3.2  Private sector participation in rural water: Yanco Creek

The following is a hypothetical rural example which examines the benefits of private sector investment in rural water infrastructure. The study on Yanco Creek is from the report into The Business of Saving Water for the Pratt Water Murrumbidgee Project and has been chosen because it provides an example that is common to other regions (December 2004). 

With limited public sector funding available, the Yanco Creek community were seeking private sector investment in a major works program that would result in water savings representing over 20 per cent of the total water allocation in the community. This saving would service 253 irrigators and eight towns with a total of over 1000 people. The intended outcomes of private sector investment in the Yanco Creek project would be:

•  improvements to the efficiency of the system by reducing stream flow impediments

•  assistance in maintaining the ecological health of the system

•  the development of community ownership, participation and empowerment

•  ensuring the survival of the region in a sustainable way, and 

•  assistance in retaining some of the water saved within the system and establishing commercial terms of recognition for the water provided to the Crown or environment.

It was estimated by the researchers that the following requirements would be necessary to attract private investment for the Yanco Creek Project:

•  a feasibility study on the project contributed to by the sponsor

•  $15M in equity is raised representing a 60:40 debt to equity ratio

•  shareholders rights need to be established

•  a clear title to the water saved by efficiency measures to investors and the concession length is 15 years

•  approval processes for private sector investment to be streamlined at all levels

•  the ability of the project to attract an equity investor and identify customers

•  obligations are agreed between the investor and governments, and

•  the investor is entitled to an agreed quantity of water saved and has the ability to on-sell the water and access to water savings is on a staged basis.

From the private investors perspective the priority for the Yanco Creek project is to establish the business case by identifying a reliable source of income and a mechanism to capture and utilise that income. The proposal presumed that the private investor is providing improvements to irrigation infrastructure would receive an agreed-to quantity of water entitlement from the water saved and be able to own and transfer this water. It was also recognised by the researchers that additional sources of income to meet standard commercial rates of return might be needed. Some of these potential income sources for the investor were identified as:

•  the purchase of the saved water for environmental purposes

•  a tolling, access or beneficiary charge for those who use or benefit from the water

•  a fee for undertaking service related work currently being undertaken by state authorities, and 

•  a credit or payment taking into account the environment benefits generated and delivered by the investor.

This case study also reviewed three potential financing models - from the public sector, the private sector and a partnership between public and private. The partnership model was seen as the most viable option bringing together investors, governments and key stakeholders from the Yanco area.

The Yanco case study also identified common benefits from private sector involvement. They are:

•  funding and maintenance of existing infrastructure

•  facilitating the move to appropriate water pricing regimes

•  greater efficiencies in water delivery

•  addressing a range of environmental issues

•  attracting new investment in water saving processes, and

•  improving security for water users.

The Yanco case study also illustrated potential legislative and regulatory changes that might encourage private sector investment in irrigation infrastructure. The main areas identified are:

•  the need for the development of a system where investors can realise the majority of water savings

•  the development of a concession deed (or something similar - authors insertion) between the government and private sector investor

•  the need for regulatory risks for the investor and purchaser to be minimised and taxation issues clarified

•  the development of efficient mechanisms to coordinate planning approvals

•  the implementation of a charging regime and recovery process - effectively adopting a user pays model, and

•  the recognition of a monetary value of water directed for environmental purposes.

The hypothetical Yanco Creek example explores the benefits of private sector involvement in rural water infrastructure. This example highlights uncertainties with existing legislation and regulations and their capacity to provide a framework that encourages investors to look at rural water infrastructure as a viable investment. This example also identifies the need to clarify commercial arrangements to encourage investment and minimise risks for new investors, and provide security for all parties.