Take a dip and be sure of a trickle
As published in the Australian, 7 - 8 March 2009
Given present and recent Australian experience, it may be more typical to think of water as a scarce resource rather than as a safe investment.
The global financial crisis brought about by the widening reverberations of the US sub-prime mortgage and credit crunch has once again changed the landscape for evaluation of asset classes.
While we have seen government take various steps to intervene in the crisis and seek, through several stimulus measures, to maintain economic activity and functioning markets, questions of capacity and priority and debt levels will be growing factors in public and private sector investments in infrastructure projects.
This raises some interesting and possibly new considerations for government officials seeking to deal with the vast scope and cost of the projects needed to address security of water supply for domestic, industrial and agricultural use.
To date, private sector involvement in water infrastructure in Australia has been limited largely to traditional procurement.
This is interesting in light of global experience. According to World Bank figures, there were almost 600 water-related public-private partnership projects across the globe between 1991 at 2007.
As of January, there are more than 84 water projects included in Global Water Intelligence's PPP tracker.
The exception to the lack of private sector involvement in Australia has been desalination plants. The present crop of desalination projects are an eclectic mix of infrastructure delivery models, including PPPs.
Globally, the drivers for government involving the private sector in water infrastructure and services have been many, and have varied from country to country, although in broad terms they have differed between the developed and developing worlds and between water-rich and water-scarce countries.
Many water PPPs internationally are concessions or service or management contracts to provide services using existing water or waste infrastructure assets.
However, more than one-third are new-build projects encompassing -- alongside desalination plants -- dams, water grids, pipelines, aqueducts, water treatment plants, water reuse or recycling plants and waste water or sewage treatment plants.
Sewage treatment plants and combined water utility-sewage treatment projects comprise more than half of all water sector PPPs.
Two years ago, Deloitte's global report card on PPPs, Closing the Infrastructure Gap, presented a summary of the record and varying success of private sector involvement in public infrastructure and identified the conditions under which PPPs could deliver public policy outcomes successfully, irrespective of infrastructure sector.
An update to the report, due for release at the Australian Water Association's annual conference this month, indicates that the global PPP experience in providing infrastructure and services in water and waste in many ways has replicated the PPP experience generally.
PPPs can be an effective infrastructure delivery tool under specific conditions, with the role of the public sector being the key to success.
The challenge with water infrastructure is its size (and therefore cost) and long-term nature. There is significant economic debate concerning the degree of bidder competition and optimal size of project required to achieve maximum public outcomes.
However, it is from a comparative perspective of asset classes -- and particularly the comparatively low degree of market (and hence revenue) risk associated with significant variability in demand -- that suggests the water, waste water and waste sector can be a relatively attractive asset class in which the private sector would invest if it is packaged up and made available.
The returns would be relatively low, perhaps, but steady.
There is little recessionary impact on operating revenues from water assets, provided the deal is correctly structured.
It certainly appears less fraught, from a private sector investment perspective, than participation in toll roads, for example, or, in the still wildly uncertain political and economic environment of our new carbon-constrained economy, in investment in base-load power generation.
Government may need to take on even more investment in higher risk areas than previously imagined.
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