Citigroup - privatise water ...

Excerpt from the Courier Mail:

Privatise water, bank urges

30 July 2007

Privatising water would cause more efficient use of the increasingly precious commodity and stimulate important infrastructure investment, Citigroup says.

The local arm of the world's biggest bank is calling on Australia's state governments to leave the pricing of water to competitive market forces.

Citigroup acknowledged its model would make water more expensive but said it would also lead to more efficient use by bringing water's scarcity into the pricing equation for the first time and encourage more development and technological innovation by making investing in water infrastructure worth the initial cost.

Currently, most state governments base water pricing on a fixed, non-consumption based cost component, and on a block tariff, which rises and falls based on the level of water consumed.

"Given the scarcity issue of water and how climate change is impacting Australia, it's not the most optimal way of pricing water," said Citigroup economist Shane Lee.

"You really need a price signal to be able to tell consumers to cut back on use when water is scarce."

Drought-ravaged Australians paid 20 per cent below the OECD average water price, Citigroup said.

According to Australian Bureau of Statistics data, household expenditure on water and sewage is only 0.7 per cent of disposable income compared to 2.7 per cent for electricity and gas, 3.6 per cent for alcohol and cigarettes and 5 per cent for household furniture.

A pricing model similar to Citigroup's would increase water prices by 300 per cent by 2032, assuming Australia's population grows by an expected five million people, according to the CSIRO.

A separate survey by the government agency also found that most higher income households were prepared to pay 10 per cent more for their water in exchange for a single day pause in garden watering restrictions.

"So there is scope for people wanting to trade off a higher water price for more water availability," Mr Lee said.

Citigroup's model also implies greater networking between agricultural and urban water supplies, and the construction of more water recycling plants, desalination plants, and water grids linking privately owned water assets.

The CSIRO report found that If these measures were not taken, water prices could rise by as much as 1000 per cent by 2032.

The average return on capital from water infrastructure developments is currently 4.6 per cent - well below the 6.4 per cent reaped by Australia's top listed infrastructure companies.

Water has already been privatised in other parts of the world including the United Kingdom, where Mr Lee said water servicing and quality had improved.

Unlike Citigroup's model, the UK system is only based on the price of bringing water to the consumer. It does not factor in water availability.

Mr Lee said most Australian state governments had shown an interest in Citigroup's model.

"We haven't heard anything from WA, but all the other state governments are interested in this at the moment, particularly Queensland where they've really put infrastructure in place ... and their just grappling with how to set up a pricing system."

Last year the Queensland state government announced it would spend $7 billion on water infrastructure, largely on a new water grid in the south eastern part of the state.

The federal government has also promised to spend $11 billion to improve water use and efficiency in the Murray-Darling Basin over the next 10 years.

See - Privatise for profits.