NEW YORK, N.Y. – 23 Jan 2013: Waterfund LLC announced today that it has signed an agreement with IBM (NYSE: IBM) to develop a Water Cost Index (WCI).
Scientists from IBM Research will apply Big Data expertise, acting as a calculation agent, to analyze large and diverse unstructured data sets. This will be used to develop of a WCI framework that would estimate the cost of water in different regions around the world. With its market and financial product expertise, Waterfund will work to structure and commercialize the WCI.
Population growth, massive urbanization and climate change are placing increasing demands on our limited water supply. Forty one percent of the world’s population – that’s 2.3 billion people – live in water-stressed areas; this number is expected to grow to 3.5 billion by 2025. And according to the United Nations, water use has been growing at more than twice the rate of population increase over the last century.
With advances in technology — deep computing and Big Data analytics linked to sophisticated sensor networks and smart meters — IBM is helping clients and partners make smarter decisions about water management. By monitoring, measuring and analyzing water systems, from rivers and reservoirs to pumps and pipes, we can better understand the issues around water. IBM is applying its expertise in smart systems and Big Data to help companies, governments and citizens understand and more effectively deal with these issues.
As governments are increasingly forced to turn to the private sector to fund the construction and maintenance of complex water networks, the Rickards Real Cost Water Index™ will serve as a benchmark for helping measure hundreds of critical projects on a like-for-like basis. Index values will reflect estimated water production costs measured in US dollars per cubic metre for a variety of major global water infrastructure projects ranging from retail water utilities and wholesale water utilities to major transmission projects.
“The backlog of investment in water systems around the world by some estimates approaches $1 trillion – quite apart from the hundreds of millions of people who have never had access to a water or sanitation system at all,” said IBM Distinguished Engineer and Big Green Innovations CTO Peter Williams. “By creating a benchmark cost for water we intend to harness the capital market to this supremely important cause. If we can make it easier to price investments in the water sector, we can improve the flow of capital into an area where it is desperately needed. We look forward to working with Waterfund to bring this about.”
Scott Rickards, President & CEO of Waterfund said, “The principal reason behind our decision to work with IBM was their unique combination of expertise in the water sector combined with the best data analytics available. Our initiative with IBM will finally bring real financial transparency to the water sector. By calculating the unsubsidized cost of freshwater production using IBM’s Big Data expertise, Waterfund can offer the first flexibly-tailored financial tools to investors in water infrastructure. The Rickards Real Cost Water Index™ highlights the energy costs, interest rate risk, and capital expenditures required to build and maintain large-scale water treatment and delivery networks.”
Typically, investors have turned to the public equity markets to gain exposure to the water sector, with mixed results. The WCI is intended to provide a market benchmark and to spur the development of third-generation financial products for both water producers and investors and to aid the growth of the water sector globally. Here are two examples of how it would work:
Scenario 1: A Water Agency cannot obtain bank financing for Phase 2 of a seawater desalination plant project due to previous cost overruns on Phase 1. Yet the Agency lacks the water it needs to supply a contractually specified daily volume of water to its largest customer, with a consequent risk of large penalties for each day of insufficient volume. Using strike and trigger values based on the WCI, the Water Agency could purchase a $25 million, 2 year insurance product. Payout to the Water Agency would be triggered on the total change in its Water Cost Index (as well as some other conditions, such as a specified increase in asset failure costs). This approach would enable the Water Agency to enhance its overall credit profile with the insurance enabled by the WCI, finance Phase 2 of the desalination plant and meet its supply obligations.
Scenario 2: A large desalination and water transmission system project needs to secure private equity and institutional funding alongside that from development banks and sovereign funds, to the tune of one third of the total project cost. To achieve this, the project needs a way to reduce risk to its investors. Based on movement in the WCI, the project could purchase $50 million in insurance. This would enable the insurance product to then be underwritten by a large reinsurer and allow the project to secure the private sector contribution it needs in order to proceed.