February 26, 2016 Manufacturers: Staying Afloat During Water Shortages

Volume 19 | Issue 1

Increasing global competition for resources, a complex and evolving regulatory landscape and rapidly escalating climate change are coalescin

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Furthermore, many industries are today facing business challenges brought about by an aging water infrastructure, which now more than ever could cause businesses to struggle with the effects of overall water resource mismanagement.

According to a CDP survey of more than 800 of the world’s largest companies in all industry segments, 68 percent of respondents said that water-related risks could “generate a substantive change” to their business, operations or revenue, with the greatest risk noted in the utility, consumer staples and energy industries. While these findings may not come as a great surprise, the potential consequences are all but invisible to the business community: according to the survey, shockingly only 22 percent said they felt water-related issues could limit their business growth. And of these, only one-third expect that constraint to be evident in the next 12 months.

Don’t Let Your Business Drown Amid Water Risks
For U.S. manufacturers, water shortages have the power to give rise to concrete and potentially costly business challenges, including supply chain disruption and expensive machinery or process changes required to maintain compliance. According to the 2015 BDO Manufacturing Risk Factor Report, 100 percent of manufacturers cited concerns around supply chains and vendors, and 96 percent of companies mentioned environmental regulations. The recent high incidence of extreme weather, like the ongoing drought conditions in the West, may have contributed to the growing concern around these risks. Furthermore, in California alone, the ongoing drought crisis cost the economy $4 billion last year, mostly due to lost crops, sinking land above depleted groundwater reserves and lost revenue for businesses, according to the New York Times.

To mitigate the risks that arise as a result of water shortages, manufacturers should consider adjusting their strategies to preserve natural resources and promote compliance and cost management, or possibly face constraints on growth and/or decreased profits. Reducing water consumption in manufacturing and moving toward more sustainable production begins with taking steps to research and design new and redesign existing manufacturing technologies and workflows to do more with less.

Promising technology and innovation exists not only to transform water treatment and usage, but also to revolutionize water-intensive manufacturing practices. Looking ahead, further new developments are possible – likely, even – with continued research and advances. However, to expedite a shift toward more conscientious production, some companies need incentives to be available to make these changes financially possible.

Soak Up the Benefits of Credits and Incentives
With this in mind, many states have implemented incentive programs to offset the costs incurred by manufacturers who integrate sustainability initiatives in order to better the communities in which they work, live and play. While national spend on environmental and resource protection is widely debated, an estimate by the EPA places it in the hundreds of billions of dollars each year. Hoping to prove the maxim “an ounce of prevention is worth a pound of cure” valid, state governments have shouldered much of that cost.

The nature of these incentive programs varies at both the state and federal level and each is generally tailored to a specific environmental issue. For example, California features programs designed to incentivize the development and deployment of manufacturing technologies that will conserve resources, as well as promote economic development and jobs. These programs include a sales and use tax exemption for manufacturers that use science, engineering or information technologies to improve existing or create entirely new materials, products and processes.

California evaluates applicants and their projects on a case-by-case basis, considering several factors including whether the project develops California manufacturing facilities and the extent to which the project will reduce air or water pollution, increase efficiency, or reduce consumption beyond what is required by any federal or state law or regulation. At the local level, the city of Santa Rosa offers a water-specific Sustained Reduction Rebate for every 1,000 gallons of sustainable water use and water flow reduction achieved through hardware upgrades or new technologies.

Several other states also offer similar incentive programs. For example, Mississippi provides a sales and use tax exemption and several other credits and incentives to eligible manufacturers and assemblers of systems or components used in the generation of clean energy. In Texas, per a constitutional amendment, pollution control equipment, including water conserving equipment at nonresidential buildings, is exempted from property tax. Colorado also offers an investment tax credit helping Colorado businesses engaged in specified activities, including manufacturing processes, receive more capital for certain investments related to improving processes and consumption.

Don’t Sink, Swim…Towards Water Use Reduction
While credits and incentives tied to water reduction efforts are available only in a few states, including Texas, Arizona and California, it doesn’t mean manufacturers shouldn’t take steps toward shrinking their water usage footprint and developing forward-looking and innovative production methods and technologies. The following are a few ways in which manufacturers can work to manage water use in production:

• Increase leadership and board oversight: While many companies conduct broad environmental oversight, addressing water risks specifically and methodically can help a business to create a plan to address short- and long-term threats that they may not have previously been aware of;
• Take a thorough risk snapshot: Doing so gives businesses the opportunity to tackle problems early, create and implement manageable changes to water management processes and avoid the costly potential consequences of inaction;
• Improve water management from the top down: Working to address degradation issues at the watershed level can help stimulate water efficiency from the source, improving sustainability along the entire water supply chain, which can ultimately benefit manufacturers at the individual factory level.

Furthermore, these types of efforts serve as an excellent opportunity to foster a positive corporate image via social responsibility. Corporate social responsibility initiatives are becoming a valuable contributor not only to a company’s reputation and image, but to their bottom lines.

A Wave of Opportunity Exists for Manufacturers
While the nation’s manufacturers experience unforeseen risks and potential business complications brought about by a water shortage now and potentially in the future, the industry is showing signs that it can turn these threats into opportunities for evolution and growth. Coupled with other industry shifts, such as new workforce demographics and technological advancement, they make the time ripe for innovation and restructuring to improve water consumption patterns. Manufacturers have evolved in the past, and if the industry can take advantage of rampant opportunities for growth and innovation, including state and local incentives, manufacturers and the communities they call home can expect a productive today and tomorrow.

Rick Schreiber, Partner & National Leader, BDO Manufacturing & Distribution Practice
Rick is the national leader of BDO’s Manufacturing & Distribution Practice, with more than 23 years of accounting experience. He services clients in a range of subsectors, including fabricated metals, food processing, machinery, plastics, rubber and transportation equipment.

Tanya Erbe, National Credits and Incentives Leader, BDO USA
Tanya is a Senior Tax Director with more than 19 years of experience in state and local taxation. Her industry experience includes insurance, aerospace, healthcare, pharmaceuticals, hospitality, manufacturing, and oil and gas.

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