NSW Local Government Water Privatised by "Stealth"

By Dr Christopher Sheil

Because selling public assets in this country is about as popular as the idea of welcoming a boatload of refugees, determined governments often pursue their privatisation policies by 'stealth'. Chris Sheils tells a story that is a worrying model for all public water providers.

Nationally, this strategy has long been operative for Telstra. And doubtless, the new Finance Minister, Senator Nick Minchin, will soon be promoting the telco's full privatisation, which the Prime Minister did his best to shepherd past the public mind during the recent election campaign.

Meanwhile, locally, an elaborate stealth strategy is also unfolding in the case of the water and sewerage works that are presently owned and operated by the Bega Valley Shire Council, on the NSW south coast.

Two weeks ago, Bega's council released a detailed options paper on "Sewerage Infrastructure Delivery." Superficially, the document is only about building sewerage works for a few of the valley's small villages, and upgrading four of the shire's existing treatment plants.

The paper favours contracting out the construction, operation and maintenance of the new works, which are valued at $140 million over 20 years. Given that the council is debt free, this may seem like small beer, but the options paper doesn't stop here.

Just the start...?

Since economies of scale will be available if the same firm also manages the valley's existing sewerage works, the paper also raises the idea of privately managing the whole sewerage system. And since economies of both scale and scope will be available if that same firm also manages the valley's water supply, the council is really proposing to flog off its entire infrastructure, bar actually transferring the ownership of the assets.

With water and sewerage infrastructure, there are also other reasons why we can be sure that, if the privately managed trunk is allowed into Bega's new works, the rest of the elephant will quickly come around the corner with its eye on the valley's entire utility.

When a naturally single system is divided into two absolutely complementary monopolies, impossible pricing complexities are automatically introduced at the interface. This is because there are no economic principles available for splitting the rent on flushing toilets between separate water and sewerage operators.

Hence, the party that bargains best will win. As multinational corporations own most private water and sewerage firms, we may guess where a local rural council would finish in such negotiations.

And at the infrastructure's other extremity, the problems from splitting the network can be endless, literally. This follows because sewerage is ultimately only a part of the filtration that separates fresh water harvests from their eventual re-use.

This intimacy encourages rival managements to shift costs. The opportunities for network trade-offs were vividly illustrated during Sydney's 1998 water contamination crisis, when eight of the nine sewerage plants within the city's catchment failed.

These relationships aren't properly canvassed in the Bega paper. The authors have made the undoubtedly correct judgement that the new sewerage works must be their project's sole leading public edge, since stealth is the only viable way to go when selling the management of a sensitive community's water supply.

If private operators build it then we can sue them if it fails!

Indeed, so deeply buried are the paper's major implications, the text invites Bega's citizens to believe that the only substantial reason why private management is being entertained is to help the council in future court actions.

In a daring bid to use the tail of the new works to wag the existing dog, the paper contends that the firm that builds the valley's new sewerage will be more easily forced to rectify any future faults, for which it is found liable, if that same firm is also sold the system's operational and maintenance business.

The logic's cute. Perhaps the council should also contract the same firm to manage customer pricing, service performance, and health and environmental standards. After all, it is the necessary but unforeseeable variations in these external conditions that constitute the council's major financial risks, particularly if changes must be negotiated with a private company that owns a management monopoly.

There seems little doubt that the community would go along with this broader, all-encompassing internalisation of the infrastructure's risks, provided the consequent efficiencies are also accompanied by democratic accountability. Why, a democratic version of such an embracing arrangement could be described as, well ... local government!

Christopher Sheil is a visiting fellow in the School of History at UNSW. © The Australian Financial Review 7 December 2001. Reprinted with the permission of the author.

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