Matthew Warren, Environment writer
August 02, 2007

THE development of water grids in Queensland and Victoria has been the first step in a move to greater privatisation of water supply and the eventual deregulation of urban water markets, according to a water economist.

Citi economist Shane Lee said the current regime of water pricing had helped exacerbate urban water shortages by not encouraging investment in new infrastructure and supplies, and needed to be replaced by an unregulated price and greater private investment in new supply.

Mr Lee said both governments and businesses were preparing for greater deregulation of urban water, with a critical step being the commitment to link different sources of water, which could then allow competition between different water supply assets.

“I think, ultimately, the next step is to address how water is priced under that system. But once you’ve got the ability to move water around you can break up the asset base,” Mr Lee said. “The Queensland Water Commission has already recommended to the Queensland Government that it should have a system of retailers able to sell water to households.”

Mr Lee said most Australian cities already had the capacity to create competitive water markets by increasing competition between retail and wholesale water suppliers and removing controls on prices.

With such a deregulated regime, water prices would probably rise, but scarcity would be reduced and increased competition would keep price increases to a minimum, he said.

“The price signal as it’s used at the moment doesn’t provide anyone with a signal to invest in infrastructure,” he said.

“If the price of water had been allowed to rise due to water scarcity, you’d have more supply of water.”

In a recent report outlining a market-based water pricing model for Australia, Mr Lee said the role of governments should be to administer water supply and ensure quality, not to be involved in the market as a supplier.

The report indicates that leading private sector companies are already gearing up for greater market competition and private sector investment in water infrastructure.

“If you were a desalination plant operator, you would increase your production and maximise returns, but when water became more plentiful you’d cut back on production and get a lower return,” Mr Lee said.

Water Services association chief executive Ross Young said reform of the competitive environment was more likely than any short-term moves to privatise water assets.

”Ownership is not really the key issue, it is the competitive environment and the regulatory arrangements in place that will drive innovation and efficiency,” he said.

“I would not think that complete privatisation of the urban water industry would be on the agenda at this stage.”

Mr Young said recent underinvestment in the system was in part a reaction to criticisms last decade that there had been overinvestment.

“There is no doubt that in response to climate change our water systems will change,” he said, “There will be opportunities for the private sector to have equity in them and greater involvement than it has now.”