Editorial: Balancing act needed to run water services

A barrage of ideological rhetoric has greeted the Government's plan to make it easier for private companies to take over water and wastewater services from councils. As much was predictable. Particular fervour is reserved for private-sector participation in this sector, perhaps because water is one of life's necessities. Rarely is it conceded that, in reality, it occupies the same utility bag as electricity, which in this country and elsewhere has been shown to sit comfortably in private hands. Rarely, either, is it admitted that, in matters of utilities and infrastructure, private-sector involvement is often essential to bridge the disparity between the demands on the public purse and the resources available to meet them.

Indeed, Local Government Minister Rodney Hide made a point of noting that the proposed changes to the 2002 Local Government Act were aimed particularly at small councils that needed to invest in water and wastewater plants and were interested in a public-private partnership. Such councils have good reason to be engaged. As well as providing much-needed investment, private participation brings cost efficiencies and financial discipline. The intended carrot for the private sector is the extension of the 15-year limit on waste-service contracts to 35 years. The Government would allow companies to build, own and operate new water and wastewater treatment plants during the contract period, at the end of which they would be transferred back to the councils.

This backing for so-called build, own, operate, transfer (Boot) schemes represents a departure from the approach adopted by the previous Government for toll roads. It wanted to keep the roads in public hands. Boot schemes have, however, been widely used in Australia, albeit not always successfully. The secret, from a ratepayer perspective, is safeguards that ensure the public partner does not have to bear more than its share of bail-out costs if a project fails to meet expectations. The private company must be in no doubt about the risk to itself.

At the same time, however, such companies need to be able to make any project profitable. A fair return is essential. The new 35-year limit makes life easier in that respect, as does the control provided by the ownership provision. But while the law will be changed to stop councils controlling the management of privately run water services, they will retain a final say on pricing and policy. That backstop may answer some of the concerns of those who fear the cost of water services will escalate. But it could also offer a considerable disincentive to private investment. If councils are inclined to meddle, companies may see themselves having too much of a burden of risk and too little chance of a viable return.

Clearly, such partnerships involve a delicate balancing act. But they should hold a considerable attraction for councils and their ratepayers. Public projects are too often the subject of cost blow-outs and delays, largely because of poor pre-work appraisal. Private companies can be guaranteed to go in with a realistic risk-based assessment of cost and use, especially if there is no chance they will be bailed out by their public partner.

In England, the private sector has shown a ready appetite for investing in water services. The experience has been somewhat chequered, with critics pointing to price rises and queries over water quality. But private involvement also sparked a big increase in investment in the sector, notably in the construction of badly needed plant. The Government is right to have opened the door to a similar development in this country. In doing so, it has tried to negate the problems encountered in England. In time, the degree of private-sector interest will show if it has got the balance right.