Africa and the US state of California share much in terms of terrain and their climate. Both regions are high agricultural producers while at the same time heavily affected by a changing climate which has threatened their future prospects.
However, as investors in the US look for a way of speculating and earning from water scarcity in California, there is little effort being undertaken to take advantage of the water situation in Africa for a return on investments.
Two billion people now live in countries plagued by water problems, and almost two-thirds of the world could face water shortages in just four years.
Data from the United Nations Environment Programme (UNEP) has shown that 25 of the 55 countries on the African continent will record water levels below 1,700 cubic meters per capita per year by 2025, representing an acute water shortage in these countries. In Sub-Saharan Africa (SSA) where water crisis is prevalent, the region is home to about 50 percent of the world’s entire population that do not have access to clean water.
With the future of the world’s most important commodity at stake, the derivatives marketplace, Chicago Mercantile Exchange (CME) Group has commenced the trading of water futures as a commodity at the New York Stock Exchange.
The commodity started trading for $496 per acre-foot. The CME launched the country’s first water market with $1.1 billion in contracts. Contracts are tied to the Nasdaq Veles California Water Index. This index acts as the spot price for an acre-foot of water.
The contracts work on the basis of the index whereupon the expiry of a contract, the prevailing water condition will act as a determinant of the price of water. In the event there is abundant rain, the buyer of the contract pays a cost as projected by the index. When there is drought and water scarcity, the seller pays more money.
In this new marketplace, those who need to buy extra water when prices are high can now bet on futures contracts to offset higher prices in the future which will allow farmers and municipalities to hedge their bets on the future price of water.
The Index is calculated and disseminated once per week after the close of business each Wednesday.
Meanwhile, the securities markets have opted for other forms of water trade. These include the World Water Index (WOWAX), a global stock market index established in February 2002 by Société Générale that contains the largest 20 global corporations of water supply, water infrastructure and water utilities/treatment sector.
They have tried to bring out the business aspect of water availability across the globe. While Earth has over 71 percent water, only a meagre 3 percent is clean and available for drinking. The rest of the water is locked up in oceans, salty lakes, glaciers, polar ice caps, atmosphere, and soil; is highly polluted, or lies too far under the earth’s surface to be extracted at an affordable cost.
The International Bank for Reconstruction and Development (IBRD) a subsidiary of the World Bank, already has a seven-year $208 billion Sustainable Development Bond to engage with investors to raise awareness for water and ocean resources.
World Bank bonds support the financing of a diverse portfolio of sustainable development projects and programs including those which protect and preserve fresh and saltwater resources and address marine pollution such as fishing and aquaculture innovation in Peru, sustainable fisheries and marine resources conservation in Seychelles, and waste management improvements in Indonesia.
In Africa, the trend in getting returns from private investors in water projects including prospecting is still too little to note despite major incentives by local funds.
The African Water Facility (AWF) provides grants and expert technical assistance to implement innovative water projects and raise investment for water projects throughout Africa.
Since its inception, the AWF has been outstanding in providing grants for project preparation with measures to strengthen water governance and water knowledge management. Overall, the Facility’s action is to support projects designed to increase water, energy and food security, enhance regional cooperation and promote socio-economic growth in Africa.
What has worked better for the continent is the development of public-private-partnerships (PPP) which mainly works around building infrastructure as well as promoting conservation of the commodity.
In Kenya, the Tana River provides water for 95% of Nairobi’s residents and generates half of Kenya’s hydropower. Excess sediment from eroding soil has been getting into the river, reducing the capacity of the reservoirs and increasing water treatment costs.
The Upper Tana-Nairobi Water Fund, a public-private partnership involving the Kenyan government, private companies and The Nature Conservancy, invests upstream to help poor communities adapt farming and forestry practices that improve yields while reducing water use and soil erosion.
The water fund – a first of its kind in Africa – builds on the Conservancy’s experience addressing similar issues in Latin America, where more than 30 water funds are either underway or in development.
This has attracted major investors – both private and public. They include Nairobi City Water & Sewerage Company, Kenya Electricity Generating Company (KenGen), Pentair Inc., Coca Cola, East Africa Breweries Ltd, International Centre for Tropical Agriculture (CIAT), Global Environment Facility (GEF), the Government of Kenya, Water Resources Management Authority (WRMA), Tana & Athi Rivers Development Authority (TARDA), International Fund for Agriculture (IFAD) and Frigoken Kenya Ltd.
The business case has showed that a US$10 million investment in water fund-led conservation interventions is likely to return US$21.5 million in economic benefits over a 30-year timeframe.
Still in Kenya, the World Bank, through the Global Partnership for Results-Based Approaches (GPRBA), has provided $21 million of results-based grants to help water service providers obtain commercial funds for delivering water services to low-income areas. These projects have already provided water access to over 300,000 people, with another 200,000 expected to benefit in the short term as the project continues.
Read also: All eyes on NSE as futures trading kicks off(Opens in a new browser tab)
As of 2018, approximately 50 transactions have been completed, which raised more than $25 million in private capital, including a $6 million loan to Nairobi City Water and Sanitation Company.
What now remains is stock markets across Africa to align their investment opportunities with the need to invest in water as well as other green bonds. The Nairobi Securities Exchange and the Commodity Markets Authority (CMA) have already rolled out a green bond that is geared towards making such investments as water available on the trading floor.
Supported by the Green Bonds Program – Kenya, guaranteed by GurantCo and structured by Stanbic Bank, the bond was issued by real-estate firm Acorn Holding Africa. The funds will be channeled towards building 5,000 environment-friendly and affordable student housing units in Nairobi and its environs, supporting a key pillar of the government’s Big Four Agenda – affordable housing.
The launch of the green bonds market has already been embedded in the legal framework through the publication of a Policy Guidance Note (PGN) on the Issuance of Green Bonds and the approval of amendments to the NSE Listing Rules by CMA.
According to the Green Bonds Kenya Annual Report for 2018, the green bond market globally has grown tremendously with issuances totaling $155.5 billion in 2017 and an estimated $250-$300 billion in 2018.
Private investments have remained focused on investing in last-mile delivery of clean drinking water, mainly targeting bottled water and other domestic consumption. Global food company Danone and impact investment company Incofin IM announced in March a partnership to pool capital from major investors to invest in innovative water businesses that provide affordable and safe drinking water to underserved populations.
With water futures trading on Wall Street, the focus will now shift on how Africa, through various derivatives markets can take advantage of the opportunity presented by climate change, to either fund infrastructure, or conservation, or purification.
In 2018, Cape Town was counting on day zero, the last time the city would shut down the water supply due to a crippling drought. Though the crisis was averted, and the dams are back to full capacity, interventions such as water futures trading would solve many a cities’ water supply issues in Africa.
