and cost such that farmers remain weary of adopting DI.

To build on these ideas, I would like to give additional context regarding the agriculture sector in China.

Geography.  Many areas of China remain difficult to farm.  Sandy soil permeates the west.  The Gobi desert is set to the north.  This is in contrast to the clay-like soil in parts of the northwest and elsewhere that are more conducive to agriculture.

Beyond soil type, water availability varies greatly.  The southeast is much wetter than the northwest, as shown in the figure below.  This problem is underscored by the government’s South-North Water Divergence Project, in which 44.8 billion cubic meters of water will be redirected from the Yangtze River in the south to the water-starved Yellow River in the north.

Farm management.  One sees a noticeable difference between farms in the north and those in the south.  Those in Northern China tend to be larger plots and are run by more sophisticated farmers that adopt new technology, seed, and farming techniques more readily.  Scale affects the appropriateness of different irrigation techniques.

Politics.  Many farm decisions happen at the local government or farm company level, not at the individual farmer level.  While peasant farmer cooperation is important, local government buy-in and provincial support drive new technology adoption and regulatory change.   Variations on this theme were expressed by irrigation technology provider Valmont Industries and seed producer Monsanto Companies.

Application.  DI is not appropriate for all types of crops.  It is particularly well suited for viney crops like watermelon where significant “dead space” exists between targeted irrigation points.

A host of other factors contribute to the adoption of DI (or lack thereof) across China, including the existence and depth of groundwater, farmers’ financial capacities, and commodity prices.

One should remember, however, that China is vast and remains underpenetrated by technology providers.  With 70% of the country’s water going to the agriculture sector and a growing population that demands more food and greater efficiencies, one can be sure that drip irrigation will play an increasing role in China's future.

On the art of blogging, and posing my main question

Let me begin by saying that I am decidedly not a “blogger.”  In my mind, blogging falls into the category of online diaries, constant status updates, and “It’s complicated” relationships – each is a chance for a bit of self-indulgence on my part and voyeurism on yours.  As such, I’ve been avoiding this aspect of the Water Study Tour – blogging?  Who would read it?  Of course, as I read my classmates' posts and am struck by their insights and collected knowledge, this chip has fallen off my shoulder.

Beyond that first mental block, there is one perhaps more deeply rooted.  I am one of the lucky people who joined this group despite having no prior experience working with water.  Before Sloan, I worked at a cleantech company doing demand-side energy management.  My interests center very generally around alternative energy, waste management, and green building design.  I’ve often criticized sustainability conversations as being unrealistically siloed; this class seemed like a unique opportunity to learn about a globally relevant topic that touches each of these interests.  And it has been – but back to blogging.  What can I contribute compared to my colleagues, whose work in this field is truly inspiring?

As I was mulling over these thoughts, I had the good fortune to be in touch with Kathrin Winkler, the Chief Sustainability Officer of EMC Corporation.  Kathrin has a blog called Interconnected World (check it out; she has a lot of great things to say about promoting sustainability from the inside out at a very traditional company).  She gave me the advice that blogging is a process – a forum for both experts and newbies like myself to ask questions and start conversations.  She reassured me that simply framing the questions would help me find answers, whether online or out in the world.

So, I’ll take Kathrin’s advice and post my thoughts into the ether!  To be honest, perhaps my biggest question at the outset of this Business of Water course came from my husband.  One of the things that drive me crazy about him is how he leaves the water running when he washes the dishes (rather than turning on the faucet only to rinse).  Each time I nag him about it, he responds with "When I lived in Colorado, of course I was more careful with water.  But here in New England, there's no shortage of clean, cheap water – so what's an extra minute of running the faucet?  At least I'm doing the dishes."

He has a point.  Water is plentiful in New England, especially in the greater Boston area.  We have two reservoirs in the near vicinity, and more rain than I care to think about.  But in the end, the question is not whether the water exists or whether there is risk.  Truly, it is "do my actions have an impact on my friends in Colorado?"  Or in L.A., Israel, or China, for that matter?  This question of interconnectivity kept coming to me over the course of this study, and set the theme for my travel experience.  I developed some strong opinions (which I'll describe further next time) - and I welcome hearing yours!