Against the tide

Australia’s water sector seems to have been ‘left in the past’, but there is hope that may change.

If you’ve read our recent story about the trials and tribulations of the nascent US water market, you might think Australia – the land of private infrastructure financing – will offer a vastly different set of opportunities. But while the country delivered a series of landmark transactions in the past few years – including the privatisation of ports, airports and electricity distribution grids – the country’s water sector hasn’t been at the centre of discussions – until now.

In a recent research paper published by Infrastructure Australia, the country’s independent statutory advisory body highlights the need for fundamental changes to the regulation and government of Australia’s metropolitan water markets – to meet the demand for water from a rapidly growing population over the next 13 years.

Currently, there are more than 200 utilities delivering services in potable water, wastewater, flood mitigation and stormwater in Australia, serving a population of more than 20 million. By 2030, the projected Australian population will surpass 30 million and be concentrated in urban areas.

The new challenge for urban water infrastructure, highlighted by the projected population growth, is to generate discussion about sector reform in a bid to deliver water security and keep the sector cost competitive.

Failure to do that will come at a high price – if governments do not respond with significant reforms, Australians will need to pay more than double for their water bills by 2040, warns Infrastructure Australia.

Sensitive business

Despite all its privatisation experience, water and wastewater services are generally seen as a sensitive sector in Australia, notes Parvathy Iyer, a Melbourne-based senior director of infrastructure at S&P Global. With state governments concerned about any socio-economic impacts from privatising water utilities.

In Australia, the private sector has been more active in the development of desalination plants, which were delivered under the PPP model about 10 years ago. Outside that, though, private-sector activities have been limited to contracting arrangements for new-build projects.

“Across Australia, many of our dams are relatively full, which gives us a rare window of opportunity for clear thinking and long-term planning to meet our future needs”
Philip Davies

A high-profile attempt to change that was the 2005 move to privatise Snowy Hydro, a water storage and hydroelectricity generation scheme headquartered in New South Wales. But the proposed sale gave rise to many controversial discussions because of its politically and economically sensitive position and was eventually put on hold.

Currently, there is no privatisation scheme for state water assets and that is set to continue, Iyer expects. Unless there is a change of mind from state governments, state utilities will continue to sponsor new development under traditional procurement, with ownership remaining firmly in state governments’ hands.

However, while most of Australia’s water utilities are currently owned and managed by state governments, some individual assets are in private hands.

Australian manager Colonial First State Global Asset Management has been investing in the water sector since 2007, with its first deal clinched in the UK. It wasn’t until December 2016, though, that the Australian fund manager tapped its home market with the acquisition of Water Utilities Australia, which comprised two utilities at that time. It later acquired an industrial water scheme last December from state-owned Hunter Water.

Danny Latham, a partner at First State and chairman of WUA, says the firm’s strategy reflects the opportunities emerging from agricultural irrigation, industrial usage and reclaimed water supplies. The potable or drinking water segment remains highly politicised in the country, he adds.

“We are seeing opportunities as well as more value in this type of aggregation platform with our mid-market strategy, which fits well in the Australian market,” Latham says.

In the end, Latham argues, access to opportunities partly depends on investors’ underlying strategies. Mega-sized infrastructure funds and large financial institutions needing to write big cheques might not find the size of the opportunity attractive Down Under, but investors with smaller ticket sizes will.

Compared with the UK, Australia is in many ways a less advanced water market, Latham adds. However, he believes there are good opportunities to be captured, highlighting that First State’s recently acquired water asset is expected to deliver relatively attractive risk-adjusted returns compared with large-cap assets.

Reform needed

Still, regardless of investors’ strategies, there is plenty of work to be done just to increase the number of opportunities available.

“Australia will need more regulatory reforms to create a better environment for private investment in the water sector, as well as political will for change by the current government owners,” argues Latham. He adds that rising environmental standards, ageing infrastructure and increasing associated capex requirements may result in more dialogue with governments at both the state and municipal level.

Despite those incentives, though, discussions about water-sector reforms and privatisation have been very slow, observes Craig Shortus, head of utilities and infrastructure at ANZ. “It won’t happen overnight,” he says, adding the sector has the potential to offer a longer-term opportunity, considering the sums required to upgrade existing infrastructure are significant.

Advising on how to reform the water sector, Infrastructure Australia suggests a three-stage approach. The first would require the Australian government to establish a national reform roadmap, which should include a consensus on a new national urban water reform plan, a new independent national reform body and incentive schemes to drive reforms. It should then be followed by consistent regulatory and governance reform and refinement at the state and federal levels over the next five years. During the final stage, state governments should consider moving under the auspices of a national regulator and privatising urban water assets. The transfer of state-owned metropolitan water utility businesses should deliver “more cost-effective, customer-responsive services”, suggests the advisory body.

“If Australians want continued access to safe, reliable and affordable water in the future, we need to begin a staged approach to reforming the sector now – starting with a new national urban water reform plan,” Philip Davies, chief executive of Infrastructure Australia, argues in the report.

“Across Australia, many of our dams are relatively full, which gives us a rare window of opportunity for clear thinking and long-term planning to meet our future needs,” he adds.

And the country had better take it.