As Australia’s water needs continue to evolve, questions about whether or not the regulatory environment surrounding the water services sector is outdated and acting as a barrier to promoting innovation and attracting investment are being asked.
Going forward, however, challenges within the sector are growing. With the national population expected to increase from around 22.7 million in 2012 and 41.5 million in 2061, long-term demand is expected to rise. Already, there is a backlog of infrastructure requirements in places like rural Queensland and rural New South Wales, while much of the infrastructure in Tasmania is aging and in poor condition. Customer needs are evolving, and many going forward will expect to be able to use recycled water and/or to be able to manage water use through real-time information. The sensitivity of the water cycle to climate variations will necessitate investment to diversity sources of supply and increase asset resilience.
On top of all this, there is the obvious need to maintain and replace existing assets as necessary. While no comprehensive stocktake of future investment needs across the sector in aggregate has been done, the level of investment needed to address all of these areas is certain to be substantial.
All of this has to happen amid an environment of growing sensitivity with regard to further price increases as well as significant levels of financial constraint on the part of not only governments but utilities themselves. Already, heavy levels of investment in response to the Millennium drought have pushed average water bills up from around $700 as recently as 2007/08 to around $1,200 in 2013/14. Those same investments have seen the financial ratios of many urban water utilities deteriorate and led to a position in which the urban water industry in aggregate was ‘not well placed to deal with significant downside shocks’ according to a 2013 financial stocktake of the sector performed by the Water Services Association of Australia (WSAA).
To make this happen, the importance of the private sector cannot be understated. Alas, WSAA and Infrastructure Partnerships Australia (IPA) argued in a recent report, investment in the sector is largely being held back by a lack of consistent economic regulation, a lack of clarity and transparency in governance arrangements and an absence of robust frameworks to foster competition and private sector involvement.
Rules governing the way in which the sector operates from an economic standpoint vary considerably across state and territory boundaries. Furthermore, while the IPA/WSAA report acknowledges that regulatory frameworks in some of the eight jurisdictions meet most of the elements of a ‘best practice’ model, it argues that four lack clearly stated objectives, six do not contain any significant consideration of the financial viability of utilities, six do not contain merits appeal processes and none have well developed incentives for productivity and innovation. The dual role of governments as both shareholder and price regulator, too, is creating challenges regarding potential conflicts of interest. All this creates uncertainty and deters investment.
Furthermore, a slew of reviews over recent years have found that governance arrangements within the sector have been poor. In 2011, the Productivity Commission found that conflicting objectives along with a lack of clarity surrounding the roles of water utilities, governments and regulators, was leading to a situation of ‘inefficient allocation of water resources, misdirected investment, undue reliance on water restrictions and costly water conservation programs.’
In its final assessment of urban water reform in 2011, meanwhile, the National Water Commission found that the capacity of major metropolitan utilities to manage operational and investment decisions was being undermined by political interventions and a shifting policy environment. Governments had failed to fully achieve the separation of policy, regulation and service delivery functions which was outlined in the COAG Water Reform Framework in 1994, that report concluded.
Finally, confidence is being further eroded by a lack of clear regulatory frameworks to enable competitive practices and private sector participation. While New South Wales has the Water Industry Competition Act and legislation to establish a framework for private companies to negotiate access to water and sewerage infrastructure was passed recently in South Australia, these types of frameworks are generally lacking across a number of states and territories, WSAA deputy executive director Stuart Wilson says. The 50-year lease of the Sydney Desalination Plant to a private operator in 2012 most likely would not have been possible in other jurisdictions where rules regarding private sector involvement in water services are less clear, he says.
To address all of this, IPA and WSAA are pushing for the development of nationally consistent standards which incentivise efficiency measures and have clear merit review and appeal mechanisms; the development of clear market rules and signals for new entrants; and clarity surrounding the roles of utilities, regulators, shareholders, system planners and policy makers.
A national agency should lead the reform process, while states should receive incentive payments for reaching milestones, their paper argues.
IPA executive director of policy and strategy Jonathan Kennedy says there is a need to act now while the sector is not in crisis so that a proactive approach can be undertaken.
“What we are saying to governments is that now is an opportunity to consider the frameworks that are needed to position the sector for the challenges ahead,” he said. “Rather than waiting until we are right on the edge of another external shock and another drought, now is the time to consider in advance of that how the sector might be better prepared.”
Kennedy says regulation also needs to evolve in order to allow the industry to respond to consumer demand and offer more tailored services. He says the United Kingdom, where a range of reforms has allowed utilities to reflect changing consumer preferences within their forward investment program and demonstrate how consumer needs were reflected in individual investment decisions, is a good example. In Australia, he says, rules in this area are more prescriptive and academic.
Wilson agrees, acknowledging that regulation of the sector was necessary but adding that in a number of cases, utilities were actually finding that aspects of the regulatory regime were acting as a barrier between them and the customer.
“The industry underwent a lot of reform in the 1990s, and was set up with government businesses under a corporatisation model with independent regulation,” he said. “I guess our basic issue is that the industry has changed a lot since the 1990s, but those models have not evolved in any sense.
“We’ve got to get to a situation whereby the prime relationship is between the utility and the customer, and the regulatory regime supports that and provides some guarantees over the top.”
Australia’s water sector faces many challenges. The push to improve the regulatory environment now in order to provide the level of certainty required to underpin the levels of investment required to meet long term requirements is on.