Tuesday, 29 June
1999
Water is the sleeping element in
the privatisation debate. With all the activity and angst focused on electricity
and 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.
Governments are already chipping
away at their water systems and at least three commissioned reports to evaluate
the impact of privatisation. Victoria, seen as the state closest to an asset
sale, has corporatised its water boards and, earlier this year, introduced
a user-pays
system.
South Australia is not far behind.
It has out-sourced water and sewerage for 15 years to United Water consortium,
composed of the French group GCE, Britain’s Thames Water and the Kinhill
Group, which has its headquarters in Adelaide. Queensland is contemplating
privatising three of its main water pipes and New South Wales has increased
the private sector’s involvement in water-treatment
projects.
Victoria’s Liberal-National
Government is about to announce the successful tender for the $30 million
Castlemaine waste-water project. Three other projects, valued at up to $80
million each, are to be announced in the next few
months.
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. Even in
the United States, water remains largely in the public sector.
European water companies are watching
developments in Australia with great interest. Much of Western Europe’s
water and sewerage has been privatised and the companies involved are making
fat profits. The British lobby group Water Watch says shareholder dividends
accounts for between 12% and 42% of water bills for ordinary
customers.
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.
With a reasonable prospect of most
States being run by Liberal or conservative coalitions after their elections,
the bankers believe privatisation can only gain momentum. 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".
But most States first need to look
seriously at selling off electricity. In Victoria, where most of the power
infrastructure has already been privatised, Premier Jeff Kennett’s
Government has taken two important steps towards preparing the water system
for sale: it has changed the pricing structure and corporatised the water
boards.
From January 1, 1998, Victorian
households began paying for water on a user-pays basis rather than simply
by flat rate with fees for excess consumption. Mr Kennett has said water
privatisation is possible after the next election. "We have given a commitment
that we are not going to privatise this item...what happens beyond 2000 I
have no idea" he said in a speech late last
year.
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, it (WATER) is likely to be next utility cab off the rank. I also
think it could happen in the next few
years."
Britain has the way among
English-speaking countries. Margaret Thatcher's Tory administration privatised
most of its water utilities in 1989. Unlike in Australia, water privatisation
came before electricity.
And, unlike electricity companies,
water companies do not operate in highly competitive markets: they have regional
monopolies whereas 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. According to a report in London’s Financial Times
about an international conference on water in Turkey last year, the World
Bank estimates the poor countries intend to spend $600 billion on water in
the next 10 years. In turkey, Thames Water of Britain, also active in Australia,
is leading an $864 million project to provide drinking water to more than
one million people of the city of Izmit, 100 kilometres east of Istanbul.
In Buenos Aires, the capital of
Argentina, Lyonnaise des Eaux, a private French water company, has taken
over the entire water
network.
The British experience is most 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 extensive
upgrading.
Victoria’s water industry has
an overall debt of $3 billion. Treasurer Alan Stockdale has said on many
occasions that a higher proportion of industry revenue is now spent on finance
charges and this has weakened the incentive to improve efficiency. To satisfy
demand and stiffer health and environmental standards, Australia needs to
spend heavily on upgrading and expanding its water
system.
INTERESTED PARTIES ARE ON THEIR
MARKS
If the private sector is saying
it can meet these costs, the Victorian 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 owners face and still access to the latest technology and
expertise.
Sources in Sydney Water board say
that the recent spate of private-sector involvement in the building of
water-treatment plants in New South Wales will save the Government millions
of dollars. "Had they been built by the Sydney Water itself, they would have
cost 40% more," one
says.
Mario D’Elia, a Vice-President
of BT Investment Bank, says that most BOOT projects make a net return of
11-13%. "The after-tax return on some of these projects is pretty good, but
there are no guarantees of payments," he says. "If you don’t provide
the service, you don’t receive the fee. This shifting of the risk to
the private sector is very advance in Victoria, and that is good news because
it means they are serious about making it work in the private
sector."
Among imminent private-sector work
in Victoria, an information memorandum is expected in the next couple weeks
on the Bendigo water-treatment project; expressions of interest in the Ballarat
project will close before the end of the month; and expressions of interest
were invited for the Grampians water-upgrade project in May 1998. These projects
each involve between $60 million and $90 million worth of capital costs and
will open the way to three or four other projects valued at up to $60 million.
D’Elia says the main interest is coming from the French and English
Companies, as well as the Australian groups Lend Lease and Transfield. "What
they really want is to win the $200-600 million projects when they come up,"
he
says.
Governments that decide to privatise
will be under pressure to ensure a consumer benefit. Wayne Schachtel, Andersen
Consulting’s managing partner for the utilities industry (Asia-Pacific),
says government will not consider water privatisation 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 it doesn’t mean
it won’t happen. I just think it will be very
considered."
Again, Britain's case is worth
consideration. There, water-company share prices and profits surged because
of efficiency gains. Although there is some price regulations in Britain,
there has been increasing pressure on companies to justify their earnings
growth.
Customers argue that they, as well
as investors, should share in the benefits of privatisation. According to
a report on the regulation of utilities in Britain, released by the specialist
FT Energy Publishing, at least one company has been forced to act to contain
customer
resentment.
The FT report says. "In March 1995,
in an offer to avoid regulatory action over ‘excessive’ profits,
North West Water (since merged with Norweb to form United Utilities) announced
a package of One Hundred and Eighty Million Pounds to share some benefits
of its efficiency gains with consumers over the following five years. By
offering such a benefit-sharing package outside the price-capping process,
regulatory is
implied."
Governments are studying the British
model of privatisation closely. In South Australia, the Liberal Government
has retained ownership of its water system but has out-sourced management
and operations to United Water. The move is widely seen as a precursor to
privatisation, with United Water a front-runner to buy the business. A report
leaked to the state Opposition four months ago canvassed options for the
privatisation of SA Water (estimated to be about $8billion), including a
share
float.
In Victoria, water and sewerage
assets have been estimated at between $16 billion and $18 billion, because
of the vastness of the system and the revenue its five businesses generate.
In the past six months, Melbourne’s water industry generated revenue
of almost $1
billion.
FIRST MOVES ARE ALREADY BEING
MADE
In Queensland, where the water assets
are valued at $12 billion, the previous Borbidge Liberal-National Government
was considering privatising three pipelines in the centre of the state. The
then Treasure, Mrs Joan Sheldon, set up an interdepartmental working party
to manage the sales of the Eungella, Blackwater and Collinsville pipelines.
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 pipes. An announcement was expected in August
1998.
In New South Wales, all water boards
have been corporatised and Bob Carr’s Government is in the process of
awarding projects to the private sector. Water and sewerage assets in NSW
are estimated to be worth up to $20 billion. NSW turned to the private sector
early in the 1990’s for the construction and operation of three
water-treatment plants valued at a total of more than $500 million. The largest,
the $300 million Prospect water treatment plant was awarded to a consortium
including P&O Australia, Lend lease and Lyonnaise des
Eaux.
Ernst & Young’s Green says
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," he says.
"To retain the quality and keep prices from escalating, you need regulation.
Those powers need to be much greater than for electricity and
gas."
Green says there is not a lot of
growth in the basic consumer retail market because people cannot be encouraged
to use more, but he sees 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 a lot of potential to make money," he
says.
Green says that before water
privatisation can be considered, bulk water entitlements as well as quality
and price to 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," Green says. Chile
has had this system for 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. Green says "There is a good wholesale market in
water for the private sector to make money out of and, in terms of retail,
there is 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. Schachtel says such utilities companies will be interested
in water as a means to diversify their portfolios and gain "synergies". He
says, "Customer retailing is a big factor that will generate their
interest".
This has already occurred in Britain.
The first merger of a power company and a water company was in 1995. The
FT Energy report, Regulation of UK Utilities -Prospects to 2000, nominates
such a trend as a challenge. "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." it says. "For the regulators, however,
it creates a need for greater co-ordination of policies and information-sharing
between
them."
The report warns that, without adequate
regulation, there are two possible outcomes:
Australian governments will need
to get the regulatory structures right before they privatise, and this will
take
time.
There are differences between the
individual Australian States and Britain. The report Reforming Victoria’s
1995 Water Industry says: "The 1989 UK reform covered 31 water authorities,
21 of which were already in private hands. The remaining 10 government
authorities were privatised and all businesses were placed under the same
regulatory regime." 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:
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.
WATER and the UNITED
NATIONS
The United Nations 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 this conference was attended
by environment ministers and officials 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 for 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
investors.
The Australian People have every
right to
ask: