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PRIVATISATION
OF AUSTRALIA'S
WATER
RESOURCES
WATER
is the sleeping element in the privatisation debate. With all the activity
previously focused on telecommunications, investors are thinking that any move
on water and sewerage is at least 10 years away.
The
reality is different.
The
potential $70 BILLION to be realised 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 privatisation.
Water
is one of the most emotive, sensitive issues in the privatisation
debate.
As
a staple of life - far more so than electricity and telephones - any move to
privatisation raises concerns that water will become more expensive for
low-income households.
In
Australia, investment bankers are salivating at the prospect of water
privatisation. 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 privatisation 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
privatised. The state-based water and sewerage industries in Australia also are
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 privatise 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 privatise 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
rationalisation when Australia is prone to droughts," he says."
"Water
privatisation 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 privatisation 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% of the world water
business.
The
move is widely seen as a precursor to privatisation with United Water a
front-runner to buy the business. United Water is a joint venture of Veolia
Water (47%), Thames
Water (47.5%) and Halliburton
KBR (5%).
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 Treasure, 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
electricity or gas.
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 money.
Before
water
privatisation can be fully achieved, bulks 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 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-privatisation debate agree that the value in water assets
lies in the fact that they have a captive customer base.
There
is a good wholesale market in water for the private sector to make money out of
and, in terms of retail; there is again, a captive audience.
Some
corporate advisers envisage the time when a company, for example, 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.
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.
Private
contracts and trade sales of water assets are likely to precede share offerings,
so water company floats are probably still a few years off.
Nevertheless,
multinational investors will start preparing themselves.
Should
Australia's Federal or State Governments (party
politicians) SELL Australia's water resources to foreign multinational
conglomerates, the wrath of the people will ensure the demise of any such
Government and the political party responsible.
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WATER
and the UNITED NATIONS
The
United Nations (Water)
hosted a 3-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."
The Australian
people have every right to ask:
