Conducting a cost-benefit analysis
Financial feasibility describes whether specific water solution(s) are fiscally viable and, moreover, how viable. The more financially viable, the more likely an industrial company will implement proposed solutions as it seeks to maximize its profitability by reducing costs. Exceptions are cases, where a company needs to adopt water solutions for reasons related to compliance, certification or risks of unreliable water access or quality. In such contexts, the financial viability is still important, but might not be the primary decision-making criteria for implementation.
In order to assess the financial feasibility of potential water solutions in a particular industry, the most important steps are to:
- Assess current operational costs of the company related to water (input, production, output)
- Determine the most appropriate technology for the water efficiency solution and whether it is available on the local market or only from abroad
- Define the capital investment and operational costs required for the implementation of specific solutions or a combination of measures
- Calculate the potential operational savings resulting from the implementation of specific solutions or a combination of measures
- Calculate a simple payback based on the capital investment required and the projected operational savings
Other capital budgeting techniques such as Net Present Value (NPV) and Internal Rate of Return (IRR) could be used to further analyse how water solution investments would pay back. These are important to look at if investment amounts are rather large. For smaller investments (i.e. between USD 50k - USD 500k) simple payback calculations could be sufficient for a company to take decisions. In most cases, the financial department of an industry would be running more detailed calculations including NPV and IRR using the capital expenditures (CAPEX) and operational expenditure (OPEX) details for the proposed water solution(s) provided by the consultants.
Why should you care
Every industrial company needs to understand the financial feasibility of any proposed water solution before taking decisions on implementation and financing. Generally, industrial companies are inclined to prioritise projects with lower payback periods even if implementation urgency is not an issue.
Key lessons learned with recommendations
Feasibility of water solutions starts with knowing the cost of water
To assess the feasibility of a particular water efficiency measure, it is important to know the costs of water supply, management and treatment at all stages of production, and based on this, to calculate the monetary equivalent of the savings per year when the measure is completed. Pay attention to regional variations in water supply costs. For example, the cost of raw water in Jordan varies significantly depending on whether you are connected to the municipal water supply network or supplied by truck or operate your own well. In some cases, financial feasibility was much lower for companies owning rights to artesian wells on farmland (with tariffs equivalent to half of those permitted as industrial wells).
The feasibility assessment compares the cost of doing nothing (business-as-usual) to the cost of the water efficiency measure (i.e. the feasibility of wastewater treatment solution that allows 100 cubic metre per day (m3/day) to be reused versus the cost of providing 100 m3/day of fresh water including discharge fees).
Unpopular technologies might not be the answer
Advanced technology is always great to address challenges in industrial companies. However, new, untested technologies are not always the best option for companies, especially if they require changes to the current operational setup. Simple but innovative solutions should be considered to maintain the interest of companies and avoid adding complexity to the companies' operations (which can be objected to by engineers and technicians). The company's financial position often calls for a conservative, low-risk strategy with technologies that they are mainly familiar with.
On the other hand, some industrial companies can be willing to experiment with new technologies (especially those with Research and Development (R&D) departments) if they see promising value on the long run. Those should be encouraged to allow for new and innovative technologies being tested and a new market is developed for innovative enterprises.
Never compare the feasibility of water measures with the feasibility of energy measures
As energy is often the biggest pain point for industries, water efficiency can be kept in the back seat even after the analysis is completed. Make sure the payback calculation is done accurately to show how feasible it is to invest in water efficiency, but never compare with energy measures such as e.g. photovoltaic (PV) solar projects, etc. when presenting to companies to avoid unfair comparisons. Helping a company address water efficiency needs goes beyond savings/repayments and can highlight how financial losses can be avoided (in the event of water supply interruption or a sudden increase in the salinity of water from the company's well). For many producing industries it is a major risk if water is no longer there.
Benchmarking is a good practice to assess feasibility
One way to introduce water solutions feasibility is to present how the company stands with regard to their Water Utilization Index (WUI) - which represents the volume of water used to produce one ton of product equivalent - as compared to local or international benchmarks. Communicate the need to approaching the international benchmarks for similar industrial activities that will not only save water (and cost), but puts the company ahead of competition, especially for those who are trying to access the export market.
Explore different solutions to problems
The market usually offers numerous solutions to a specific water problem. Each solution proposed to a company must suit its case not only financially, but also in terms of technology and personnel. Once an improvement point is identified, try to propose more than one technical solution or scenario to help decision-makers in the company plan the implementation of the proposed solution(s). It also helps to compare the financial impact of each scenario on the long run separately.
In some cases, this is not possible or feasible to think of multiple alternatives. For example, if a reverse osmosis plant needs only minor adjustments, it does not make sense to propose replacing it. However, when upgrading a wastewater treatment plant, there are often several options to choose from. Also consider the complexity of each proposed solution from an operational point of view to avoid adding a challenge to the company's engineers/operators when they are not prepared for it.
Use the Microsoft Excel template Financial Calculator to conduct a rough financial feasibility analysis for different financing options using growth projections, loan repayment calculations and intervention-related CAPEX and OPEX costs.
KNOWLEDG HUB (2022): https://www.chathams.co/1311-2/ [Accessed: 13.02.2023]
This webpage explains three common return on investment (ROI) methods used to express the return you are getting on an investment: Payback Period, the Net Present Value (NPV) and the Internal Rate of Return (IRR).