It’s impossible to know where the war in the Middle East is heading. The US is again threatening imminent strikes on vital Iranian infrastructure. And Iran is warning it could retaliate with “broader” attacks. Less than two weeks ago, it claimed it could exert “irreversible damage” on critical energy and water facilities in the Gulf.
Whatever happens, the war has exposed the acute vulnerability of the Middle East’s water infrastructure. There are many viable alternatives to oil and gas resources, but none for water. Water is much more important to the Gulf states’ survival than all their oil and gas fields, refineries and export terminals.
The Gulf’s blistering temperatures and scarce rainfall mean it’s always lacked freshwater. Historically, the region’s ‘saltwater kingdoms’ coped by drawing on their limited groundwater reserves (the water lying beneath the land’s surface that can be accessed through wells and springs). But once oil production began to boom, water demand quickly outstripped supply (massive volumes of high-purity water are required to refine crude oil).
As a result, the kingdoms had to build huge desalination plants to turn the Gulf’s seawater into water people can drink and use to grow crops and in industrial applications. It’s estimated that about 100 million people in the Gulf region depend on desalinated water. Collectively, the Gulf states produce about 40% of the world’s desalinated water via more than 400 plants. Without them, booming cities like Dubai, Abu Dhabi and Riyadh would be largely uninhabitable.
So far, there’s been only a couple of attacks directly targeting the region’s desalination plants: Iran claims the US hit its plant on Qeshm island in the Strait of Hormuz on 7 March, while Bahrain reports that an Iranian drone damaged one of its desalination facilities the following day. But the plants are often sited in infrastructure clusters, so they risk getting hit in attacks targeting power plants and ports. Moreover, desalination is highly energy-intensive so disruption to power networks could threaten the plants’ ability to produce freshwater at scale.
Whatever happens next, the Gulf states look set to step up their efforts to bolster their resilience to water supply shocks. Instead of building large, vulnerable above-ground reservoirs, some have been building desalination plants and emergency storage reserves deep underground. Saudi Arabia is building solar-powered desalination plants and encouraging the development of many small plants across the country. Losing a few small facilities might be disruptive but not catastrophic.
Water scarcity is a global challenge
Water scarcity is most acute in the Middle East and North Africa, given its arid climate and negligible rainfall. But it’s a challenge worldwide. According to the environmental think tank World Resources Institute, 25 countries face extremely high levels of water stress each year, meaning they regularly use up at least 80% of their available water supply. All but two are emerging markets (EM). Many EMs face acute physical climate risks (including drought, heat stress and wildfires). And their economies tend to rely heavily on water-intensive agriculture, while their rapid urbanisation and industrialisation are driving surging levels of water demand, particularly in their big cities.
But water utilities throughout the EM world are seeking innovative ways to prevent water stress that could lead to water crises. They’re embarking on multi decade investment cycles to modernise their water infrastructures. Many are deploying new monitoring technologies and data-driven solutions to manage water scarcity more effectively. Innovative approaches include decentralised wastewater treatment, AI-driven leakage detection technologies, atmospheric water generation (capturing humidity from the air using condensation techniques) and solar-powered irrigation systems.
Outside the rich Gulf states, some EMs have lacked the capital to invest in water-efficient technologies, desalination plants and wastewater treatment. But many are increasingly tapping into private capital to upgrade their infrastructure. That shift is creating quasi regulated monopolies with robust and predictable cash flows. Take Brazil’s largest water and sewage provider Sabesp, which we own in the Rathbone SICAV Global Emerging Markets Equity Fund. São Paulo’s reformist government partially privatised Sabesp in 2024, enabling the firm to implement much-needed efficiency gains and ramp up its capital expenditure aggressively.
Chile is the most water-stressed country in South America. Chilean firm Aguas Andidas is meeting this challenge head on and transforming Santiago’s wastewater treatment plants into resource-recovery centres producing clean energy and reclaimed water.
Filipino firm Manila Water serves one of the most densely populated and water challenged cities in the world. It’s cut its water loss to just below 13% – well below the 25% global standard – using a combination of modern metering, network repairs and strong local stakeholder communication. As the Philippines continues to build out public private partnerships, the company is well placed to benefit from this regulatory reform.
Water is a more precious resource than oil because it’s essential for human survival.
That makes the water sector an increasingly attractive thematic investment, especially in the EM world where demand for better water resilience is most urgent and some of the opportunities are outsized.
