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Privatizing Australia's water

Water is the sleeping element in the privatization debate. With all the activity previously focused on telecommunications, investors are thinking that any move on water and sewerage is at least ten years away. The reality is different.

The potential $70 billion to be realized through the sale of water assets is becoming too tempting for the state treasurers committed to economic rationalism. Australian Governments are already chipping away at their water systems and at least three have commissioned reports to evaluate the impact of privatization.

Water is one of the most emotive and sensitive issues in the privatization debate. As a staple of life - far more so than electricity and telephones - any move to privatization raises concerns that water will become more expensive for low-income households.

In Australia, investment bankers are salivating at the prospect of water privatization. Many have hired specialists from public sector to prepare them for when the lobbying intensifies.

John Walters, executive Vice-President of BT Investment Bank, says, "We are very interested in the water industry because there are so many potential opportunities for the private sector to get involved".

Industry observers believe privatization of water is inevitable. Mark Green, national director of utilities and partner at the accountancy firm Ernst & Young says, "I think after electricity and gas, water is likely to be the next utility cab off the rank. I also think it could happen in the next few years."

Unlike electricity companies, water companies do not operate in highly competitive markets: they have regional monopolies whereas electricity companies compete against other generators on a shared grid.

Private water firms, many of them European, are also taking leading roles in building the water supplies of developing nations. The British experience is highly relevant to Australia. British water companies are reported to have extracted big efficiency gains since being privatized.

The state-based water and sewerage industries in Australia are also big and there are a lot of potential profits to be extracted. But they are capital-intensive and in some areas require extensive upgrading. To satisfy demand and ensure health and environmental standards, Australia needs to spend heavily on upgrading and expanding its water system.

If the private sector is saying it can meet these costs, the Australian Government is listening. It has set up a water-reform unit in Treasury and is involving an ever-growing number of private-sector interests in water-treatment projects. Many of these involve so-called BOOT (Build, Own, Operate, Transfer) schemes. An operator enters a long-term contract with a government agency to build, operate and provide a facility on a fee-for-service basis.

Tax and accounting incentives are offered to ensure investors receive a return on their investment earlier than they normally would through such huge infrastructure commitment. Governments argue that, through BOOT projects, they can reduce building costs, avoid the operating risks that owner’s face and still access the latest technology and expertise. Governments that decide to privatize will be under pressure to ensure a consumer benefit.

Wayne Schachtel, Andersen Consulting managing partner for the utilities industry (Asia-Pacific), says governments will not fully privatize water until they work out an effective regulatory regime that passes the risks to the private sector but ensures it does not get excess profits at the expense of consumers.

"It would be political dynamite to have companies making big profits through water rationalization when Australia is prone to droughts," he says. "Water privatization is a big, thorny political issue, but that doesn’t mean it won’t happen. I just think it will be very considered."

Australian Governments are studying the British model of privatization closely.

In Adelaide, every time you turn on the tap, the cash registers are ringing in Paris, London and Houston, Texas. United Water owns Adelaide’s water supply, a joint venture between three water multinationals based in France, Britain and the US. In fact, just three companies now control 75 per cent of the world water business. The move is widely seen as a precursor to privatization with United Water a front-runner to buy the business. United Water is a joint venture between Veolia Water (47 per cent), Thames Water (47.5 per cent) and Halliburton KBR (5 per cent).

In December 1997, three publicly owned Queensland water pipelines (Eungella, Collinsville and Blackwater) that supply coalmines and other industrial customers in central Queensland were offered for sale. Four Australian and overseas consortia were short-listed to buy the pipelines. The then Treasurer, Joan Sheldon, set up an inter-departmental working party to manage the sales with the water assets valued between $12-15 billion.

The Queensland Commission of Audit, a body set up by the Borbidge Government in 1997, recommended an end to public ownership of water assets. The Government appointed Deutsche Morgan Grenfell to advise it on the sale of the pipelines. An announcement was expected in August 1998, but was not released for public scrutiny.

Ernst & Young say water is not a commodity that lends itself as easily as, for example, electricity or gas to privatization. The distinguishing factor is that water has a quality about it. To retain the quality and keep prices from escalating, you need some form of regulation. Those powers need to be much greater than for electricity and gas.

There is not a lot of growth in the basic consumer retail market because people cannot be encouraged to use more, but many opportunities for growth in industries such as beverages, hospitals, mines, nurseries, pulp and paper, and in co-generation plants.

All these industries need water and if you can tap into that, there is lots of potential for somebody to make lots of money.

Before water privatization can be fully achieved, bulk water entitlements as well as quality and price must be examined. Heavy consumers of water are given a ceiling on their consumption entitlement. If they do not use it all, they can sell the balance to consumers that need water above a given ceiling. Such a system is supposed to promote more efficient use of limited water resources. It is a form of competition based on tradeable water rights. Chile has had this system for over 40 years.

All sides of the water-privatization debate agree that the value in water assets lies in the fact they have a captive customer base. There is a good wholesale market in supplying water for the private sector for a profit, and in terms of retail there is also a captive audience.

Some corporate advisers envisage the time when a company, for example, an energy utility, will bid for water assets so that it can provide a one-stop-shop for gas, electricity and water on one meter. Such utilities companies will be interested in water as a means to diversify their portfolios and gain unlimited profits.

Customer retailing is a big factor that will generate the interest of the multinationals. This has already occurred in Britain. The first merger of a power company and a water company was in 1995. As utility companies from one industry seek to enter the markets in another, the exploitation of synergy across related industries is a key business strategy.

For the regulators, however, it creates a need for greater co-ordination of policies and information sharing. Without adequate regulation, there are three possible outcomes:

  • excessively high prices;
  • poor service; or
  • both

Australian governments will need to get the regulatory structures right before they fully privatise, and this may take time.

At the moment, by contrast, Australian states have full control over their water systems and the structure is much simpler. This means Australia has two advantages over Britain:

  • ownership structures are simpler: and
  • Australia can learn from Britain’s mistakes.

Water and the United Nations

The United Nations (Water) hosted a three-day conference in Paris, during March 1998, on managing the world's limited fresh water supplies. According to the British BBC and the United States Boston Sunday Globe, environment ministers and officials attended this conference from 84 countries. It was agreed that water should be paid for as a commodity rather than be treated as an essential staple to be supplied free.

French President, Jacques Chirac, told delegates "no more barren wrangling over the market versus the state. Water has a price and zero price is a forewarning of scarcity."

Chirac (who chaired the conference) estimated that it would cost $400 billion to set up reliable water networks around the world and told participants that governments could not foot the bill alone. The proposed solution was to market water as a prime opportunity for multinational investors.

As John Bastin of the European Bank of Reconstruction and Development has said, "Water is the last infrastructure frontier for private investors".

Australia’s taxpayers must now pay the price of our politicians’ folly and their eagerness to support International Treaties.