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Privatising Australia's water

By Selwyn Johnston - posted Thursday, 9 February 2006

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 ten 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 and 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 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 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.

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About the Author

Selwyn Johnston is an independent candiate for the federal seat of Leichhardt in far North Queensland for 2007.

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