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Towards Urban Water Reform: A Discussion Paper

Commission research paper

This commission research paper was released on 28 March 2008. It is part of a suite of research papers developed under the Environment and Resource Management research theme.

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  • Key points
  • Media release
  • Contents
  • There is no effective market for urban water. Governments (operating as planners, suppliers, distributors and retailers) make supply investments and manage available water with only limited knowledge about the value that users place on the resource.
  • Charging regimes now recover operating costs and a return on assets but do not reflect the scarcity of water in times of shortage. Instead, demand is managed by overriding the preferences of urban consumers through restrictions on water uses.
    • The annual cost to households of restrictions would amount to billions of dollars.
  • For the past two decades, and in contrast to earlier years, most governments avoided investments to augment supply. More recently, they have embarked on a range of projects including desalination, recycling and some links to rural supplies.
    • Efficient water supply decision making needs to be based on cost-benefit frameworks that assess the relative merits of the various augmentation options in ways that better address climate related uncertainty and which can adapt to improved understanding of future needs and supply options.
  • Policies that restrict interaction between water used by rural and urban sectors limit opportunities for inter sectoral trade. This distorts water use and infrastructure investment decisions.
  • Monopoly provision of urban water impedes opportunities to develop alternative supply sources. Reform has been confined to governance arrangements rather than the structural changes necessary to achieve more efficient outcomes.
  • A well functioning urban water market could provide more timely investment signals, a wider range of innovative supply options, greater choice of products and options for water users and more efficient use of nationwide water resources. This is attainable without compromising equity, health, safety or environmental objectives.
    • Equity concerns can be addressed effectively by targeted policy instruments.
  • The direction, if not the end point, for reform seems clear. The potential gains are sufficient to warrant a comprehensive public review to determine the extent to which a more market oriented focus could be pursued and to alert the community to the tradeoffs. Key areas that warrant investigation include an assessment of the costs and benefits of:
    • allowing a greater role for prices to signal water scarcity and to allocate resources
    • removing the artificial impediments to rural urban water trading
    • removing barriers to competition in the supply and retailing of urban water.
  • Transaction and adjustment costs need to be assessed in conjunction with how best to sequence incremental or co ordinated reforms.
  • Existing inter jurisdictional arrangements such as the National Water Initiative could be modified to progress a more ambitious and coordinated reform agenda.

Most urban households face severe restrictions on their use of water. These impose hidden costs that could amount to billions of dollars each year. Australia's urban water shortages are only partly due to low rainfall. An important contributor has been inadequate institutional arrangements for the management of our urban water resources.

In a discussion paper released today, the Productivity Commission identifies a number of deficiencies in how urban water is currently managed, the most fundamental being the lack of any effective market.

Commission Chairman, Gary Banks said, 'From storage and distribution through to delivery and waste water removal, urban water supply is the domain of government monopolies. Water charges cover storage and distribution costs, but ignore whether dams are overflowing or running dry. With no real urban water market, the difficulties of making efficient investment decisions are compounded.'

The paper reveals that some of the issues are complex to resolve and it does not lay out a particular blueprint for reform. Nevertheless, the Commission finds that the direction for reform seems clear. Key areas for more detailed assessment that it identifies include:

  • allowing a greater role for prices to signal water scarcity and to allocate resources;
  • removing artificial impediments to rural urban water trading; and
  • removing barriers to competition in the supply and retailing of urban water.

The Commission argues that appropriate reforms would be best advanced through a comprehensive public review, to determine the merits of different options and build a greater understanding within the community of the costs of the status quo and the tradeoffs in pursuing change.

Background information

Leonora Nicol (Media, Publications and Web) 02 6240 3239 / 0417 665 443

Preliminaries
Cover, Copyright, Foreword, Contents, Abbreviations and explanations, Glossary and Overview.

1 Setting the scene
1.1 Introduction
1.2 An overview of urban water systems
1.3 Past reform
1.4 Key issues

2 Objectives and their achievement
2.1 Introduction
2.2 Objectives for urban water
2.3 Urban water management in the 'big dry'
2.4 Principles in augmenting urban water supplies

3 Pricing urban water
3.1 Introduction
3.2 Current arrangements
3.3 Improving administered pricing
3.4 Broader institutional and structural reform to improve pricing

4 Integrating rural and urban water resources
4.1 Introduction
4.2 Exploring alternative institutional models of integration
4.3 Facilitating efficient rural–urban water trades

5 New water supplies
5.1 Introduction
5.2 Facilitating efficient investment in new water supplies
5.3 Desalination case study

6 Institutional and structural reforms
6.1 Introduction
6.2 Further commercialisation of water utilities
6.3 Procurement, contracting and privatisation
6.4 Toward decentralised competition — unlocking the supply chain
6.5 Prospects for a decentralised market
6.6 Policies that distort urban water objectives
6.7 Implementation, transition and adjustment

References

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