The involvement of the private sector in water is dependent on, amongst other matters, the ability to make commercial returns in the target market. Water, at least in urban settings, has the characteristics of a large, reliable market with growing demand for the service - which is attractive to investors. Table 1 summarises some of the other key characteristics of rural and urban water markets in Australia.
Table 1: Variations between rural and urban markets
| Rural Water Market | Urban Water Market |
Nature of supply | Supply is driven by variability in climate and rainfall and in some irrigation districts by the capacity of the irrigation system. | Supply is driven by variability in climate and rainfall as dams are the main source of water. Demand is influenced by seasonal variations and population growth. |
Number of customers | Discrete customer base which uses low cost water supplies for irrigation and stock and domestic uses. | A large and differentiated customer base, including households, commercial and industrial users. There is generally a capacity to pay relatively high prices for water. |
Pricing structures | The NWI requires a move to lower-bound 1 pricing which may be difficult to achieve. | The NWI requires a move to upper-bound 2 pricing which is being delivered by major urban utilities. A move to upper-bound pricing by non-metropolitan utilities may create opportunities for greater private sector involvement. |
History of private sector investment | On farm private investment aimed at water use efficiency will continue to be required. There is also a need for increased investment in water supply infrastructure to the farm gate. | A recent history of private sector investment through the delivery of capital works programs and the outsourcing of operations and maintenance by water utilities. |
Third party access arrangements | There appears to be limited third party access arrangements although an expansion in water trading may change this situation. | Third party access opportunities appear real across a range of areas, including the recycling of water and in servicing new sites. |
Importance of environmental flows | Investments are required in infrastructure to increase efficiency and meet environmental needs. In the past, governments and water users have contributed according to their capacity to pay. | Urban water utilities are required to comply with environmental flow requirements. Yields from catchments can be reduced to meet these requirements. |
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1 Lower bound pricing - the level at which to be viable, a water business should recover, at least, the operational, maintenance and administrative costs, externalities, taxes or tax equivalent regimes (not including income tax), the interest cost on debt, dividends (if any) and make provision for future asset refurbishment or replacement. Dividends should be set at a level that reflects commercial realities and stimulates a competitive market outcome. (NWI 2004)
2 Upper bound pricing - the level at which, to avoid monopoly rents, a water business should not recover more than the operational, maintenance and administrative costs, externalities, taxes or tax equivalent regimes provision for the cost of asset consumption and cost of capital, the latter being calculated using a weighted average cost of capital. (NWI 2004)