Thoughts on Hausman's Critique of CVM

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May 26, 2008


Mario Alemi said...

Right, bottled water could even be seen as no-water investment. It is brand driven. You sell the "San Pellegrino" brand with some water.
Unfortunately in some places (I was recently in Sanaa, Yemen) bottled water is the only, and extremely expensive, way to access potable water.

What about investing in water technologies? Process water like ultrapure water (e.g. for the electronic chips) and mobile water purifiers (for energy plants) rely on new technologies, quickly evolving.

The same for wastewater, a business driven by necessity, regulation and technology.

Cheers, Mario

Ed Vogt said...

There are a lot of different ways to invest in Water. There are many companies in the US and abroad that deal directly with the generation and distribution of drinking water (US Water and American Water in the USA, Veolia internationally). In addition, there are a lot of plays in terms of equipment manufacturers. Probably the single biggest opportunities have to do with Water Scarcity. Generally, this will require taking marginal waters, tertiary treated wastewater, brackish waters, and seawater, and treating them to drinking water standards. This is already commonly done in arid or semi-arid areas. The technologies that are used for this is usually a combination of microfiltration membranes in combination with reverse osmosis membrane treatments.

It should be kept in mind that water supply is kind of like food supply. You have to have it to live in contrast to say ... electricity. As such, there will always be a view that water should be cheap. There are plenty of examples of people spending a lot more for water than they should (bottled water) coupled with people complaining about the price of water (just try to increase the price of tap water & watch the public scream).

In regards to your comment regarding benefit/cost of government vs. private, that seems a little over reaching. Granted if you are going to invest in something, this is valid but as a service to the world, it's questionable at best. There always are and always will be stupid investments by governments of all kinds, but there are a lot of good investments to. Our public water systems have done far more to eliminate disease than any other medical advance. You wouldn't get the same bang for your buck from curing cancer. The resulting increase in productivity, and the relative cheapness of this effect is immense.

'Nuff said

David Zetland said...

Ed -- good point on "public" water systems, but I do not think that their provision should be left exclusively to government. The government should finance provision of public water supply, but provision can be public, private or in-between (community, co-op, nonprofit). And we see examples of all types, worldwide.

Ed Vogt said...

And we do see private influence in water systems. This is very common internationally, and is done in many places in the US including Indianapolis, New Jersey, and Phoenix among others. However, a "public" water system does not only apply to the water treatment facility. A "public" water system includes the water sourcing, the water treatment plant, the distribution system, the collection system (sewers), and the wastewater treatment facilities. Also, keep in mind that water systems in the US are controlled locally. Every city, town, or municipality controls their own water system. They have the choice to build, run, & operate it as they see fit. I've seen the full gambit from fully public systems run well & run terribly - both by public & private entities.

John Wilson said...

Can't say I agree with the overall perspective here, but in the spirit of critique I'll offer one tweak: time should be one of your "factors" affecting "returns."

Time is important because if there is limited storage capacity, then you can't transfer water among users with different time demands. A classic example is urban/agricultural transfers in the Tampa Bay region of Florida. Azurix, an Enron spin-off, went around making economic efficiency presentations about how if they could buy and sell water rights, it would solve all sorts of problems. They promised to spur investment in irrigation efficiency so that water could be used by thirsty urban residents (read: yards).

Problem is, the urban "shortage" was in the summer and the agricultural "surplus" was in the winter. For those who aren't familiar with the Tampa Bay region, please accept as fact that there is nowhere to store that much water for six months.

Florida's planner-driven water management system lacks a method for explicitly determining "return" on investment, but it does a whole lot better than a market system would in making sense of the values that need to be balanced.

David Zetland said...


As Ed would no doubt agree, Azurix was clearly an incompetent private company (Enron strikes again!). Public managers have no monopoly on long term planning skills.

Kabir said...

I must say I am a little confused. What exactly is investing in water? It seems from the above comments that you are refering to investments in extraction rather than investment in increasing the sustainability of extraction - one of the ways that this might be achieved is to increase the possible sources of extraction (one of the things mentioned above). Other forms of investment (which i am not exactly an expert on) that help in increased ground water levels (crucial for the poor) also imply other ecological benefits. Complementarities in ecological investments must be taken into account when calculating returns (impossible task?). How does this fit into the use classifications above?

David Zetland said...

Kabir -- I think that investing in extraction and sustainable extraction are the same thing, perhaps with a longer time-frame with the latter.

Note that ecological benefits need not be added if they are positive, and a water project already has a positive net benefit. OTOH, they *must* be considered if they are negative, i.e., they are offsetting part/all of the gains from the water project.

I am not one to advocate a project that has a 1.1:1 benefit:cost ratio -- because I think that's pretty aggressive (The Army Corps of Engineers love to do that), but PLUS + PLUS > 0 is okay logic for me :)


You are right. Investing in water as become the most important as the investing in property.But investing in property will give you a good income as the period increases but the investment in water will give you a daily income because people can leave without property but they cant live without water.

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