Water Journal : Water Journal February 2015
FEBRUARY 2015 water 7 My Point of View plants are often privately owned and operated. Some large trunk pipelines are also privately owned. Commonly, the extensive core network of water and wastewater pipes is managed and operated centrally, and is government-owned along with the retail business of billing customers. These distribution and retail businesses of water and wastewater are attractive to superannuation funds. They generate a steady return and will grow along with the population growth in the major cities. Capital expenditure is required for maintenance (including any backlog) and to service new growth. The superannuation funds have the financial strength to be able to meet these demands. Private ownership of specific treatment plants and desalination plants is already evident. These are smaller investments compared to the network businesses and can be treated separately or together with the network. Where bulk water provision comes from dams there are typically requirements about catchment management, an environmental flow regime, and rules related to irrigation releases. These are complex matters to manage and often involve competing uses for water and conflicts between stakeholders. In these circumstances the government is arguably the preferred owner and the current ownership situation should often remain undisturbed. shoulD there be restrictions on oWnershiP? Water and wastewater services are critical for health and security. To the extent that these concerns are heightened by different ownership it is possible to put restrictions around the ownership of these utilities. However, imposing restrictions tends to lower the value of the business to investors, so such a step should be assessed carefully. The precise concern needs to be specified and the restriction set to address that matter alone. It is not unusual for companies to have restrictions on their ownership, although usually these restrictions are driven by market competition concerns. Foreign ownership has been restricted in some past privatisations, notably Qantas. WhAt inDustry reGulAtion is requireD? Regulation of water and wastewater falls into three categories. The first is health based – drinking water standards are specified. This regulator is nationally based and scientifically focused. The second category concerns performance and environmental standards. For many utilities these standards are specified in an Operating License granted by the state-based regulator on behalf of the government. A large number of issues are covered, including such matters as: • The standard of sewerage treatment and discharges; • Permitted service disruption intervals; • Biomass disposal requirements; • Levels of leakage; and • Metering requirements. The third category of regulation is economic. The regulator sets prices for water and sewerage services; these prices are set to cover a permitted return on assets, allowable operational costs, and capital expenditure that is considered by the regulator to be necessary. Under government ownership the state-based regulators are not free of government influence or even overt interference. This influence can be evident in pressure to keep prices as low as possible, particularly just before elections. Influence can also be evident in License conditions that are set to prioritise development in an order that suits the government of the day, rather than a more balanced outcome or the commercial priorities of the business. A preliminary requirement for private ownership is truly independent regulation. Before billions of dollars are invested there must be certainty that the regulatory regime is going to follow the rules and procedures specified, and not be controlled by government or anyone else outside that regime. This means that before any privatisation of water utilities the regulatory system must become firmly independent. The regime must be clearly specified; an appeal or review mechanism should be allowed so that decisions can be openly examined. This is a similar regime to that in the electricity and gas sectors in Australia and in the water industry in the UK. It is not unusual. The implications of a truly independent regulator for the water utilities would be prices set to ensure adequate maintenance, new capital expenditure and efficient operating expenses. Under government ownership the temptation to delay maintenance to keep prices low is a short-term strategy that leads inevitably to lower performance standards and larger price increases in the future. Lower prices also distort the capital structure of the utility. Less debt can be serviced and the equity component is therefore larger than it would otherwise be. This equity receives a dividend return that is well below commercial levels and below what the government would earn on its capital in some other investment. WhAt benefits Arise from PrivAtisAtion? There are at least two advantages of privatisation. First, the government can recycle the asset to meet other policy requirements. State budgets are tightly constrained by demands for health, education and public transport services and by the limited capacity to raise revenue to meet these demands. An activity provided by government that can be provided by some other party, such as superannuation funds, for the same cost provides an opportunity for the government to raise billions of dollars in revenue by selling these assets and replacing them with others of higher priority. The second major advantage is greater efficiency for the utilities, particularly in their finances. While urban water utilities can always improve, a reduction in operating costs related to a change in ownership is not likely to be large. Over recent decades the utilities have made major cost savings in this area. What may make a significant difference is a truly independent regulator to review the maintenance and capital costs of the utility. For example, the maintenance budget will not suffer short-term cuts to artificially lower prices prior to an election; the pace and position of development may be established in a balanced way without political intervention; and the capital structure of the utility can be optimised to reduce costs.
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