Japan will profit from Singapore’s taste for sewage. Hong Kong dig in!

Hong Kong’s dependence on imported water is a problem increasingly being felt across the world
Population growth, climate change and plain old bad piping mean it’s time to invest in the companies behind desalination technology

Neil Newman

Published: 10:30am, 31 Aug 2020

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Hong Kong is notorious for its dependence on imports. Consumer goods, food, electricity and, crucially, water. In fact, our reliance on drinking water piped across the border is cited as one of the main reasons the British quickly agreed to return the territory to China in 1997 without seriously considering other options – China could simply turn off the tap.

HONG KONG DROUGHT OF THE 1960s

In the 1960s, Hong Kong was struck by a severe drought, with water rationed and supplied only for four hours every four days. The colonial government opted for a quick fix under the desperate circumstances, undertaking the Dongshen project to import water from the Dongjiang in Guangdong. The abundant fresh water from China, coupled with construction of water reservoirs and seawater flushing infrastructure, got the crisis under control within a few years. And attempts to create an alternative water supply through desalination were abandoned five years before the handover. To the British, buying water from the mainland was simply a commercial transaction, but in the process it gave the Chinese the upper hand in negotiations by controlling Hong Kong’s water supply.

The Aberdeen Reservoir Dam in Hong Kong. Photo: Martin Chan

Hong Kong has grown increasingly reliant on imported water, and the Dongshen Water Supply Scheme now accounts for 70-80 per cent of fresh water used today, and about 52 per cent of total water consumed – catchment water and toilet flushing seawater included.

Water security, that is both access to clean water and safety from flooding, is a growing global concern. And although a vast amount of rain has fallen in the region this year, relieving near-term shortages while causing a lot of other issues, the long-term problem is not going away. And thanks to the coronavirus we are all being called upon to wash our hands more frequently, which may be a drop in the bucket compared with the amount we use for a lazy shower, but it doesn’t help.

RAPID GLOBAL POPULATION GROWTH

Around the time the screw-down tap was patented in Rotherham by plumbers Guest and Chrimes Ltd in 1845, the planet was home to a little over 1.2 billion people. Today, the United Nations’ global population estimate is 7.8 billion, and although the pace of population growth is expected to slow, we may exit this century with some 10.9 billion people – so the demand for fresh water is going to increase significantly. Yet even today, we struggle to provide enough fresh water, with the World Health Organisation estimating that only 71 per cent of the global population has access to it.

There are three main water-supply issues in major cities: we do not collect enough, we draw too much from natural supplies, and we waste an awful lot. If these concerns are not addressed, the gap between supply and demand will widen as migration and population growth put more pressure on our water supplies.

A nearly empty dam on a farm in Piketberg, north of Cape Town, during the drought. Photo: AFP

WHO IS RUNNING DRY

Two years ago, after three years of poor rainfall, Cape Town made headlines as the first major world city to run out of water. Experts in part blame climate change, and also a lack of investment in water infrastructure. South Africa will spend some 900 billion rand (around US$66 billion) over the next 10 years to fix the problem. At the height of the crisis in 2018, residents of Cape Town came perilously close to having armed guards at standpipes in the street and having to contend with a hard limit of 25 litres of water per day – that’s about the amount used in a four-minute shower. Americans on average use about 300 litres a day on anything from drinking water to washing the car. By comparison, Capetonians’ lives were getting quite uncomfortable.

Usage of the water that’s available can also cause problems. Mexico City, Sao Paulo and Jakarta are extracting groundwater so fast that parts of the cities are sinking at alarming rates – up to 38cm per year in the case of Mexico City. India faces a looming water shortage that the government believes will impact just under half of its 1.3 billion people. As many as 21 Indian cities may run out of groundwater this year. And national population growth suggests that by the end of this decade, India’s demand for water will outstrip supply by a ratio of two to one.

Even seemingly perpetually drenched London has its problems, with the Greater London Authority forecasting supply problems by 2025 and severe shortages by 2040 – the main issue being leaky plumbing that is wasting as much as a quarter of the water supplied. Similarly, Tokyo, the most populous urban area in the world, suffers from poor plumbing that threatens the supply. I shudder to remember the summer of 1994 when I turned on the tap in my little place in Meguro-ku to see yellow water smelling like a putrid swimming pool. That was the first year I bought a water filter, and I haven’t been without one since.

An Australian farmer inspects an empty dam near Goulburn, about 170km southwest of Sydney. Photo: Reuters

Events over the past two years have revealed the perilous state of Australia, which had very little water to begin with, and, of course, California. Both are places that curiously have chosen to produce goods that consume vast amounts of water: rice, grain and wine. These areas are particularly economically and socially at risk. Melbourne’s water is fast running out, and, with reserves currently standing at 60 per cent, the city is turning to a technology Hong Kong abandoned and our arch rival Singapore embraced in desalination and sewage recycling.

HARD TO SWALLOW

Singapore is an appropriate comparison to Hong Kong, as both were under British colonial rule and Singapore suffers similar water scarcity problems as Hong Kong; plenty of rain but not enough storage. Historically, Singapore has had to rely on Malaysia for water, which for historical reasons makes Singaporeans very uncomfortable. Perhaps one reason the island city has looked for alternatives was that the water agreements signed with Johor in 1961 and 1962 had expiration dates. The first ended in 2011 without renewal, and the second will end in 2061. Singapore seems determined not to renew the latter and remain at the mercy of Malaysia for its water – a strategic vulnerability.

A desalination plant in California. Photo: AP

DESALINATION AND WATER RECYCLING

Singapore is now investing heavily in both desalination and recycling from sewage using membrane technology, with the expressed intention of becoming self-reliant. Desalination, largely achieved through “reverse osmosis” using membranes – rather than the energy-hungry method of boiling and condensing seawater – has been the mainstay of alternative water supplies where seawater is available. And new, energy-efficient technology is able to turn sewage into drinking water through successively finer filter membranes.

The Japanese have the lead in membrane fresh water technology and, aside from removing substances from non-potable water, they are also using dehumidifier technology to efficiently pull fresh water from thin air. Its Ministry of Economy, Trade and Industry is forecasting that by 2025 the market for desalination technology will reach 4.4 trillion yen (US$41.5 billion), more than three-and-a-half times the 1.2 trillion yen it was worth in 2007. Investors interested in building a long-term water investment portfolio would do well to look at Japanese firms whose stock prices have fallen well behind the recovery seen in other markets and remain depressed. As a thematic investment, water security is one theme we will find ourselves revisiting often. ■

Neil Newman is a thematic portfolio strategist focused on pan-Asian equity markets

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