Decaying infrastructure and ever increasing water bills are causing rising unease in Australia, a dry country with irregular rainfall and weather patterns made more unpredictable by climate change.
A rising urban population is adding ever greater pressure upon the country’s tired water infrastructure which is now in urgent need of renewal.
Research by Infrastructure Australia shows the need to upgrade the urban water supply network will see the average household water bill soar over the next few years if the cost is placed fully on the hard-pressed customer. Without reform, annual average water bills are forecast to rise from the current $1,226 to $1,827 in ten years’ time and $2,553 in real terms by 2040.
Such a steep rise in a key household expense is likely to cause significant hardships to many Australians who are seeing their housing and electricity costs rise while they struggle to remember their last pay rise.
This opens up a great opportunity for the private sector to help refresh Australia’s urban water network, according to Trent Mikkonen, Associate Director in AMP Capital’s Infrastructure Team based in Sydney.
“The private sector offers the potential to more efficiently allocate capital, deliver cost and operating efficiencies and drive improved outcomes in infrastructure projects.”
Up to now the involvement of the private sector in urban water has been limited to the outsourcing of service delivery functions, such as construction, operation or maintenance contracts. This has led to improvements in innovation and service quality, according to research conducted by Infrastructure Australia.
However, “The full benefit of private sector involvement is most likely to be realised by allowing it to deliver urban water services on a level playing field with the public sector; this should be within a governance environment that facilitates the commitment of investment capital over the long-term.” according to Mikkonen.
Keeping household water bills low and minimising taxpayer support requires keeping long-term costs to a minimum, which often requires up front capital investment to reduce operational costs over the long run.
“Infrastructure investors become more interested in long-term investing when a transparent and predictable governance regime that covers economic, health and environmental regulation is in place,” says Mikkonen.
Smaller scale water projects have shown how private investment can deliver great benefits to consumers and taxpayers.
Riverland Water was granted a concession by the government in South Australia to build and operate ten water treatment plants over 25 years until 2025. These provide safe and reliable drinking water to approximately 150,000 people living in more than 90 communities along the Murray River. The company receives a payment from SA Water for every megalitre of water that is treated. This has delivered attractive total return to its owners, investors in the AMP Capital Community Infrastructure Fund, of 13.8% since its acquisition in 2011 to 31 December 2017.
“This demonstrates how private investment in water infrastructure can improve the service level,” notes Mikkonen. “Yet it also delivers attractive returns to investors from an investment with defensive properties, inflation protection and exposure to urban population growth over the long-term,” he adds.
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