Flogging the water

Peter Primrose

The Water Industry Competition Amendment (Review) Bill 2014 is the precursor to the main event: the privatisation by the Baird government of our public water utilities. Like all privatisations, in the end consumers will pay more. A key objective of Labor's 2006 Water Industry Competition Act was to ease pressure on drinking water supplies by promoting the development of alternative sources of water such as recycling and stormwater harvesting. To quote the long title, it was "an Act to encourage competition in relation to the supply of water and the provision of sewerage services and to facilitate the development of infrastructure for the production and reticulation of recycled water". 

During its time in office, the NSW Labor government extensively promoted water saving measures. In 2005 it established the Water and Energy Savings Fund to promote water and energy saving initiatives throughout the state. It allocated $43 million to 79 projects, saving an estimated 12 billion litres of water every year through a diverse range of recycling, water efficiency, stormwater harvesting and groundwater projects. In 2010 greater Sydney was using the same amount of water that it had used in the early 1970s, despite having 1.3 million more people. Put another way, Sydney's total water consumption fell from 506 litres per person a day in 1990-91 to 314 litres per person a day in 2009-10. In 2009-10 alone, 35.8 billion litres of water was recycled in Sydney Water's area of operations. Over the previous 15 years, Sydney Water had gone from using 6.2 billion litres of recycled water in wastewater treatment plants to 16.3 billion litres a year. 

To ensure that this commitment to recycling continued to grow, the 2006 Act encouraged the development of these alternative sources of water. The Labor Party understood in 2006, and understands today, that good water policy is much more than simply trying to find ways to make markets work more efficiently. It must be seen as more than an issue of pricing. Good water policy must be seen in the context of preserving a resource that will inevitably fluctuate in supply over decades. Section 10 (4) (d) of the Act provides that the Minister must not grant a licence to supply water unless he or she is satisfied that if such a licence is granted "sufficient quantities of the water supplied by the licensee will have been obtained otherwise than from a public water utility". This meant that the licensee could not simply purchase drinking water from public utilities and on-sell it to retail customers. The objective was to ensure that new entrants contribute a "new commercial source of water" to "ensure that existing water resources are not compromised through the introduction of competition". 

Central Park on Broadway is a good example of a water project developed under section 10 (4) (d). It will save close to one million litres of drinking water every day by recycling water that will then be used for activities such as flushing toilets, car washing and irrigating the 170-metre vertical garden. In Rosehill a licensed scheme is now providing three billion litres of recycled water ever year to industry and agriculture, and this will soon rise to seven billion litres a year. This saves our drinking water supply by identifying and utilising water other than from our public water utility, which is exactly what the 2006 Act intended. 

The Baird government now proposes in this bill to repeal that key section of the 2006 Act with the sole stated objective of creating a so-called level playing field that allows new entrants to compete with public utilities for the right to service industrial and larger commercial customers without developing alternative water sources. In other words, they can simply buy it from Sydney Water, Hunter Water or another catchment authority. This will probably significantly reduce the chances of converting these customers to alternative supplies such as recycled water or harvested stormwater, which would ease demand on potable water supplies. As Elizabeth Farrelly wrote recently in the Sydney Morning Herald:

Just as we head into another El Niño, the Baird Government proposes to remove water efficiency requirements from utilities. This is the latest in a string of bizarre moves from our various conservative governments; squeeze the poor, pamper the rich, preserve graft in financial services, undermine renewables, trumpet cheaper energy—and water? Mate. Don't worry about it.

Perversely, the Minister's second reading speech notes that the 2006 Act was "developed in the midst of drought". True enough. In 2006 our dam supply of water for Sydney was around 30 per cent. If the government had not been transferring water from the Shoalhaven and if water restrictions had not been in place, Sydney's water supply would have been down to single figures. However, the Minister's comment seems to suggest that in 2014 New South Wales is not in drought, or that drought is some kind of rare event. This is especially concerning coming from someone who is also the Minister for Western NSW. Today, around three-quarters of this state is in drought and the Bureau of Meteorology forecasts that there is a 50:50 chance we are moving into another El Niño event. That is why we must maintain the core requirement in section 10 (4) (d) of the 2006 Act. 

The government argues that the BASIX and Green Star schemes, along with the Protection of the Environment Operations Act 1997, will be sufficient to support investment in recycling. However, none of these instruments specifically targets the development of new water sources—they are targeted at consumption or rainwater tanks. Recycling has always been considered an essential component of Sydney's and the Hunter's water strategy. It is also proposed to allow new entrants to provide retail services—billing and metering—to residential and small commercial customers in new greenfield and infill developments if these services are provided in connection with a scheme licensed under the Water Industry Competition Act.

The result of these changes will be to move away from regulation designed to promote alternative sources of water towards a system of retail competition. Infrastructure developed by private sector operators will be able simply to deliver water derived from public utilities rather than from recycling or stormwater harvesting. This has serious implications for water conservation and drought security. The core question that remains unanswered by the Urban Water Regulation Review Position Paper and the Water Industry Competition Amendment (Review) Bill 2014, which arose from it, is: What is the public good in introducing this legislation? Again, to quote Elizabeth Farrelly:

First, the Independent Pricing and Regulatory Tribunal recommended the scrapping of Sydney's water usage and efficiency targets. Then, within days, Water Minister Kevin Humphries introduced a bill to relieve water and sewerage utilities from their existing obligations to use recycled water. This is madness.

Jeff Angel from the Total Environment Centre makes the point that removing Sydney Water's conservation targets, while at the same time allowing it to sell more water to private operators and boost profits, is simply a bid "to increase its attractiveness to potential buyers": reduce staff, fatten it up, and then sell it. No compelling case has been made that any change to water competition legislation is required or that increasing private investment is either necessary or desirable without the provisions in the 2006 legislation. There is no evidence that privatisation reduces costs to consumers or increases innovation in service provision and delivery. Water is a natural monopoly, thus for-profit providers have only two ways to make money: cut costs or increase fees. Both of these are deleterious for customers and for citizens.

These proposed changes to the 2006 Act are clearly a stalking horse for privatisation of public water utilities. The Baird government has made one thing crystal clear: It not only likes privatisation but cites it as the solution to virtually every issue facing the state. There are multiple ways to privatise an industry or utility: sell off assets, contract or outsource services, or introduce competition. This bill will privatise water in New South Wales by stealth through facilitating competition in a way that is advantageous for for-profit providers. Extending competition for billing and metering services to residential and small commercial customers in already developed areas, including those serviced by Sydney Water and Hunter Water, will open the way to privatisation of existing retailers. The government's position paper that preceded the bill did not preclude ultimately allowing new entrants to compete for retail services in these areas, stating only that it will not occur "at this stage" and that the government considers that more "analysis and consultation would be required". 

Adoption of such a "vertically disaggregated" model in the energy industry has encouraged retailers to promote increased sales at the expense of demand management. This is not an entirely new direction for the New South Wales Liberals and Nationals, of course. What is already happening at Sydney Water and Hunter Water has a familiar ring to it. Under the Baird government, Sydney Water is not customer focused; it is profit focused. It is all about paying the maximum dividends to the Liberal government. Sydney Water's annual report shows that it made a massive after-tax profit in 2012-13 of $415 million. That is $48 million higher than in 2011-12. This was because of the higher income it got from water sales and service charges. Sydney Water paid the New South Wales Liberal-National government a record dividend of $368 million in 2012-13. The Auditor-General found that 24 per cent of all the money that Sydney Water receives from its customers is now paid out as dividends and taxes.

While it has been increasing profits, Sydney Water has had to cut its staff and put up its domestic water prices. You cannot blame Sydney Water for this any more than you can blame cattle for being fattened up in a field before they are sold off. The Baird government is cutting staff and services at Sydney Water, and increasing how much profit it makes. All this is to make it more appealing to potential buyers when the government announces that it will be put up for sale and privatised. Internal documents show that in late 2012 the government hired consultant firm Farrier Swier to find ways to increase private involvement in Sydney Water's wastewater plants with an estimated value of around $5 billion, such as those at Bondi, Malabar, North Head and Cronulla.

The same thing is taking place in the Hunter. Premier Mike Baird has failed to rule out the further privatisation of Hunter Water assets. It is already being privatised by stealth. So-called non-core assets are being sold. In June 2014 the government announced that the maintenance and operation of Hunter Water's 25 treatment plants will be outsourced for at least eight years to multinational company Veolia under a $279 million contract. This privatisation follows the government's decision earlier this year to sell Hunter Water's Honeysuckle head office building with a 10-year leaseback. Some of the proceeds of the sale of the Hunter Water headquarters will go towards the Burwood Beach Wastewater Treatment Works. As always, a great slice of Hunter Water's profits will not stay in the Hunter but end up in consolidated revenue in Sydney, just like the proceeds from the sale of the Port of Newcastle. The Baird government is also weighing up the potential divestment—in other words, privatisation—of the Kooragang Island recycled water plant project. 

Most recently, at the beginning of August Hunter Water announced that it was selling its subsidiary Hunter Water Australia, which had been created in 1998 to provide water treatment, engineering, surveying and laboratory services. It developed to become an international success. What reasons were given for this sale? It is because the Baird government had just outsourced to Veolia the work it had done previously to maintain and operate Hunter Water's treatment plants. To quote Hunter Water General Manager Kim Wood:

Not only is the contract the largest ever signed by Hunter Water, but it is also the first time the business has taken the operation of its treatment plants to tender.

This was the first time Hunter Water had taken the operation of its treatment plants to tender, having previously done the work itself through its 100 per cent owned subsidiary Hunter Water Australia. Now it is selling off an integral part of its own operations. As I said, this is privatisation by stealth. Not only will it mean higher prices for Hunter Water consumers in the end but also it has meant job losses. On top of the massive losses of manufacturing jobs in the Hunter caused by the government's refusal to give bus, train or shipping contracts to New South Wales employers and the decimation of TAFE, job losses in Hunter Water are damaging the entire Hunter community. 

It is also unlikely that the private sector water licences will have the same environmental reporting, energy use and waste management requirements as currently imposed on Sydney Water and Hunter Water. This could—and, understandably, consequently does—give rise to demands by both Sydney Water and Hunter Water to have their requirements removed. Under this level playing field argument, the Minister will likely acquiesce. Remember this is the same Minister who announced that he would scrap the Sydney Catchment Authority, which was specifically established by the Carr government in 1998 as an essential stand-alone authority to protect the drinking water supply catchment for the people of Sydney, the Illawarra and the Blue Mountains. While it is envisaged that the Environmental Planning and Assessment Act will work in concert with this bill, it is of concern that the bill is silent on this issue. This is a missed opportunity, especially given that environmental protection remains one of its stated aims. 

In particular, the question remains as to whether new entrants to the market will, under this legislation, be self-assessors when it comes to environmental impact and risk. Without more stringent penalties for environmental damage the bill runs the risk of failing to protect our natural environment and our water resources. As with the public health and safety penalties, this legislation must ensure that the onus of proof is on the private supplier and not on the public agency. I will return to this point later, but a reasonable bill would specifically require that any new entrants to the market are not self-assessors for the purposes of environmental impact under the Environmental Planning and Assessment Act. 

As a consequence of the way water is delivered to consumers, regardless of whether there are multiple retailers in New South Wales, no consumer will, in reality, be able to choose their providers. Therefore, any argument about competition leading to lower prices is negated. In addition, if IPART continues to set prices either for wholesale water or for both wholesale and retail, then private water companies will have an incentive to either drive prices up or reduce costs in areas such as maintenance and quality control if the specific requirements of the 2006 Act are removed by this bill. 

If pricing arrangements are made independent of IPART through long-term contracts between a private licensee and a public authority such as Sydney Water, the outcomes become even more perverse. Prices will be set according to long-term contracts. This might be cheaper in the short term, but when we return to conditions of severe drought, as we inevitably will, and severe water restrictions are imposed, Sydney will face the prospect of a multiplicity of prices and a variety of restrictions for the provision of water depending on which area of Sydney people live and who is supplying their water. As I said, good water policy has to be seen in the context of preserving a resource that will inevitably fluctuate in supply over decades. Regardless of where people live in greater Sydney they should pay the same amount for their water and be subject to whatever restrictions are applied to protect that supply. 

In the United States of America—arguably a jurisdiction in favour of privatisation and with the most favourable conditions for privatised services—most water services remain publicly delivered. Only 6 per cent to 8 per cent of water services in the United States are delivered through for-profit contracts. Many jurisdictions in the United States have, in fact, remunicipalised their water utilities and services primarily as a consequence of water quality issues. Labor is concerned that protections in the 2006 Act concerning the provision of water services for people in need, including people living in remote areas and those experiencing financial hardship, will be weakened by this bill. Water is an essential service and it is imperative that any and all suppliers and operators of water services are required to provide those services for the entire New South Wales community. A reasonable bill would ensure that the provisions relating to social programs for the supply of water remain unchanged from the 2006 Act. 

We have concerns regarding providers of last resort. Providers of last resort are those public utilities that are required to step in should there be a failure of service delivery or of infrastructure. That a provider of last resort must be a public water utility is in and of itself appropriate, but that consumers of a failed entity may be required to participate in cost recovery is problematic. The requirement that a public utility is required to step in means that it is the citizens of New South Wales who will inevitably provide some element of cost recovery. As one of the most significant issues with private investment in public projects is the defraying of risk from the private entity is imperative that any legislation ensure that risk is borne by the entity making the profit. As the bill stands some consumers will, in effect, have to pay twice for the failure of a private company. 

A reasonable bill would have required that the provisions related to providers of last resort ensure the burden of cost recovery will not fall on customers and that any public utilities required to step in should there be a failure would have adequate opportunity to pursue costs from failed entities. While the bill currently provides some protections for consumers with regards to the granting of retail licences in that consumers must elect to switch to another provider and must have a contract with them, and that any alternative provider of water services must already be supplying services such as recycled water or sewerage to the connected property, Labor shares the concerns of some stakeholders that changes to retail licensing might give rise to a proliferation of small retail suppliers with little or no experience in the water industry simply managing the on-selling of water. 

Further, while the proposed increase in penalties is welcome, Labor has grave concerns about the requirements that must be satisfied in order to secure these penalties. Specifically, new section 20M requires that the prosecution must prove that the infrastructure was operated without the required approval or licence or in contravention of the licensing conditions, that the act was intentional and that the operation of the infrastructure caused high-impact or wide-scale actual or potential harm to the health and safety of human beings. The multiple limbs of the offence suggest that it will be impossible to grapple with, except in the case of the most severe failure. Any reasonable bill would replace the "ands" with "ors", and delete new section 2 altogether. The onus in new section 20M should be reversed so that it lies with the provider and not with those making the claim that a health or safety breach has taken place. 

In addition, the requirement that these allegations form part of an initial notice to appear or an application is problematic as this precludes the capacity to address these issues should they arise in the course of any proceedings. Moreover, given that agriculture, fisheries and forestry are parts of the New South Wales economy, it seems an oversight not to include protections for potential damage to those industries and any others that might be impacted by failures in water quality or service provision. It is unconscionable for any legislation designed to enable for-profit providers to make money by selling a publicly held resource back to the public not to contain stringent regulations to ensure that any breaches that may occur are adequately penalised. This Government—Premier Baird, in particular—has made it clear that it is an active advocate of privatisation. This bill is not good water policy. Privatising Sydney Water and Hunter Water is not good water policy. We oppose the bill.

This is the text of a speech in the NSW Legislative Council by Peter Primrose on 14 October 2014. Peter Primrose is the Shadow Minister for Finance and Services, Shadow Minister for Water, Shadow Minister of State and the Shadow Minister for Assisting the Leader on Western Sydney. He is also Vice-President of the Evatt Foundation.

See also: