Rathbones
Time for a change
David Harrison, Global Sustainability Fund Manager at Rathbones
Much of the world’s water infrastructure has suffered from years of neglect and lack of investment. Rathbone Greenbank Global Sustainability Fund manager David Harrison looks at the solutions.
Water pipes are ageing badly all over the world. Perhaps nowhere has older pipes than the UK and Europe, where ancient pipework is seen with a mixture of pride and frustration. Centuries-old plumbing is charming when it works, but it’s often worn out and leaking, causing damage, inconvenience and waste. The recent financial and pollution troubles clouding Thames Water, the UK’s largest water company, underscore the scale and urgency of the problems.
Last year, a UK not-for-profit calculated that European nations were replacing about 0.5% of water and wastewater pipes each year. That implies an average life of roughly 200 years. In the UK, just 0.05% was being replaced, meaning it would take 2,000 years to upgrade the whole pipe network (and the first replacements would then be 2,000 years old anyway).
Modern PVC plastic pipes are expected to last between 50 and 100 years, depending on how and where they are used, so it’s beyond doubt that the need to replace old metal, concrete and brick infrastructure in Europe – and the UK in particular – is huge. This will require huge investment in water infrastructure. UK water regulator Ofwat and most water companies have announced plans for billions of pounds of investment in coming years, but even more will be required. The same goes for the US. A much younger country, the average American water pipe is still 45 years old and there are still some original pipes dating back more than 100 years in the older towns and cities.
That should be good for UK-listed engineering company Halma, which we own – it has a bundle of 45 different businesses, with the common DNA being safety. Within its water analysis and treatment division there’s a diverse mix of helpful technologies, from leak detection equipment that a water engineer can use in the field to robots used to inspect wastewater pipes and tools used to repair and recycle pipes. Halma pumps a lot of money into these businesses’ research and development to make their tools even better and to discover new ones.
Another company that’s part of the solution is US-based Badger Meter, which we’ve held since 2018. Badger is based out of midwestern city Milwaukee and probably isn’t a brand you will recognise, but it’s an essential cog in the global water system. It makes high-quality water meters. Not the meter you might find in your home, but those used in industrial and large commercial settings. It’s been around for over a century and has built up an enviable market position in the US, where there are very few large-scale players. Their meters measure not only the flow, but the quality of water running in a local municipality. This is critical for measuring the efficiency of the system for spotting any necessary repairs. Traditional mechanical meters are being replaced by digital meters, which now represent over 70% of Badger’s sales. These digital meters are often linked to the cellular network which allows engineers to check water flow remotely, saving time and money. It also ensures problems can be spotted much more quickly, reducing waste.
One of the biggest issues with water infrastructure is the amount that’s ‘lost’ in the system because of leaks or breakages – roughly averaging 30% worldwide. The UK has been awash with untreated wastewater as well. In 2020, the UK Environment Agency reported that water companies released huge quantities of untreated waste in 400,000 instances all around the country. Just last week Thames Water was fined £3.3 million for polluting a Gatwick stream – popular with anglers – back in 2017 because of malfunctioning equipment and sustained failures of its staff.
How we treat water, both before we use it and after, is increasingly critical. Another business we have held for a long time is Evoqua Water Technologies. Evoqua is in the process of being bought by Xylem, a large US water infrastructure business. We think Evoqua will add a lot to the combined group. Based in Pittsburgh, Evoqua treats water and wastewater for local authorities and companies, predominantly in North America. Everywhere where water needs to be filtered, made safe or purified, Evoqua can help. This is especially important in heavily regulated areas like aviation, food processing and pharmaceuticals. About 40% of Evoqua’s revenue comes from this sort of ongoing operational, servicing and maintenance work. This is tremendously sticky business as it entails integrating water treatment into the production lines and processes of its customers. Changing suppliers can often mean having to shut down and refit.
The rest of Evoqua’s cash comes from one-off sales of filtration products, testing apparatus and even a patented renewable energy system that turns dirty waste into clean power. This uses ‘anaerobic digestion’ (bacteria eating the pollutants in the water), which creates bio-gas that can be burned for electricity generation and also creates fertiliser for farmers. There are many water treatment companies with relatively small shares of the overall market, so there’s plenty of space for Evoqua (and now Xylem) to expand its business, both in North America and abroad.
While there’s no easy overnight fix, embracing technology and digital solutions can help improve efficiency and greatly improve the quality of the water in our homes and waterways. Updating this is complicated, costly and takes a long time. This is our hunting ground – looking for those businesses that are often the ‘picks and shovels’ of the water infrastructure ecosystem. Many of them aren’t household names and are often niche and focused companies.
