Israel: Waterworks for the World?

With decades of experience managing this precious natural commodity, it hopes to become the Silicon Valley of water-management tech

Source: BusinessWeek online

For decades, water has been an extremely precious commodity in Israel. And over the years, the Jewish state has developed numerous technologies to deal with severe water shortages.ֲ Already, 60% of the country's sewage water is recycled, and in September, the world's largest desalination plant was opened along Israel's southern Mediterranean coast. Now, new ventures are sprouting up to develop technologies for a global market where demand is growing rapidly. Israel is looking to exploit its expertise and become a major player in the global market for water technology.

"The water industry is where the telecommunications industry was 20 years ago, highly regulated and on the verge of a major change," says Ori Yogev, chairman of Waterfront, a newly formed industry lobby made up of academic institutions, the state-owned water utility, and private companies. His goal is to turn Israel into water technology's equivalent of Silicon Valley, with $5 billion in water-related exports by the end of the decade.

Last year, the global water industry chalked up sales of $400 billion and is growing annually at a healthy 7% clip.ֲ But the industry's technology segment is growing at double that pace and already accounts for a quarter of all revenues. Israeli companies that focus on desalination, drip irrigation, and water purification witnessed a 30% jump in export sales in 2005, to $810 million. Other global players in the water business include French giants Veolia Environnement (NYSE:VE - News ) and Suez (NYSE:SZE - News ).

A RISING TIDE.
The huge potential has already started attracting the attention of multinational corporations.ֲ In November, 2004, General Electric (GE ) paid $1.1 billion for U.S. based Ionics, a leading player in the desalination and water reuse and recycling fields. Two months earlier, Germany's Siemens (SI ) acquired U.S. Filter Corp. for $1 billion as part of its strategy to expand in the water and wastewater-treatment area.

Israel is already a world leader in desalination.ֲ A $200 million plant built by Israel Desalination Enterprises and France's Veolia Water is supplying drinking water to much of Israel's southern Negev region. Water produced at a string of desalination plants planned for the Mediterranean coast is expected to meet 15% of the country's needs in 2008.ֲ

IDE has developed a technology called reverse osmosis, which produces a cubic meter of water for about 60 cents, substantially lower than existing plants.ֲ "We're now seeing annual growth of 30% to 40% in the desalination market due to demand in places like the U.S., India, China, and Spain," says Avshalom Felber, president and CEO of IDE. The Israeli company recently won contracts to supply desalination plants to Spain and India.

BIG DRIPS.
Israeli companies are also big players in the field of drip irrigation, controlling about half of the estimated $1 billion to $1.5 billion global market. Local experts note that drip irrigation -- a method used to water crops in arid and semi-arid climates -- is used on 60% of the agricultural land in Israel, while the U.S. figure is only 6%.

"We've witnessed 15% annual growth in the past four years and expect the trend to continue," says Erez Meltzer, president and CEO of Netafim, the world leader in drip irrigation, with 2005 revenues of $350 million.ֲ But the real explosion in demand, as Meltzer sees it, will happen when water subsidies for agriculture in countries like the U.S. and Australia are phased out or eliminated.

The big change in the past few years is the establishment of dozens of startups focusing on the development of new water technologies. The process is reminiscent of the early 1990s, when Israel's high-tech industry took off with the backing of a nascent venture-capital industry.

PLANTING SEEDS.
"We're starting to see substantial deal flow of startups focusing on water-related technologies and interest in investing in this sector," says Nir Belzer, senior partner at Millennium Materials Technologies Fund. The Tel Aviv-based fund is in the process of raising $100 million for its third offering focused on water, energy, and environmental ventures.

In the past, a lack of exit options led venture funds to steer clear of the water sector. But Belzer believes this is rapidly changing with the growing interest of huge corporations and stock markets in water technology. On Dec. 5, Amiad Filtration Systems raised $11.4 million on London's Alternative Investment Market (AIM).

The Israeli government is also taking a more positive view. The chief scientist of Israel's Industry & Trade Ministry has decided to fund water projects at two of the country's 24 incubators for seed-stage ventures. Up to now, funding has focused on software, telecommunications, biotech, and life sciences.

COOPERATIVE VENTURE.
In addition, the state-owned Mekorot water utility has agreed to serve as a testing ground for new technologies.

"We'll identify the needs, test the technology, and commit to purchase," says Mekorot Board Chairman Booky Oren. This kind of close cooperation is expected to open a lot of doors for many of the startups. Mekorot is already testing about a dozen new locally developed technologies.

One startup that has already received a local stamp of approval is Atlantium, a company based in Bet Shemesh that plans to start exporting its novel technology for disinfecting municipal and industrial waste in 2006. "We're looking for $6 million in sales next year and a three-fold increase in 2007," predicts Atlantium President and CEO David Waxman. He bases his upbeat forecast on the growing demand for nonchemical solutions in the $5 billion global market for water disinfecting.

Israel hopes to become a key player in the fast-growing global market for new technologies such as those developed by Atlantium. It won't be easy, as local companies will no doubt face increasing competition from huge corporations entering the field. Success will likely depend largely on close cooperation between the government and the private sector in marketing Israel's years of expertise.