Where's the money in Hurricane Harvey's wake?
Published September 7th, 2017
When Hurricane Harvey hit Houston last week, he posed an interesting question for the water industry: what kind of opportunity is there in these extreme weather events? I have been hearing a lot of answers over the past week, but there are two big obstacles to stormwater management becoming a strong growth market.
First, there is no business model for funding flood-related infrastructure. Whether you want to build new flood channels, create more permeable urban surfaces, strengthen levées, or introduce smart systems for managing flood water, the money has to come from taxation. This is very difficult to raise before the event. In theory, insurance companies should see the advantage of funding stormwater management, but in practice they don’t want to open up their risk modelling to third-party scrutiny, so they are not open to discussions on the subject (although once a city has invested, they might reduce the premiums payable).
Second, it is virtually impossible to design an appropriate flood control system. The temptation is towards massive over-engineering – particularly when you see cities like Houston saturated by three 500-year floods in a decade – but funds are limited. This means that engineers find themselves either designing something that proves inadequate, or which is never used and looks like an expensive white elephant. There is no way to be right.
The reality is that most before-the-event flood protection does not come through public infrastructure. It comes through the building code. The exception is where flood mitigation can be tied to other environmental objectives. For example, green infrastructure in cities like Singapore and Melbourne serves to mitigate the impact of heavy rain, while at the same time improving the liveability of the city. You could say the same thing about creative alternatives to combined sewer overflow corrections in the US. It is only because these flood mitigation measures are connected to the environmental regulation of wastewater systems that they go ahead.
These are all rich world solutions, however. In emerging markets, where building codes are rarely enforced, and funding for public infrastructure is even tighter, after-the-event action seems to be the way.
In Stockholm last week, I bumped into World Bank economist Richard Damania. He has been working on a yet-to-be-published paper investigating the long-term economic impact of droughts and floods. The research suggests that the impact of droughts is generally worse and more long-term than the impact of floods. This, he thinks, is because floods are immediate and visible. They attract more media coverage and political attention, and in turn this leads to more focused efforts at reconstruction. Furthermore, there is some evidence that in the longer term, cities which have experienced floods (such as those impacted by the 2004 Indian Ocean tsunami) may in economic terms overtake comparable cities which have not been similarly affected.
The same is not true of droughts. These tend to enjoy a much lower profile (a flood-related death attracts six times the media coverage of a drought-related death), and they barely attract any investment in recovery, despite having a devastating impact on people’s life chances. Often, drought will lead to malnutrition, and if that occurs in the first 1,000 days, the effects can be long-term and irreversible.
I can see where Damania is coming from, but I think it also highlights another dimension to the issue. The impact of floods is most damaging in cities where there is property at risk. The direct impact of droughts is primarily in the countryside where crops are at risk, but indirectly they are also a big driver of urbanisation, as destitute farmers migrate to the cities. Historically, urbanisation (and regulation) have been the biggest drivers of spending on water infrastructure.
My conclusion is that whatever warnings one might read into this year’s hurricane season, it is unlikely to translate into accelerated spending outside the directly affected areas. Or to put it a different way: after-the-event spending will always be greater than before-the-event spending, and most of this spending will be concentrated in larger cities.