Reforming Urban Water

Good morning ladies and gentlemen. I would like to extend my thanks to Brendan and the team at Infrastructure Partnerships Australia for partnering with us on this event and through 2017.

I would also like to acknowledge Brendan’s leadership in the infrastructure sector and wish him well in his new endeavours in 2018.

I extend a warm welcome to our distinguished guests Commissioner Jane Doolan, from the Productivity Commission and the Hon Alan Stockdale.

I’m looking forward to hearing more on the work of the PC, including progress on their inquiry into national water reform in the panel discussion a little later focussed on how to drive national change in this important infrastructure sector.

First of all though, today we are launching the latest paper in Infrastructure Australia’s Reform Series, Reforming Urban Water: A national pathway for change.

Urban water isn’t something that is often talked about by people outside of the sector. But the sector is vitally important to all of us—it provides essential services to more than 20 million people and 9 million connected properties in our cities and towns.

The sector supports our way of life by providing us with safe, reliable drinking water; efficient wastewater services, a range of other recycled water; storm water and flood mitigation services.

When we get up to brush our teeth in the morning, we expect when we turn on the tap that water will come out and it will be clean and safe.

But most people (present company excluded) don’t stop to think about the extensive largely hidden water infrastructure systems required to deliver these services.

In releasing this paper today, we’re hoping to make people stop and think about urban water, realise that we need to change how we are currently operating and start planning, for the longer term, for our future.

Our concern is, that without action, household water and sewerage bills could go the way of energy and rise dramatically.

We’re hoping this paper, along with the important work that the Productivity Commission is doing on urban water, will be a catalyst for governments to start the process of reforming the sector now, before it’s too late.

I’ll start today by giving a brief background on the progress in urban water reform, then I’ll explain in some detail the challenges that the sector is facing, and talk through the reform pathway that we are recommending.

The urban water sector that exists in Australia today is fundamentally different and much improved from the sector in the early 1990s.

This is owing to two major reform efforts that we saw through the COAG Reform Framework in 1994 and the National Water Initiative in 2004. These both sought to unlock efficiency gains and improve service quality through a variety of governance, pricing and regulatory reforms.

These changes were driven within each jurisdiction, but with the guidance and leadership of the Australian Government and independent agencies such as the National Water Commission.

While we should applaud these past reforms and the benefits they have brought the sector we shouldn’t let these successes breed complacency.

Infrastructure Australia is a strong believer that reform is an ongoing journey—it requires continuous political commitment, the spirit of which has been missing in the urban water sector.

Indeed, reform efforts in urban water have stalled since 2004 and the issues with the water sector have continued to compound.

In many ways, urban water has fallen behind the rural water sector, which has seen more consistent application of National Water Initiative principles over recent years.

Progress against urban water objectives, such as cost-reflective pricing and independent pricing regulation, has slowed—and in some places has even started going backwards.

So what are the challenges that we need to address through reform?

There are many factors which are beyond the sector’s direct control—such as climate variability and rapid population growth.

And there are challenges that are the result of previous decisions, such as ageing infrastructure in our towns and cities.

These issues will continue to compound and eventually have a big impact on the cost of delivering urban water services.

In preparing this report, we commissioned modelling to show just how much these factors could affect the average household bill.

The analysis is based on projections of future revenue requirements to meet future costs.

Alarmingly, we found that without action, our water bills could double by 2040.

This would see the average bill increase from around $1200 to over $2500 in today’s money.

For many families, this will place further pressure on their household budgets. Particularly in the context of slow wage growth, rising cost of living pressures, and increasing bills - it is therefore imperative that the urban water sector ensures services remain safe, efficient and affordable.

In the water sector, many parts of the country lack cost-reflective pricing, so cost increases may not be passed through to customers. Instead, it will be the broader taxpayers who foot the bill or—where there is insufficient funding—service quality could decline.

To tackle the challenges facing the urban water sector, we need lasting solutions that focus on efficiency as a key priority. Short term measures such as running down legacy assets won’t cut it when it comes to long-term affordability—in fact, such measures are likely to exacerbate cost issues.

That is why one of the backbone recommendations of the paper is to create strong, straightforward national objectives that can be applied across the urban water sector and understood by all stakeholders—from policy-makers and politicians to water customers and taxpayers.

We have identified four clear national objectives for the sector to underpin all decision making and long-term planning in urban water:

  • a focus on the long-term interests of users
  • efficiency and affordability
  • independence, transparency and accountability
  • security and resilience.

To get a better understanding of how we have performed against these four national objectives we measured the success of the regulatory frameworks around the country.

I think it’s important to note that through this process we were not looking at any particular regulator, utility, government department or Minister. We were looking at the rules of the game, not the players.

And what did we find?

Our federated system has blessed us with many benefits, but national consistency of urban water governance and regulation is not one them.

Instead, past reform efforts have left us with eight separate systems across jurisdictions—at various stages of progress.

We found that there are clearly some big differences in the regulatory frameworks across states and territories. The standout performers are clearly those jurisdictions that have prioritised reforms through previous national agreements such as the COAG Reform Framework and National Water Initiative, and beyond.

The experience of Victoria over recent years, and New South Wales before them, provide examples for other states to follow. Many smaller states, including South Australia, Tasmania and the ACT, have excelled in a number of areas of reform despite their scale.

However, no jurisdiction meets best practice across all forms of regulation. This means there is still work to be done across the country to ensure water services are delivered efficiently, securely and transparently—and most crucially, in the long-term interests of customers.

In particular, regional areas require increased attention to ensure that there are the right plans in place so they do not fall behind their metropolitan counterparts.

Reforms here should focus on enhancing the efficiency and resilience of regional service providers through increased scale and access to dependable sources of funding through transparent Community Service Obligations.

Even in parts of the country where reforms have been progressed, there is still more work to be done to prepare for the challenges of coming decades.

Reforms in these areas should focus on formalising the genuine independence of regulators from governments, as well as baking concepts like competition, innovation and community engagement into long-term planning and governance processes.

So, what kind of reforms are we proposing?

The challenge for jurisdictions is not simply understanding what needs to be improved or which models should be adopted. Governments must also focus on how we transition from the status quo to a more efficient, sustainable future urban water sector.

We have made a series of recommendations to governments, which establish a clear pathway to reforming the urban water sector.

While we recognise that these reforms will take time to roll out, it is important now that governments begin the process of initiating reform. So we have suggested a three stage approach.

Stage 1

This first stage—establishing a national reform pathway—can and should be undertaken by the end of 2018, 12 months after the completion of the Productivity Commission’s inquiry report on National Water Reform.

First and foremost, we believe that the time has come for a new national agreement that focuses on urban water. The National Water Initiative may still provide the most appropriate vehicle for rural water reforms, but the scale of change required in urban water means it warrants a separate agreement—guided by strong national objectives.

This national agreement should follow the four national objectives that we outlined for the sector:

  • a focus on the long-term interests of users
  • efficiency and affordability
  • independence, transparency and accountability
  • security and resilience.

We also believe there is a need for an independent national champion of urban water reform. This body should provide support to jurisdictions through their separate reform efforts, guide public discussions about urban water and call out instances where reforms are not being progressed as planned.

We must acknowledge that the bulk of reforms must be carried out by jurisdictions, and any reform processes should respect their various starting points and their respective autonomy. However, by driving these reforms through COAG, there is a clear opportunity to establish greater momentum for more consistent improvements across state borders, and to minimise any political pain borne by each government when initiating changes.

We strongly believe that there is an opportunity for the federal government to provide national leadership on urban water reforms that will benefit all Australians through better, more affordable services—and a boost to our national productivity over time.

Stage 2

The second stage—rolling out nationally consistent reforms—should be implemented over the next five years.

This includes a range of refinements to regulation and governance in each state and territory, as well as improvements to long-term planning and pricing frameworks, and enhanced collaboration between regulators.

Regional outcomes should be prioritised to ensure customers outside major cities also benefit from progress in urban water delivery. Private participation should be encouraged where there is potential for it to improve services and reduce costs.

Stage 3

The final stage should only be considered following delivery of nationally consistent reforms. Moving to a national regulator and privatising urban water assets could provide substantial benefits to customers if implemented in the right way—but it is important to recognise that the sector needs to be reformed first.

These future decisions are not inevitable consequences of broader reform, but just present opportunities for future governments to consider.

Concluding remarks

I would like to conclude today by saying that Australians are best served by infrastructure that is well planned, well considered and well delivered.

In the urban water sector, we have a distinct opportunity now to plan and prepare for the challenges ahead. It’s important that we don’t wait for a crisis like that faced in the Millennium Drought before embarking on this reform journey.

The scale of this task is immense, but that is exactly why it is so important for governments around the country to get on the front foot to make this reform happen.

The time is now.

Thank you.