Focus: Increasing private investment in the urban water sector
1 December 2015
In brief: Water Services Association of Australia and Infrastructure Partnerships Australia, the peak bodies for water utilities and infrastructure respectively, have released a joint report that calls for major reform in the provision of urban water services across Australia. The report suggests that there is a need for greater private sector involvement in the urban water sector but that current regulatory settings need to change in order to facilitate this. Partner Kate Axup (view CV), Associate Danielle Jones and Vacation Clerk Katy Milne report.
- Current private sector involvement in Australia's urban water sector
- Encouraging greater private sector involvement in Australia's urban water sector
- The Thames Tideway Tunnel project: case study
How does it affect you?
The joint report, called Doing the important, as well as the urgent: Reforming the urban water sector (the Report), highlights that:
- Many water utilities are not now in a financial position to make the investments in infrastructure that are necessary to service growth areas and meet community expectations as to water quality and wastewater treatment.
- There is real opportunity for greater private sector investment in major water infrastructure projects, particularly in the wastewater sector.
- Current regulatory settings and governance structures do not adequately facilitate or encourage private sector investment in the urban water sector.
- A national body responsible for urban water is required to develop an urban water competition framework to guide the development of good policy at a state and territory level.
The Report notes that there is great variability in the structure, ownership and governance of the 220 water utilities found across states, territories and municipalities.1 For example, some utilities form departments of local municipalities, whereas others are state-owned corporations. While in Australia there have been examples of private sector partnering, joint ventures and outsourcing in the water sector, there has been very little ownership of water assets by the private sector.2 This is in contrast to other countries where water sector infrastructure has been privately owned and developed and is delivering considerable benefits to customers and success to private investors. It is also in contrast to what we are seeing in terms of the privatisation of electricity infrastructure and port assets in various Australian states and territories, and the substantial involvement of the private sector in other vital Australian infrastructure such as roads, hospitals and prisons under public-private partnership models.
The Report suggests that changes to Australia's water regulatory settings would encourage greater private sector involvement in the urban water sector. Specifically, the Report calls for:
A nationalised and uniform approach to water services
A nationalised and uniform approach would remove duplicated and inconsistent regulation that can hamper the involvement of the private sector in major infrastructure replacement and renewal projects.3
Given utility and state budgetary constraints can limit the renewal or maintenance of water assets, access to private sector finance and skill should facilitate effective and efficient provision of water services across Australia.4
An overarching national body leading and managing the process of change across Australia
A consistent national approach to water policy would allow private sector entities to plan their investments in the water sector at a national basis (rather than a state-by-state basis). Further, an overarching national body should assist private sector interaction with water utilities.
The corporatisation of water utilities and increased autonomy from government
Presently, 'urban water pricing fails to reflect its cost of provision.'5 The Report suggests that greater utility autonomy would allow utilities to set pricing approaches that better reflect 'actual servicing costs'.6 This would also allow the long-term funding of private sector-led renewal projects in the water sector.
A corporate structure would also allow utilities greater flexibility to plan and innovate new solutions in servicing customers including through private investments.
Competition in the water sector is currently limited to traditional outsourcing and contracting arrangements. Greater competition can create efficiencies in water servicing, especially where there are opportunities for tendering in the delivery of major projects. Currently the lack of clear regulatory frameworks is causing roadblocks to market entry for private operators, as well as limiting financial certainty for public utilities.
Clearer frameworks governing third-party access to the water sector and competition between private sector operators for water utility work will provide a more strategic approach to how new entities in the water sector can best be used.7
Examples of privatisation in the UK water market, such as the Thames Tideway Tunnel Project, suggest it is possible to meet the objectives of public utilities, private operators and customers through effective regulation.
Linklaters, Allens' international alliance partner, has been extensively involved in advising Thames Water (a private water utility) on the £4.2 billion Thames Tideway Tunnel project. This project is aimed at relieving the pressure on London's aging sewer system and reducing the weekly efflux of sewage into the Thames River.8 It involves the construction of 25 kilometres of tunnel to convey both raw sewage and rainwater discharge to sewage treatment works.
It was considered that the risks associated with the Thames Tideway Tunnel project and the required capital expenditure would unduly jeopardise Thames Water's ability to carry on its usual business as a water utility. For this reason, Thames Water procured bidders to own, finance and deliver the tunnel project, while in parallel procuring main works contractors, project approvals and geotechnical and other due diligence. Thames Tideway Tunnel Ltd was created by Thames Water and is intended to become a sister utility.
On 14 July 2015, the preferred bidder was announced (DIF, Allianz Capital Partners, Amber Infrastructure and Dalmore Capital).
Water utilities in the UK operate on the basis of a Regulated Asset Base model under which customer charges are regulated by Ofwat (Office of Water, a government regulator). The tunnel project will be funded by Thames Water customers via an additional charge on wastewater bills. It was initially estimated that the project will add a maximum of £70 to £80 to average annual wastewater bills from 2019, although these estimates have been revised down to £20 to £25.9
- IPA and WSAA, Doing the Important as well as the urgent: Reforming the urban water sector (2015), p 28.
- Ibid, p 35.
- IPA and WSAA, Doing the important as well as the urgent: Reforming the urban water sector (2015) pp 13.
- Ibid, p5.
- Ian Harper, Competition Policy Review: Final Report (2015), p 52.
- IPA and WSAA, Doing the important as well as the urgent: Reforming the urban water sector (2015) p5.
- IPA and WSAA, Doing the important as well as the urgent: Reforming the urban water sector (2015) p 51.
- BBC news, London's 'super sewer' gets the go ahead (12 September 2014).
- The Telegraph, Water companies say super-sewer will add £25 a year to Londoners' bills (24 August 2015).
- Kate AxupPartner,
Ph: +61 3 9613 8449
- Andrew MansourPartner, Sector Leader, Power & Utilities,
Ph: +61 2 9230 4552
- Bill McCrediePartner,
Ph: +61 7 3334 3049
- Jodi ReinmuthPartner,
Ph: +61 8 9488 3702
- Emma WarrenPractice Group Leader, Projects & Development,
Ph: +61 3 9613 8856
- Leighton O'BrienPartner,
Ph: +61 2 9230 4205
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