Opening financial taps for more water
Rajasekar Krishnamurthy on finding water's real cost
Water is the most common substance found on earth, yet some observers predict that it will become as precious and contentious as oil is today. With only 1 percent of the world’s supply available for drinking, and roughly 11 percent of the global population lacking access to potable water, it’s easy to see why.
But before water can flow through new or repaired systems, the world has to turn on the financial taps.
“There is a backlog of water development projects, estimated to be about $1 trillion,” says Rajasekar Krishnamurthy, a research manager at IBM’s Almaden Research lab. For example, the state of Texas has a water plan that shows $53 billion is needed for water-supply projects ranging from reservoirs, wells, and pipelines to desalination plants.
Determining water’s cost
One reason for that log jam is the difficulty in obtaining financing for water projects, in part because no one knows the real cost of water in a given area.
“The true cost of water production, the true efficiency, is not well known,” says Krishnamurthy. “Water is often subsidized in different ways, so it’s difficult, almost impossible, to monitor its true cost.” In some cities around the world, governments have subsidized water’s cost by more than 90 percent.
Developed in the Accelerated Discovery Lab at IBM Research in San Jose, CA, the Water Cost Index is designed to fill that gap. “We’re building benchmarks and determining real costs, region by region,” says Krishnamurthy. But that process is not as simple as it sounds. It involves Big Data and advanced analytics.
Analytics parse the text reports and estimate missing data
The first step is to amass and then analyze cost data. “We analyze publically available financial reports that agencies make available,” says Krishnamurthy. Those agencies include not only water suppliers and distributors, but also government and non-governmental agencies that subsidize water in some way.
And even that process is not as simple as it sounds. “Agencies report in different ways and at different frequencies,” says Krishnamurthy, noting that for some agencies the latest available reports may be six months to a year old. “We need to account for the variation, and in some cases even extrapolate to fill in missing data.” The reports are typically in pdf or html format, and are designed for human consumption. The cost variables and subsidy information are hidden in various sections of these large, 100+ page documents.
Building on top of IBM InfoSphere BigInsights, the research team uses advanced text analytics capabilities to extract the cost variables and advanced statistical techniques to estimate any missing cost variables to obtain a complete and up-to-date Water Cost Index for all regions.
Additional analytics challenges arise since agencies occasionally change, over time, their reporting formats or the way in which they break down specific financial details. It is critical that the analytics ensure that everything extracted is correct – what Krishnamurthy calls the “veracity aspect.” They also have to acquire data from different geographic areas and sources, the “variety aspect.”
“Calculating the water cost index in this manner creates a truly uniform global benchmark, which supports accurate apples-for-apples comparisons across different regions,” says Krishnamurthy.
The goal is to analyze some 500 agencies around the planet, representing areas that account for about 25 percent of the world’s gross domestic product. “Right now the focus is on representative agencies in seven geographical regions,” Krishnamurthy says.
Working with Waterfund
IBM is working with Waterfund, a company that provides financial risk management to the water industry. The two entities recently announced their first project: an agreement with the Ministry of Water and Environment of the Republic of Uganda that makes the country the first in Africa to become a member of the Water Cost Index.
“The unprecedented level of transparency that the index will bring to pricing water sector investments in Uganda will be a great asset in attracting private sector funding that can help us provide clean and safe freshwater to all our citizens,” says the Hon. Professor Ephraim Kamuntu, Uganda’s Minister of Water and Environment.
Krishnamurthy foresees the water index process being applied in other areas. “The establishment of the benchmark is now going to help in development of secondary financial products for both water producers and investors, and also insurance companies will start to incorporate it in their risk modeling, another place where advanced analytics are going to come into play.”