Water Journal : Water Journal February 2015
water FEBRUARY 2015 48 Feature article Another example of investors’ willingness to participate in the industry is the widespread use of water bonds in the US, which involves the issuing of debt to fund specific projects. The Californian water bond approved in November 2014 will provide US$7.5 billion in funding for water-related projects and programs throughout California. The question then arises as to what would be required to pursue such opportunities for greater private sector involvement. prerequIsItes For greater prIvate sector Involvement Introducing a greater role for the private sector is not necessarily straightforward. As observed by the Competition Policy Review Draft Report (2014): Well‐considered privatisation of remaining infrastructure assets is likely to drive further consumer benefits through lower prices flowing from greater discipline on privatised entities. Governments need to approach privatisation carefully, to ensure that impacts on competition and consumers are fully considered and addressed. Initiatives to facilitate greater private sector involvement will need to simultaneously: • Ensure that the interests of customers are protected (particularly where the supply of services involves market power) as well as broader public policy objectives (e.g . protection of public health and the environment); • Be sufficiently attractive to potential investors who assess infrastructure projects against a multitude of options in other asset classes and countries, and allow them to manage the risks associated with their investments. As recognised by WSAA (2013), there are a number of prerequisites that would need to be addressed to satisfy both of the above conditions. A fundamental one of these is the existence of a stable, transparent and independent framework of economic regulation. Such a model is outlined in WSAA’s 2014 report: Improving Economic Regulation of Urban Water, prepared by Frontier Economics. Well-developed regulatory frameworks to protect public health and the environment are also critical. Careful consideration should also be given to the need for associated pro-competitive structural reforms and related regulatory arrangements such as third party access and licensing regimes for new suppliers. Existing legal barriers (e.g . the provision in the Victorian Constitution enshrining public ownership of water businesses) also need to be addressed. Facilitating privatisation may require addressing disincentives inherent in current taxation and Commonwealth–State financial arrangements (e.g. the potential disincentive for State Government to privatise water assets and forego dividends and payments received under the tax equivalent regime). Last, but by no means least, is the need to challenge public perceptions and political resistance to privatisation of the water industry: the notion that the supply of an ‘essential service’ cannot be entrusted to private businesses. The contention that government ownership and control of water businesses automatically leads to better outcomes for customers and the broader public needs to be subject to more rigorous scrutiny than it has been to date. conclusIon The current focus on how to fund public infrastructure under conditions of significant budgetary constraint provides a timely opportunity to reconsider whether it is necessary for governments to own and operate water assets. Given the significant potential benefits of greater private sector involvement, there is a pressing need to progress the detailed policy work to establish the necessary pre-conditions. wJ reFerences Business Council of Australia (2013): Infrastructure Funding and Financing. Commonwealth of Australia (2014): Competition Policy Review, Draft Report, September 2014. Frontier Economics (2014): Improving Economic Regulation of Urban Water. A report prepared for the Water Services Association of Australia. Infrastructure Australia (2013): 2013 State of Play Report: Australia’s Key Economic Infrastructure Sectors, December 2013. National Water Commission (2014): National Performance Report 2012–13: Urban Water Utilities, April 2014. National Water Commission (2014): Urban Water Futures 2014, NWC, Canberra. Productivity Commission (2011): Australia’s Urban Water Sector, Report No.55, Final Inquiry Report, Canberra. Productivity Commission (2014): Public Infrastructure, Inquiry Report No. 71, Canberra. Water Services Association of Australia (2013): The Future of the Urban Water Industry, Submission to the National Water Commission’s Triennial Assessment, December. World Economic Forum (2014): Infrastructure Investment Policy Blueprint, prepared in collaboration with Oliver Wyman, February. Is it time to consider greater private financing of water infrastructure? the author Mike Woolston (email: mike.woolston@frontier- economics.com.au) leads Frontier Economics’ Water practice. Mike has a comprehensive knowledge of the water industry, and specialises in microeconomic and regulatory reform.
Water Journal December 2014
Water Journal April 2015