Scarce Water Threatens Lima’s Growth

Via MarketWatch, an article examining the impact of water scarcity on Lima’s growth:

Growing constraints on water in Lima are threatening to derail business activity in the Peruvian capital, a key hub of the country’s decade-long economic boom.

Water provisions in Lima, the world’s second-biggest desert city after Cairo, Egypt, are stretched due to increasing demands from industrial and domestic consumers during Peru’s decade-long economic boom.

Yet poor management of available water resources in the broader, hydro-rich Andean nation means supply in Lima is tighter than it should be.

The stresses facing Lima are part of a broader challenge in many fast-growing emerging markets that lack infrastructure and management tools to meet growing demands for water.

A 2010 study by the 2030 Water Resources Group, which includes the World Bank and a number of multi-national companies, estimates there will be a 40% gap between the global water demand and supply in the next 20 years.

As in many other developing markets, the distribution of water is highly unequal in Peru, where mining companies face protests by local activists concerned about supply and contamination.

While the Andean nation has the world’s eighth-biggest renewable freshwater supply, much of the water is located in areas where few people live. The Pacific region, where Lima is located and where 70% of Peru’s population lives, has only 1.8% of the country’s water resources.

Without better management of available resources and more water pumped, channeled or otherwise diverted to Lima, Peru’s manufacturing hub will be threatened and the area’s economic and demographic growth potentially crimped, experts say.

There is, however, no easy fix. Lima’s population has surged during the past few decades as residents from the countryside flocked to the city in search of jobs and to escape political violence.

Today, the city has a population of about 9 million, which is almost a third of Peru’s total population. About a million people in Lima don’t have access to running water, while state-owned water company Sedapal estimates that another million residents have their supply cut off periodically mainly due infrastructure problems.

Water waste is rife in the Peruvian capital. Observers estimate that 30% to 40% of water is lost in the system through leaks and theft. Despite being in a desert, the per capita use of water in Lima is double that of some European capitals and 50% higher than in the Colombian capital of Bogota, according to The Nature Conservancy.

Pedro Pablo Kuczynski, who served in previous administrations as prime minister, finance minister and energy and mines minister, says many “companies are thinking of moving out, going south or north because they won’t have enough water.”

Beverage companies are some of the businesses most at risk, including brewing giant SABMiller PLC (SABMRY, SAB.LN), the world’s second-biggest brewing company by volume. It entered Peru in 2005 with the acquisition of Union de Cervecerias Peruanas Backus & Johnston SAA (BACKUSI.VL), which today supplies most of Peru’s beer market.

Peru’s per capita beer consumption amounts to about 40 liters per year, up from 31 liters in 2006, according to SABMiller. Beer consumption in Peru ranks fifth or sixth in Latin America. In 2010, SABMiller concluded that the biggest risk to its business in Peru was growing water scarcity at its breweries, particularly in Lima.

While the company has cut back on its own water use, it is calling for more cooperation among the government, industry and residents to improve water management and reduce waste.

Water makes up about 90% of beer. “Water is a shared risk and to be able to protect our business growth we need to work to resolve water challenges at the watershed level,” says Andy Wales, SABMiller’s head of sustainable development. Environmentalists say the heart of the problem is that water in Lima is undervalued.

“This results in the indiscriminate use of water. This is not sustainable,” says Luis Alberto Gonzales, The Nature Conservancy’s representative in Peru. Most of Lima’s water supply comes from the Rimac River, which has its source high in the Peruvian Andes.

Environmentalists say the river is all but dead due to contamination from farming and informal mining activities upstream and pollution from industry and residents in Lima. During a recent trip to the outskirts of Lima, men were seen tossing bags of garbage into the Rimac, while stray dogs paced the river’s edge, rummaging through trash.

On the other side of the river bank, some factories pumped murky-white waste water straight into the Rimac. Even while treated for consumption in Lima, the river’s water still isn’t sufficient to meet demand.

Sedapal’s general manager, Rossina Manche, says the government is working to prevent future water constraints. It plans to award a contract in the next two years to build a tunnel to channel water from the Chillon River, located north of Lima, to the Peruvian capital, Ms. Manche says.

In the next three years, the government also hopes to have a desalinization plant built in southern Lima, which would pump in seawater from the Pacific Ocean in case of an emergency with the regular water supply.

Meanwhile, Ms. Manche says about 6 billion soles ($2.3 billion) is expected to be invested in the next five years to prevent leaks by replacing old pipes, while also expanding services to residents that don’t have access to running water. Sedapal says it is also cracking down on theft. “We have discovered large companies that are not paying for the service, that have illegal connections,” Ms. Manche says.

Industrial and domestic consumers could see their water prices rise in the next few years as the government looks to cut back on subsidies and price water closer to its actual costs. While authorities could face a political and social backlash by raising tariffs, Ms. Manche says Sedapal will look to build support for the initiative by highlighting the investments needed to meet growing demands for water.

“We need these investments,” she said. “If the situation stays the same, it will become critical.”

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