Audit reports are usually about numbers. But in the urban water section of the Australian Infrastructure Audit, the words make sense but the numbers don't.
The Report makes some sensible findings about urban water reform and as you know - at WSAA we have been arguing for reform of economic regulation to better meet customer needs.
Pleasingly the Report finds that economic regulation is fragmented and may not effectively protect the long-term interests of customers. It also notes that the links between health, economic and environmental regulation are not well identified.
A literal reading of the numbers in the Audit Report however, would make policy makers think: why bother with water reform?
Based on the numbers, the Report says demand for water infrastructure is projected to grow significantly slower than GDP.
The Report uses the concept Direct Economic Contribution to compare future infrastructure needs across industries. DEC appears to be a measure of a sector’s value added though capital and labour. The higher the DEC projected for the future, all things equal, the more infrastructure required.
For urban water the Audit Report projects that DEC will need to increase by 50 per cent between now and 2030. But not to worry because GDP — the size of the economy — will increase by much more than that - 86%. So water will shrink as a proportion of the total economy. This would hardly present a major task to fund and the burden on consumers could fall significantly.
If only it were that simple... the calculations seem to assume that the only driver of future water infrastructure is population growth, and that future growth is no more costly than past growth.
In reality there are many drivers of future infrastructure needs in the urban water industry:
- New water sources of all types are significantly more costly than dams built 50 years ago
- Similarly, in some case assets built 50 to 100 years ago require increased maintenance and renewal to deliver the same level of service
- The community expects higher standards of wastewater treatment to protect sensitive waterways, but these measures come at a cost
- Providing water and wastewater services to new growth areas on city fringes can be high cost and exceed the revenue that can be generated from those areas
- There are still areas of under-pricing among utilities where returns are well below commercial levels
- The water industry is exposed to pressures from climate variability and extreme events.
The Report notes some of these concerns, but in public debate the numbers often trump the argument. DEC significantly understates the urban water challenge. Assuming away these challenges is not in the interests of our customers, now or over the next century.
27 May 2015
