Water Journal : Water Journal February 2015
FEBRUARY 2015 water 47 Feature article • An ongoing requirement for replacement of ageing infrastructure. However, in general, there is little evidence of a looming ‘infrastructure funding gap’ in the water sector of the sort that is seen to characterise some other infrastructure sectors (e.g . roads). Infrastructure Australia, in its 2013 State Of Play report, concluded that Australia’s water infrastructure networks are broadly meeting aggregate needs. Pointedly, it indicated the key imperatives lie with institutional, planning and regulatory reforms in the sector. There is also little evidence of an inability to fund the investment that will be required. The widespread introduction of independent economic regulation and moves towards full cost recovery should theoretically enable water businesses to finance their ongoing activities. That said, the Water Services Association of Australia (WSAA, 2013) recently raised concerns about the impacts of some recent regulatory pricing decisions on the financial status of water authorities and their ability, over the longer term, to finance their activities. should prIvate FInance play a bIgger role In the australIan water sector? The absence of a demonstrable ‘infrastructure gap’ might suggest little need to consider more private sector involvement or financing in the water industry. There are, however, other reasons why greater private sector financing of water investments may be beneficial. The first relates to broader public sector financing benefits via what has become known as ‘capital recycling’. Governments across Australia have significant capital tied up in water assets. This capital comes with its own opportunity cost. Infrastructure Australia (2013) estimated that the potential proceeds from the sale of public water assets might be valued at $54–$61 billion for bulk water assets and $32–$35 billion for distribution assets. The sale of existing assets has potential to free up public resources for allocation to other important activities. In addition, many of these infrastructure assets are associated with high levels of public sector debt. Their sale would remove a constraint on governments’ ability to raise debt to fund infrastructure investments in other sectors. However, as observed by the Productivity Commission (2014), the merits of such capital recycling initiatives depend critically on robust cost-benefit analyses of both the decision to divest the existing asset/s, and the decision to invest or otherwise use the proceeds as separate matters. The second – and arguably more compelling – argument for considering greater private sector financing is that private sector ownership can increase economic efficiency. More efficient investment and operation of infrastructure can generate savings that can be passed through to end users through lower prices and/or better services. What matters ultimately is that investments are made in the ‘right’ assets with appropriate returns to the community. Government ownership or control can lead to inefficient investment because of: • Funding uncertainty relating to governments holding down prices for political reasons; • Changed spending priorities or politically popular investments being prioritised rather than those that maximise efficiency; • A lack of strong incentives to rigorously evaluate and manage investments. Both the Productivity Commission and the National Water Commission have questioned the robustness of government decisions to invest in water security assets (particularly the size of desalination capacity, much of which now lies mothballed). These investments still have to be funded by customers and/or taxpayers. In considering what drives these inefficient outcomes, perhaps the most common theme emerging from a succession of independent reviews of the water sector in recent years by the National Water Commission, the Productivity Commission, various State Commissions of Audit and others has been one of poor governance arrangements, largely stemming from government ownership. For example, the Productivity Commission (2011) concluded that: Conflicting objectives and unclear roles and responsibilities of governments, water utilities and regulators have led to inefficient allocation of water resources, misdirected investment, undue reliance on water restrictions and costly water conservation programs. To address these sorts of problems, the Productivity Commission placed considerable store on improving governance arrangements in the sector through establishing clear objectives, clarifying roles and responsibilities, and better monitoring performance. However, the experience to date suggests that the governance problems associated with government ownership of water businesses are intractable, and it is time to consider more far-reaching reforms involving direct private ownership of water assets. alternatIve sources oF prIvate FInancIng and Involvement There is a wide range of models for involving the private sector in public infrastructure. For example, the National Water Commission identified management contracts, affermage leases, leases, concessions, and divestiture (NWC, 2014). While the appropriate model is likely to vary depending on the circumstances, it would seem timely to consider approaches that go beyond contracting out. Despite many PPPs in the sector, which involve private financing, there are only isolated examples of brownfield assets being leased, sold or otherwise transferred to private owners. These include: • The privatisation of the Sydney desalination plant; • The transfer of irrigation systems in SA, NSW and, more recently, in Queensland to co-operatives; • The proposed long-term leasing of SunWater’s industrial and commercial water pipelines. To date in Australia, privatised water assets have generally been those that don’t provide services directly to ‘mum and dad’ customers. However, there is no in-principle reason why divestiture might not extend to large urban water supply networks (in conjunction with a carefully designed regulatory framework). The privatisation of the water industry in the UK in 1989 provides precedent. Under the regulatory framework in the UK the industry has attracted £100 billion of investment. Interestingly, two of the biggest water and sewerage businesses in the UK (Anglian Water and Thames Water) are owned by consortiums that include Australian investors. These investors include Australian superannuation funds, Colonial First State (the asset management arm of CBA) and IFM (owned by Australian Super funds). This suggests that Australian superannuation funds would invest in Australian water assets if the conditions to do so were right.
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