Warning: This one is a little long and a little vague. Feel free to contribute, clarify, contradict.
Do you know of any interesting research about returns to investing in "water" (in a broad sense: for drinking, producing energy, for watering lands, for home use, for... whatever) around the world? I'd personally find that very interesting.
This question really needs a book-length answer (and even then...), but here's my
best blogger shot at it:
Let's start with uses (ordered from highest to lowest value):
- drinking water (tap or bottled)
- industrial water (energy or production)
- residential water (existing or new development)
- irrigation water (annual or perennial crops)
And now let's talk about who is making the investment and where they are (matched in most/least wasteful pairs):
- wet/dry places
As you can see from these lists, many factors matter. You can also see that I have made a few controversial choices. I am not married to any of these choices, but I made them with specific examples in mind -- and I can easily be wrong. Please correct or argue with me in the comments. Links to specific examples are particularly welcome!
Now consider the factors affecting "returns" to investing in water:
- Benefit/cost ratios: For any private investment in water, that ratio is likely to be higher than one. For government investment in water, the ratio is often less than one. (I'll get to that below...)
- Opportunity costs: This means the cost of uses forgone by using water in a certain way. Water used for irrigation is not available for drinking.
- Fixed costs (e.g., aqueducts, dams) and externalities (e.g., damage to environment from use or disposal of water -- including discarding water bottles, creating nasty runoff, etc.)
- Equity and efficiency: Water does have a social/public/moral dimension, so legitimate equity factors (the children!) will trump illegitimate equity factors (the farmers!)
The highest uses (after drinking water, bottled or tap) are probably in manufacturing drugs (legal and illegal) or high-technology equipment (microchips). The lowest uses are almost always the result of government policies: farmers in India who get free electricity for irrigation pumps, the Libyan "Great Manmade River" (delivering fossil water from under the Sahara for growing wheat), or the recently-discontinued Saudi program of mining fossil water to grow "national wheat" [great post here].
My least-favorite waster, Imperial Irrigation District, gets its own line. [posts]
So, let's get to your main question -- where should one invest in water? It depends (says the many-handed economist) on the property rights, competition, mix of equity and efficiency considerations, etc. In fact, I'd say that the most profitable place to invest in water is where rights are clear and the high-value use is identified. That's why Nestle and Coke are in the bottled water business (Raw materials cost = 0.03 percent of the retail price? Gotta love it.)
Unfortunately, Nestle's investments are not doing very much for the people most in need -- poor people in developing countries -- and governments in those countries are not doing very much either, copying the mistaken policies that we see in the western US (cheap water to farmers, self-sufficiency in food, etc.), and the poor are left behind.
Bottom Line: Water is essential to life. Unfortunately, investments in water that could improve many people's lives are distorted by unfair, inefficient and downright criminal political mismanagement. (That strong enough for ya?)
Today at Aguanomics: sustainable living (it might work out fine -- if the icecaps don't melt...)