Case Study No. 1 Liquidity crisis; Water scarcity

Case Study No. 1 Liquidity crisis; Water scarcity Questions 1) Explain Adam Smith statement that : “nothing is more useful than water: but it will purchase scarcely anything; scarcely anything can be had in exchange for it.” Use the Diamond-Water paradox as an example 2) Do you think Adam Smith statement still holds true today? Which drivers make water a scarce resource today? 3) Do you think management of water will be a challenging issue in Saudi Arabia within the next few decades?ABSTRACTFULL TEXTAs water becomes ever more scant the world needs to conserve it, use it more efficiently and establish clear rightsover who owns the stuff “NOTHING is more useful than water,” observed Adam Smith, but “scarcely anything can be had in exchange for it.”The father of free-market economics noted this paradox in 18th-century Scotland, as rain-sodden and damp thenas it is today. Where water is in ample supply his words still hold true. But around the world billions of peoplealready struggle during dry seasons. Drought and deluge are a costly threat in many countries. If water is notmanaged better, today’s crisis will become a catastrophe. By the middle of the century more than half of the planetwill live in areas of “water stress”, where supplies cannot sustainably meet demand. Lush pastures will turn tobarren desert and millions will be forced to flee in search of fresh water. Where water is available, when and in what condition matters hugely. About 97% of the water on earth is salty; therest is replenished through seasonal rainfall or is stored in underground wells known as aquifers. Humans, whoonce settled where water was plentiful, are now inclined to shift around to places that are less well endowed,pulled by other economic forces. Climate change is making some parts of the planet much drier and others far wetter. As people get richer, they usemore water. They also “consume” more of it, which means using it in such a way that it is not quickly returned tothe source from which it was extracted. (For example, if it is lost through evaporation or turned into a tomato.) Thebig drivers of this are the world’s increased desire for grain, meat, manufactured goods and electricity. Crops,cows, power stations and factories all need lots of water. To make matters worse, few places price water properly. Usually, it is artificially cheap, because politicians arescared to charge much for something essential that falls from the sky. This means that consumers have littleincentive to conserve it and investors have little incentive to build pipes and other infrastructure to bring it towhere it is needed most. In South Africa, for example, households get some water free. In Sri Lanka they payinitially a nominal 4 cents for a cubic metre. By contrast, in Adelaide in Australia, which takes water conservationseriously, an initial batch costs $1.75 per cubic metre. Globally, spending on water infrastructure faces a hugefunding shortfall. A hole of $26trn will open up between 2010 and 2030, estimates the World Economic Forum, athink-tank. In many countries people can pump as much water as they like from underground aquifers, because rules areeither lax or not enforced. Water use by farmers has increased sharply in recent decades (see chart). This hasPDF GENERATED BY SEARCH.PROQUEST.COM”Nothing is more useful than water,” observed Adam Smith, but “scarcely anything can be had in exchange for it.”The father of free-market economics noted this paradox in 18th-century Scotland, as rain-sodden and damp thenas it is today. Where water is in ample supply his words still hold true. But around the world billions of peoplealready struggle during dry seasons. Climate change will only make the situation more fraught. 11PDF GENERATED BY SEARCH.PROQUEST.COMallowed farmers to grow huge amounts of food in places that would otherwise be too dry to support much farming.But it is unsustainable: around a fifth of the world’s aquifers are over-exploited. This jeopardises future use bycausing contamination. It also damages the layers of sand and clay that make up aquifers, thereby reducing theircapacity to be replenished. People do not drink much water–only a few litres a day. But putting food on their tables requires floods of the stuff.Growing 1kg of wheat takes 1,250 litres of water; fattening a cow to produce the same weight of beef involves 12times more. Overall, agriculture accounts for more than 70% of global freshwater withdrawals. And as the global population rises from 7.4bn to close to 10bn by the middle of the century, it is estimated thatagricultural production will have to rise by 60% to fill the world’s bellies. This will put water supplies under hugestrain. Food for thought Extravagance must be tamed. Farmers produce far more food than finds its way into stomachs. Some estimatessuggest that as much as a third of all food never actually makes it to a plate, wasting as much water as flowsdown Russia’s Volga river in a year. Richer households are responsible for throwing out the largest share ofunwanted victuals. Poorer ones may never even see the produce that rots on slow, bumpy journeys to market. Water is vital not only for food and domestic well-being. It is “fundamental to economic growth”, points out UshaRao-Monari, head of Global Water Development Partners, an investment outfit backed by Blackstone, a private-equity giant. Scarcity stalls industrial development by squeezing energy supplies. Electricity generation dependsupon plentiful quantities; nuclear power requires water both for cooling turbines and the reactor core itself, forexample. Coal-fired plants cannot function without it. Power generation is a thirsty business. Overall about 41% of America’s withdrawals go towards cooling powerstations. In countries such as Brazil, where hydroelectric power provides more than two-thirds of the country’sneeds, scarcity is also a worry, particularly when dam designs rely on rivers fed by rainfall (see “Dams in theAmazon: Not in my valley”). Spikes in energy prices often follow dry periods. Zambia endured sporadic blackoutsthat began a year ago and lasted until April, when drought crippled power generation from the Kariba dam. As poor countries develop, global demand for electricity from industry is expected to increase by 400% over thefirst half of the 21st century. The majority of water-intensive industries, such as coal mining, textiles andchemicals, are found in countries that are particularly prone to water shortages: China, Australia, America andIndia. Industry can increase strains on supplies too, by polluting water, making it unfit for human use. Over a thirdof China’s waterways have been spoiled by industrial effluent and other nasties. Climate change will only make the situation more fraught. Hydrologists expect that a warming climate will see thecycle of evaporation, condensation and precipitation speed up. Wet regions will grow wetter and dry ones drier asrainfall patterns change and the rate increases at which soil and some plants lose moisture. Deluges and droughts will intensify, adding to the pressure on water resources. Late or light rainy seasons will alterthe speed at which reservoirs and aquifers refill. A warmer atmosphere holds more moisture (the water content ofair rises by about 7% for every 1oC of warming) increasing the likelihood of sudden heavy downpours that cancause flash flooding across parched ground. This will also add to sediment in rivers and reservoirs, affectingstorage capacity and water quality. Less snow in a warmer world creates another problem. Places such as California depend upon mountainmeltwater flowing down in time for summer. Climate change will make the availability of water more variable inSouthern Africa, the Middle East and America. The World Resources Institute, a think-tank, ranked 167 countries,and found that 33 face extremely high water stress by 2040 (see map). Uncertainty surrounds what this will mean for crop yields but a study by academics at Columbia University is notencouraging. Higher concentrations of carbon dioxide in the atmosphere may make plants use water moreefficiently in some parts of the world (they will lose less moisture during photosynthesis). Average yields of wheat-growing areas fed by rainfall–mostly located in North America and Europe–might rise almost 10% by 2080 andwater consumption decline by the same proportion. But average yields of irrigated wheat–common in countries22such as China and India–could drop by 4% and maize harvests would fall everywhere. High and dry Altered weather patterns will mean that crops may wither where they once thrived. By 2050, even if temperatureincreases can be limited to 2[degrees]C, crop yields could slump by a fifth in Africa. Altered rainfall patterns couldmake conditions too dry and hot to grow beans in Uganda and Tanzania, for example, according to a studypublished this year in Nature Climate Change. But forecasting precisely how regions will fare from deluges ordrying is difficult as past weather records are a less useful guide as the climate changes. There is no single solution for the world’s water crisis. But cutting back on use, improving the efficiency of that useand sharing out water more effectively would all help. There are many schemes around the world to meet eachobjective but so far these tend to be implemented piecemeal rather than in a co-ordinated effort to preserve theworld’s supplies. Farming, because it uses water so heavily, is an important target. Changing agricultural practices is vital andfarmers, at least in the rich world, are becoming more shrewd in their use of water. Precision planting, hybrid seedsthat require less watering and other technologies are all helping to conserve precious supplies. Drip irrigation,which targets water directly to the roots of plants rather than spreading it indiscriminately, can cut use by 30-70%. Water for farming can be gathered through means other than raiding aquifers. Schemes for harvesting rainwater,by collecting it in tanks rather than letting it run away, are commonplace. Recycling wastewater has hugepotential. Fruit trees in Israel are showered with it. Overall the country recycles 86% of its sewage, a vastly highershare than any other; Spain is next at just 20%. Israel does not think it can rely on its neighbours to supply it withwater. Singapore, reluctant to depend on Malaysia, recycles sewage into drinking water. But politicians elsewhereare too squeamish to let people drink recycled waste. Water stress afflicts one in four cities worldwide. Policymakers could do a lot of basic things better to cope with it.Plugging leaky pipes would be a start: they cause some big cities in the Middle East and Asia lose up to 60% oftheir water. Rich cities still have a long way to go too: London wastes 30% of its water through leaks, equivalent toa bathful a day for every household, by one estimate. In Chicago wooden pipes still carry water. Fixing pipes couldsoon become easier and cheaper. Robotic systems are being tested which can detect and repair leaks by sensingpressure changes around them and plugging holes while pipes are still in use. Poor countries, where millions live in slums without proper sanitation, need more pipes in the first place, not tomention reservoirs and purification works. Where new infrastructure is required, better methods of modellingscarcity could help. They would let new installations be sited where they will guarantee supplies, even if climatechange has an effect on patterns of rainfall. Space Time Analytics, a Brazilian company, is working on a globalwater-risk management system that will have the ability to predict likely shortages with much more precision. To understand why water supplies become insecure, you first need to know two things that affect the volume ofwater stored in lakes and reservoirs, says Juan Carlos Castilla-Rubio, the firm’s boss. The first is the changes in thevolume stored over the years. The second is the variability during any given year. This is because, in many places,water storage represents the buffer between triumph and disaster during unexpected dry spells. And knowing howit may be likely to vary in the face of climate change could justify appropriate infrastructure investment ahead oftime. Go with the flow Better modelling tools may also convince governments everywhere of the urgency of dealing with water scarcity.There is plenty of capital available for water infrastructure, reckons Ian Simm of Impax Asset Management, aninvestment firm. The problem lies in securing consistent political support for it, especially at the local level. Hard-nosed private investors have turned away from water, reluctant to risk vast sums for uncertain returns stretchedacross future decades. “If I build a billion-dollar desalination plant, will I get paid? That is the sector’s biggestissue,” explains Ms Rao-Monari. Desperately dry countries have shown that impressive infrastructure can be built with money and consistentpolitical support. Desalination plants convert seawater to drinking water, but at a cost that can induce tears.PDF GENERATED BY SEARCH.PROQUEST.COM33Unsurprisingly, most of the biggest are in the Middle East. The Sorek plant in Israel, the country’s largest, suppliesmore than 1.5m people–equivalent to about 20% of municipal demand. But the process is still more expensive thanalmost all other ways of supplying fresh water because of the enormous quantities of electricity required. Desalinated water is far too expensive for irrigation, points out Mike Young, a water-policy expert at the Universityof Adelaide. Better for countries to eke out the little they have more efficiently, he argues. Existing managementsystems often hinder such sharing. In poor countries they are often rudimentary. In rich countries entitlement andallocation schemes largely came into being during times of abundance. They are often slow, bureaucratic and fartoo scattered. America, for example, has more than 50,000 water utilities. Everywhere, water is devilishly difficult tomanage. As it flows, it is used and reused, making it hard to track and measure. Rights regimes that are well designed and implemented are among the most effective tools for distributing waterfairly and sustainably. Under one such system, Australian states began reforming water management in 1994. Fewothers have followed, though attempts at reform in Chile and Yemen have met with varying degrees of success. An “unbundled” system, in which component parts are managed separately, could replace irrigation systems wherethose who arrived first enjoy more senior rights. In California this has created a division between those who cameto the state before and after 1914, for example. And as any water saved by irrigators passes down to more juniorrights holders, there is little incentive there to adopt technologies which boost water efficiency. To create tradable water rights, Australia first drew up a baseline for water use, taking into consideration pastcommercial, social and environmental needs. Next, old water rights were replaced with shares that granted holders(usually landowners) a proportion of any annual allocations. Clever formulae take account of the seniority of pre-existing rights. Different classes of shares determine who gets what and when to balance the competing claims ofupstream farmers and downstream urbanites. After that a regulatory board makes sure that all users get as muchas they are entitled to. Allocations made to shareholders are tradable, but those receiving them can also store them for the future. Thisprevents any sudden wasting of water at the end of each year and encourages thrift during a drought. Issuingshares in perpetuity ensures that a holder can have more water only if someone else is prepared to have less. Acentralised register holds everything together. Two markets for trading have been created: one in which shares areexchanged, and another for allocations of water in a given year. The idea is not a new one. In places such as Oman,aflaj systems involve villages trading in shares and in minutes of water flow. Pooling resources Such regime change originally met strong resistance from farmers and other big users in Australia. But tradingallocations reaped enormous rewards for shareholders. During the first decade of reform the annual internal rate ofreturn from owning a water right was over 15%; those who held water shares saw the value of their rights doubleevery five or so years. But following this example elsewhere will be tough. Even rich countries will struggle tounbundle rights that have accumulated over decades. Reforming water management is urgent nonetheless. More than two centuries ago Adam Smith was onlymoderately gloomy about the precious liquid. Filmmakers today take a more dystopian view. In the latest “MadMax” film, for example, armed gangs race around desert landscapes, fighting and dying for water. Such scenariosare still fiction, fortunately. But the prospect of water wars is far from fanciful. Some think that global drying is oneof the causes of bloodshed in such places as Somalia, Sudan and Syria. With clever pricing, clearer ownership and a bit of co-operation, water scarcity can be alleviated. If humanity fails toact, it will get just deserts.

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