A Discussion Paper on the Role of the Private Sector in the Supply of Water and Wastewater

A Discussion Paper on the Role of the Private Sector in the Supply of Water and Wastewater Services

August 2006

Table of contents

About this Discussion Paper...... iii

Executive Summary

1.0Introduction

1.1Provision of safe and reliable water and wastewater services in the future

1.2Current Australian water and wastewater service provision

1.3Emerging concerns about investment in water infrastructure

2.0A greater role for the private sector?

2.1Private sector involvement in other Australian sectors

2.2Australian rural and urban water markets

2.3Potential benefits of private sector involvement

3.0Australian examples of private sector involvement

3.1Overview of private sector participation in urban water

3.2Private sector participation in rural water: Yanco Creek

3.3Outsourcing

3.4Public Private Partnerships

3.4.1Example: United Water

3.4.2Example: ActewAGL

3.5Third party access

4.0International examples of private sector involvement

4.1The experience in France

4.2The experience in the United Kingdom

4.3The lessons learned and experiences elsewhere in the world

5.0Potential for community concerns

5.1Water Quality

5.2Operational risks

6.0Barriers to private sector involvement in water and wastewater in Australia

6.1Water pricing arrangements

6.2Third party access arrangements

6.3Risk management

7.0Option for assisting in the involvement of the private Sector

7.1Development of a national code for third party access

7.2National guidelines for contracting with the private sector

7.3Other suggestions?

8.0References and suggested reading

Tables and Figures

Table 1: Variations between rural and urban markets

Table 2: Public and private sector involvement in major urban water facilities......

Table 3: Five arrangements for private sector involvement

Figure 1: A summary of COAG review findings into energy reforms

Figure 2: Spectrum of rules for setting prices to access monopoly infrastructure

Questions

Questions have been included throughout the text of this discussion paper. You may also go directly to the questions by holding the CTRL key and clicking on questions in the list below.

Q1:What are likely to be the most important issues that urban water utilities will need to address to meet future demands? (page 4)

Q2:What are likely to be the most important issues that rural water utilities will need to address to meet future demands? (page 4)

Q3:To what extent should the private sector play a greater role in urban water and wastewater infrastructure and services? (page 11)

Q4:To what extent should the private sector play a greater role in rural water and wastewater infrastructure and services? (page 11)

Q5:What are the pros and cons of using outsourcing as a way of involving the private sector? (page 11)

Q6:What are the pros and cons of using PPPs as a way of involving the private sector? (page 14)

Q7:What are the pros and cons of using third party access as a way of involving the private sector? (page 16)

Q8:What aspects of the examples provided are the most relevant to the Australian situation and why? (page 20)

Q9:Are there any water quality issues that need to be addressed in relation to increased private sector involvement? (page 21)

Q10:If any further safeguards need to be in place for managing private sector involvement, what would these look like? (page 22)

Q11:How significant are pricing barriers to private sector involvement in water and wastewater services? Can anything more be done to reduce them? (page 24)

Q12:How can risks best be allocated between public and private sector participants in water and in wastewater services? Is this a significant barrier to private sector involvement in the water sector? (page 26)

Q13:Are there any other significant barriers to private sector involvement in water and wastewater services? What could be done to reduce them? (page 26)

Q14:How would a national code for third party access assist private sector involvement?
-At what scale should such a code operate? (National, State, regional, local?)
- Why? (page 28)

Q15:How would national guidelines for contracting with the private sector assist private sector involvement? (page 29)

Q16:What other steps could be taken to encourage or manage private sector involvement in this sector? (page 29)

Q17:Other issues you may wish to raise (page 29)

About this Discussion Paper

The Discussion Paper on the Role of the Private Sector in the Supply of Water and Wastewater Services canvasses the implications of a greater role for the private sector in providing water and wastewater services.

The Paper has been prepared by the Natural Resource Management Branch of the Department of the Prime Minister and Cabinet and seeks the views of the public and, in particular, industry sectors that have an interest in the management of these services.

How to provide a response to the Discussion Paper

The Paper includes questions and provides opportunities for comment. To encourage feedback from readers, there are several methods available for commenting on the Paper. Readers can respond via an online form or by downloading a Microsoft Word form which can then be returned to the Natural Resource Management Branch either by email or normal post. Detailed information about the submission process is available on the Department of the Prime Minister and Cabinet website at this address: You may also download additional copies of this document from that address.

The Discussion Paper will be open for comment to anyone who has an interest in this subject for six weeks from Monday 21 August 2006 until close of business on Tuesday 3 October 2006.

At the end of the submission period, all comments will be collated and analysed. Feedback to the discussion paper will inform the Australian Government on options and approaches to encourage and to manage private sector involvement in the supply of water and wastewater services in urban and rural Australia.

Acknowledgments

The Australian Government would like to acknowledge contributors who assisted in the development of this discussion paper. This includes Dr John Marsden of Marsden Jacob and Associates for the research paper Third Party Access in Water and Wastewater Infrastructure: Implications for Australia produced for the Australian Government Department of Agriculture, Fisheries and Forestry (DAFF).

Representatives from government and industry have also contributed to the discussion paper through their involvement in the DAFF sponsored Recycling and Third Party Access Symposium held on 14 December 2005.

The Australian Government would also like to acknowledge the contribution of representatives from the finance and water industry sectors and government officials who agreed to discuss their perspective on the role of the private sector in a series of interviews undertaken between April and June 2006.

Photographs

Photographs on the title page are hosted on the website of the Australian Government Department of the Environment and Heritage. They were taken by:

John Baker (Lake Placid, Barron Gorge National Park)
Trevor Ierino (Lake Hume, and Stuart Murray Canal, Waranga Basin, Victoria) and
Andrew Tatnell (Dead tree trunk in saline billabong).

Executive Summary

Water is a vital commodity; essential to life, agriculture and industry. It is in demand, as our population grows, yet in most places its supply is diminishing. At the same time, we recognise that much of our water has been over exploited and that we need to allocate a greater share to the environment to ensure the health of our rivers and wetlands.

This reality of growing demand and diminishing supply from existing sources means that investment to augment existing supplies of water and in using water more efficiently and productively will be needed.

The water industry is dominated by governments at every level. Governments do not simply regulate and protect our water resources they also own the water companies that deliver water and sewerage services. Government-owned water companies are substantial contributors to the revenues of most state and territory governments.

The private sector has a great deal to offer the water sector. There is a significant amount of private capital available for infrastructure investment and there is also considerable expertise in both water science and technology as well as management in the private sector. This is not to diminish the resources of the government-owned water companies; but is there anything special about water which decrees that the private sector should have only a limited role?

Our water challenge is a formidable one and all stakeholders will need to be involved to ensure that Australia’s water resources are secure and used sustainably.

The objective of this discussion paper is to explore the role of private sector in supplying safe and efficient water and wastewater services in Australia, and to gain your views on whether greater participation from the private sector is warranted and if so, how it might be encouraged.

The discussion paper reflects the issues found in the literature on this topic (see the reference list for further reading) and reports the outcomes of discussions with private and public sector stakeholders in the water and wastewater services industries. The paper is not a detailed technical analysis of the issues, or a policy paper. The aim of the discussion paper is to gain broader views from the public and specialists involved in the water sector to help inform policy development.

The paper begins with an overview of the challenges ahead for providing safe and reliable water and wastewater services in urban and rural Australia. It gives a summary of the growth in demand for water services and the challenges posed by issues, such as climate change and the need to deliver water for environmental flows.

The paper notes that water is primarily the responsibility of state and territory governments and that there are a variety of government-owned companies and agencies used to deliver water and wastewater services in urban and rural sectors. The paper also examines the challenges faced by water providers to maintain water infrastructure in a condition so that:

there is enough water for our needs in the future
leakage and wastage is minimised
service delivery is maintained to a high standard
water quality is not compromised, and
there are appropriate financing and management skills available to meet the challenges of the future.

In this context, the paper seeks your views on: What are likely to be the most important issues that urban and rural water utilities will need to address to meet future demands?

The paper then asks for your views on: To what extent should the private sector play a greater role in urban and rural water and wastewater services?

To set the context for these questions, the paper provides an overview of other sectors in the economy that have benefited from increased private sector involvement, such as in electricity and gas. It presents an overview of the characteristics of the rural and urban water markets to give a sense of where the opportunities for private investors are to make a commercial return. The paper also provides a summary of the experience of private sector participation in Australia’s urban and rural water markets.

This is followed by a discussion on the options available for the private sector in the water industry. The options canvassed range from outsourcing, which is commonly used by large urban water utilities, through to public private partnerships (PPPs) and third party access arrangements. A case study of United Water in South Australia and ActewAGL in the Australian Capital Territory is provided to illustrate public private partnerships in an urban setting and a case study of Services Sydney Pty Ltd to demonstrate issues associated with third party access. Following this discussion your views are sought on: What are the pros and cons of using outsourcing, PPPs or third party access arrangements to involve the private sector in water and wastewater services?

Examples of the experience with private sector involvement in other parts of the world, and in particular in the UK and France are provided to give a broader view of the benefits and costs. In France, for example, notwithstanding its long tradition of government-owned industries, there has been extensive and long-term private sector involvement at all levels of service provision. Your views are sought on: What aspects of the examples provided are the most relevant to the Australian situation?

The next two sections of the paper deal with the potential downside and barriers to private sector participation. Significant for governments is the potential for community concerns about the protection of important features of the water industry such as the ability to manage precious water resources in an integrated and sustainable, manner. The community might also be concerned about the implications for the provision of essential water and wastewater services in the event that a private sector participant failed in the management of this service. Against each of these concerns, your views are sought on: In what ways might private sector involvement impact on each of these concerns?

Then there are the commercial barriers to participation. The paper summarises the current approaches to water pricing and the methods used for charging access to existing infrastructure via third party access arrangements. Is the price of water too low to enable a commercial operator to make an adequate return? It seeks your views on: How significant are pricing barriers to private sector involvement in water and wastewater services? Can anything be done to reduce them?

Since risk allocation and risk management are important to ensuring that water and wastewater systems are well managed and can provide public benefits from private sector participation, the paper gives an overview of these issues and asks for your views on: How can risks best be allocated between public and private sector participants in water and wastewater services and is this a significant barrier to private sector involvement in the water sector?

Your views are also sought on whether there are: Other significant barriers to private sector involvement in water and wastewater services and what could be done to reduce them?

Finally, the paper outlines two possible initiatives to help facilitate and manage private sector involvement. First, the development of a national code for third party access as a means of reducing the time and cost involved in negotiating access arrangements. Second, the development of a set of national guidelines for contracting with the private sector – to assist in risk allocation and in the development of PPPs. Following a short explanation of each of these concepts, your views are sought on: How would a national code for third party access or national guidelines for contracting with the private sector assist private sector involvement?

Your feedback to the discussion paper will inform the Australian Government on approaches to encourage and to manage private sector involvement in supply of water and wastewater services in urban and rural Australia.

Executive Summary1

the role of the Private Sector in the Supply of Water and Wastewater Services – discussion paper

1.0Introduction

1.1Provision of safe and reliable water and wastewater services in the future

All Australians need a reliable water supply that is safe to drink. The correct treatment and disposal or reuse of domestic wastewater and industrial wastes is also essential to our economy and the health and wellbeing of all Australians. Over the last 200 years these essential services have been the direct responsibility of governments and their agencies.

The Australian economy and population have been steadily growing and the demand for water continues to increase in line with that growth. For example, water demand increased significantly by 67 per cent from 1986 to 1997 with the most of this growth associated with expansion in irrigated agriculture. Per capita water consumption also increased in the urban sector from 95kLin 1993-94 to 115kL in 2000-01 (ABS 2005 p.183). However, due to factors, including drought awareness and water restrictions, urban water use has decreased since 2001. For example, in 2004-05 urban users consumed, on average 84kL per person a reduction of some 3.65 per cent since 2003-04 and a 15 per cent reduction in per capita consumption over four years since 2000-01.At the same time, average household consumption in capital cities fell by 9 per cent, from 251kL per household per annum in 2000-01 to 225kL per household per annum in 2004–05 (Water Services Association of Australia (WSAA), 31 January 2006 press release).

In their report Water and the Australian Economy the Australian Academy of Technical Sciences and Engineering and the Institution of Engineers highlighted that if water use trends continue the water needs of industry, particularly irrigation industries, will be seriously affected by a shortfall in water availability by 2020 (1999 p. 4). In 2006 the Business Council of Australia observed that with an expected rise in population to 25 million by 2025, nearly all Australian cities will be consuming water at unsustainable levels (BCA, 2006 p.12). Some governments are proposing and implementing strategies to mitigate these risks and meet water supply and demand issues, through initiatives such as desalination and recycling schemes.

The ability to meet future water supply demands in urban and rural regions are likely to be stretched further by the need to return water to the environment, growth in the Australian economy and impacts from climate change (some catchments that supply major Australian cities are recording decreasing water yields of up to 25 per cent. In the most extreme case flows into Perth’s reservoirs have declined by 64 per cent in the last 20 years (WSAA 2005 p.3).

There is also a need for additional investment in water supply and wastewater infrastructure to improve efficiencies and meet future needs. According to Engineers Australia over the next 20 years water supply and sewerage capital expenditure in South East Queensland, Sydney and Melbourne will amount to at least $12.6 billion (2000 p. 35). The BCA also reported in 2006 that there is an urgent need to invest in water infrastructure to minimise wastage and improve Australia’s GDP (BCA 2006).

The challenge is to provide for the future growth in water and wastewater services to our cities and towns as well as water for irrigation and other forms of agricultural production. This challenge also involves the maintenance and renewal of existing infrastructure and the provision of new infrastructure and services. The overarching question posed in this discussion paper is: