Securing Australia’s Urban Water Supplies

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November 2006

Opportunities and Impediments

Securing Australia’s
Urban Water Supplies:

A discussion paper prepared for the

Department of the Prime Minister and Cabinet

Marsden Jacob Associates

Financial & Economic Consultants

ABN 66 663 324 657

ACN 072 233 204



Postal address: Level 3, 683 Burke Road, Camberwell

Victoria 3124 AUSTRALIA

Telephone: (03) 9882 1600 International: +61 3 9882 1600

Facsimile: (03) 9882 1300 International: +61 3 9882 1300

Author(s): Dr John Marsden and Phil Pickering
Copyright © Marsden Jacob Associates Pty Ltd 2006

This report has been prepared in accordance with the scope of services described in the contract or agreement between Marsden Jacob Associates Pty Ltd ACN 072 233 204 (MJA) and the Department of the Prime Minister and Cabinet (the Client). Any findings, conclusions or recommendations only apply to the aforementioned circumstances and no greater reliance should be assumed or drawn by the Client. Furthermore, the report has been prepared solely for use by the Client and Marsden Jacob Associates accepts no responsibility for its use by other parties.

Photos on cover:

Garden sprinkler – Marsden Jacob Associates

Hinze Dam, 3 December 2002 - Courtesy of Gold Coast Water

Maree area in outback South Australia – Image courtesy of Emergency Management Australia



executive Summary i

1.Introduction 1

2.Water consumption and demand 4

3.Water resources and climate 8

4.water supply Planning and infrastructure 13

Water supply planning under climate uncertainty 14

Implications for capital investment 16

Water-supply planning objectives 19

5.Water supply and demand options 21

Integrated Water Cycle Management 22

Unit Costs of Supply Options 23

Purchase of water for cities 27

Water recycling 29

Summary Perspective on Water Supply Options 36 capacity 38

7.Pricing and Cost Recovery 45

Costs of water supply 45

Cost recovery 46

Tariff structures 48

8.Market and institutional arrangements 53

Bibliography 57

List of Figures

Figure 1: Direct Costs of Water Supply/Demand Options– Sydney, Adelaide, Perth, Newcastle iv

Figure 2: Findings on Impediments and Opportunities for Securing Australia’s Urban Water Supplies xi

Figure 3 : Water Usage Per Capita by Sector, selected countries 4

Figure 4: Consumption per capita (2004/05) 5

Figure 5: Trend in rainfall, 1950 – 2005 8

Figure 6: Annual Inflows for South West Dams (south-west WA) 10

Figure 7 : Annual Inflows for Lal Lal Reservoir (Ballarat /Geelong) 10

Figure 8: Annual Inflows for Warragamba and Three Nepean dams (Sydney Region) 11

Figure 9: Annual Inflows for Wivenhoe Dam (south-east Queensland) 11

Figure 10: Total Storage Capacity and Annual Usage – Mainland State Capitals 13

Figure 11: Capital Cities – Water Capital Expenditure Per Capita Over 5 Years (2001-2005) 17

Figure 12: Direct Costs of Water Supply/Demand Options– Sydney, Adelaide, Perth, Newcastle 23

Figure 13: Levelised Cost of Water Supply and Demand Options – 3 Cities 26

Figure 14: Comparative risk levels of reclaimed water and other events − (number of people likely to experience various events over a year from each ten million Australians. 32

Figure 15: Cash Outflows and Inflows of Major Water Utilities (annual average 2001-2005) 40

Figure 16: Major Water Utilities – Payments To and From State Government 2004/05 41

List of Tables

Table 1: Indicative Full Cost Degree of Cost Recovery, Australian Capital Cities, 2005 vii

Table 2: Goals for per capita consumption 6

Table 3 : Impact of Climate Scenarios on Estimated Yields and Required Timing of Next Source 18

Table 4: Recycled water use as a proportion of treated water 30

Table 5: Cost of Recycled Water by Scheme 31

Table 6: Water and Wastewater Capital Expenditure Per Capita 2001-2005 39

Table 7 : Payments to Governments from Capital City Water Utilities (2004/05) 42

Table 8 : Comparative Net Debt and Capital Expenditure (2004/05) – State and Water Businesses 42

Table 9 : Estimated Full Cost of Water Supply to Major Australian Cities 46

Table 10: Indicative Full Cost Degree of Cost Recovery, Australian Capital Cities, 2005 48

Table 11: Major Water Utilities – Long Run Marginal Cost and Price 50

Glossary and Abbreviations


Australian Competition and Consumer Commission


Australian Academy of Technological Sciences and Engineering


Australian Water Association


Council of Australian Governments


Central Region Sustainable Water Strategy (Victoria)


Community Service Obligation


Department of Sustainability and Environment, Victoria


Economic Regulation Authority (Western Australia)


Food and Agriculture Organization of the United Nations


Independent Pricing and Review Tribunal, NSW


indirect potable reuse – purified recycled water discharged into a water body before being used in the potable water system


Institute for Sustainable Futures


integrated water cycle management


long run marginal cost – the long term incremental cost associated with the demand (say from a new entrant), often a period of 20 years or more in utility industries.


Marsden Jacob Associates


National Competition Council


National Water Commission


National Water Initiative


Power and Water Corporation, NT


public private partnerships


reverse osmosis managed aquifer recharge


South east Queensland


Toowoomba Water Futures Advisory Panel

Wentworth Group

Wentworth Group of Concerned Scientists


World Health Organization


Water Services Association of Australia

Basic measures


kilolitre = 1,000 litres or 1 m3 (cubic metre) and weighs 1 tonne


megalitre = 1,000 kL (or 1,000 m3)


gigalitre = 1,000 ML


teralitre = 1,000 GL or 1 km3 (cubic kilometre)

    executive Summary

  1. Historically, Australia’s major cities have been almost totally reliant on traditional surface water supplies and are therefore susceptible to the impacts of drought and climate change. While judgements may differ, the current drought now appears to be, at least, equivalent to the Federation drought of 1895 to 1902.

  2. The current drought raises strong concerns. First, it is extreme in terms of the historical record. Second, it is a portent of a future under climate change. Third, it is a reminder (for south eastern Australia at least) that climate and rainfall patterns can change abruptly as they have already done in the south-west of Australia.

  3. Current water supply capacity across Australia has been typically planned to require restrictions on demand as frequently as 1 in 25 years based on the long-term historical record. Unfortunately, in many cases the long-term historical record no longer provides a reliable or confident indicator of current or future rainfall and streamflows. As a result, for many cities current supply capacity is now grossly inadequate and restrictions have become more frequent and more severe.

  4. All capital cities with the exception of Darwin and Hobart now have inadequate water supplies and most are relying on increasingly severe restrictions to balance demand and available supply. Some regional cities are facing sharply diminished supply and extreme restrictions. Significant investment in water conservation and new water supplies is required.

  5. The severity of the current drought has caught much of Australia off-guard, requiring hastily implemented actions to restore a balance between demand and supply of water as quickly as possible. As the Prime Minister recently noted:

    The simple fact is that there is little or no reason why our large cities should be gripped permanently by water crises… Having a city on permanent water restrictions makes about as much sense as having a city on permanent power restrictions. The Hon. John Howard, 17 July 2006

  6. The availability of potable water, without lengthy or severe restrictions, is a fundamental indicator of urban water supply performance.

  7. This report has been prepared for the Department of the Prime Minister and Cabinet to provide a high level perspective on water supply and demand for Australia’s large cities and to identify impediments to, and opportunities for, securing future urban water supply by restoring and maintaining the demand supply balance. 1

Water Supply Planning Under Uncertainty and Differences in Investment Levels

  1. Across the States, there appear to be major differences in the way water supply planning and decision making for their capital cities has dealt with climate risk and uncertainty. The drought raises questions about how water supply planning should deal with the uncertainties of climate variability and the extent past rainfall and streamflow (the ‘100 year’ record) remains valid or useful as the basis for projecting future rainfall and streamflows.

  2. These differences in the way climate uncertainty and risk have been treated correlate with recent levels of expenditure on water supply infrastructure. Over the past five years per capita expenditure in Perth, which has incorporated a ‘step-down’ climate scenario into planning for many years, has been twice or more the level of water supply investment in Sydney, Melbourne, Brisbane and Adelaide, which have not adopted scenario planning approaches or not done so until very recently.

  3. Looking forward, there are also differences in announced water supply strategies and levels of future capital expenditure. While Perth will continue to spend heavily in comparison with other capital cities, substantial infrastructure investment expenditures will also be made in south-east Queensland. Many of the regional centres hit hardest by the drought, including Toowoomba, Goulburn and Ballarat, have urgently moved to develop emergency water sources.

  4. To date, publicly foreshadowed expenditure on water supply for the other major cities is comparatively low, although explicit contingency strategies and options have been publicly indicated for Sydney and recently for Melbourne. With finalisation of the Central Region Sustainable Water Strategy, a robust planning framework for Melbourne and surrounding regions has now been adopted. But there are few firm commitments. The published planning documents for most other cities, including Adelaide, Hobart and Darwin, do not appear to countenance a downward ‘step-change’ in rainfall and therefore have not publicly identified the contingency measures that would be required.

Water Supply and Demand Options

  1. Water planners have two fundamental options available to ease water restrictions – to encourage water conservation or to increase water supply. Voluntary water conservation is often the most affordable, environmentally sensitive option available to urban water users.

  2. Most major Australian urban centres are currently subject to policies and strategies to reduce per capita water usage by 20 per cent or more over time. Water conservation alone is generally insufficient to meet the needs of an expanding population, particularly in fast growing regions such as Western Australia and south east Queensland.

  3. In terms of the elements of the respective strategies, the Sydney and Melbourne strategies place very heavy reliance on demand management and set more ambitious targets for reductions in per capita use than do other capital cities.

  4. For Australia’s coastal cities, an extensive array of additional water supply and demand management options are available which potentially allows diversification of supply against climate variability and climate change. Supply options which are not rainfall dependent obviously include seawater desalination which, with the notable exception of Brisbane, can potentially offer large scale supply immediately and for coming decades. Greenhouse emissions from desalination are high and can be offset directly or via trade of greenhouse credits as envisaged by the Kyoto Protocol. In addition, careful attention is required to minimise impacts on the marine environment. There are generally technical solutions available to minimise these impacts and these then become a question of cost.

  5. For Australia’s major inland cities and towns, some of which are facing the most severe drought in the country, recycled water and purchase of irrigation entitlements may be among the few alternative water supplies available.

  6. Opportunities for substitution of non-potable water for potable water will arise in power station cooling and in mining operations. Although much of the ‘low hanging fruit’, i.e. inexpensive, socially acceptable recycling opportunities, has already been harvested, additional opportunistic, small scale initiatives are being developed daily.

  7. Indirect potable reuse (IPR) – where purified recycled water is discharged into a water body before being used in the potable water system – has successfully been implemented in Europe, Singapore and the United States. In addition, returns to rivers are currently observable in Australia on the Murrumbidgee, Kingaroy and other inland towns located on river systems. The key issue is not whether the science or the engineering are feasible, but the extent to which IPR will be accepted by the public. Major new water recycling initiatives are frequently comparable with, or more expensive than, the cost of desalination due to long transportation distances and/or the need for third pipe systems.

  8. There is also important potential for cities to purchase water entitlements from irrigators. Significant trades have already occurred in Adelaide and Perth, but have, to date, been excluded as a matter of policy for other capital cities.

  9. As emphasised by the National Water Commission in its June 2006 report to CoAG, all feasible water supply options should be on the table for consideration. The Wentworth Group of Concerned Scientists endorse a similar view, stating that there is now a need to “accept that desalination, potable reuse, and recycling and urban-rural trade are all legitimate options for our coastal cities and often better options than building new dams and damaging more coastal rivers.”

Variation in Supply Costs

  1. Marsden Jacob’s analysis of the costs of the major supply and demand options available to Australian cities (Figure 1) emphasises:

  • the very low cost of most options in favourable locations and situations;

  • the very high cost (>$3.00/kl) of many options in unfavourable locations and situations;

  • the corresponding lack of any simple universal cost ranking which can be simply applied to each and every situation;

  • the dominating influence of the cost of pipelines and pumping where water needs to be transported over distance;

  • that the relative cost of water management options can be counter-intuitive. For example, the cost of rainwater tanks and recycling schemes in some areas can be considerably higher than the cost of conventional water. Rainwater tanks deliver the highest benefit compared with cost in areas that receive consistent rainfall during the year. In areas that receive little rainfall during summer months, such as Perth, rainwater tanks supply relatively little water and at high unit cost with the result that other water sources are typically required to make up the shortfall during the heaviest periods of water use;

  • the need to examine water supply and demand management options on a situation-by-situation basis; and

  • there is some undesirable variation in the costing methodologies applied by the different States and a lack of disclosure for others.

  1. This variation in costs from location to location impedes simple understandings of comparative costs. This means that solutions appropriate to one area can be inappropriate to another and that options favoured by popular opinion may not always be cost effective. This issue appears particularly relevant to popular supply options such as recycling or rainwater tanks.

Figure 1: Direct Costs of Water Supply/Demand Options– Sydney, Adelaide, Perth, Newcastle

    Source: Marsden Jacob Analysis based on water supply plans for Sydney, Adelaide, Perth, Newcastle. Lower bound of indirect potable reuse estimate based on Toowoomba.

    Note: Comparable costings for Melbourne are not available and no costings are available for Queensland.

  1. Choice of additional water supplies and demand management measures involves more than comparison of unit costs. In times of uncertainty and increased risk, ‘security through diversity’ and rainfall independent sources are potentially powerful criteria supplementing a triple bottom line assessment.

Public Perceptions and Leadership

  1. Community perceptions and acceptance are also critical, particularly for water recycling, desalination and the possibility of purchasing water from rural users.

  2. There is some tendency for potentially controversial options to be censored out of consideration before the portfolio of choices is presented to the public. Subsequent resistance on the part of the public also has the potential to remove some water supply options from consideration. Strong and timely leadership is required to determine the options to be pursued and how and when the community should be engaged, especially because the risks of inaction are high.

  3. Survey research confirms the importance of public trust in the responsible water authority or local council in promoting or undermining public acceptance of non-familiar supply options, particularly water recycling. There is a clear need and role for authoritative, factual information from government.

  4. Public trust is bolstered by having clear, widely adopted standards and guidelines. For unfamiliar options such as indirect potable reuse, state or national guidelines should be developed as a matter of priority.

Financial Capacity

  1. On a standalone basis, virtually all water businesses supplying the capital cities have significant financial capacity to fund both increased levels of capital expenditure and the dividends to the State Governments. Most of the businesses have paid dividends but have not increased capital expenditure significantly and certainly not increased it to the levels required to have avoided the current shortfall in supply.

  2. Dividend payments from the major water businesses typically range from 50 per cent to 90 per cent of after tax profit. This compares with an average dividend payout rate of 60 per cent to 70 per cent for Australian private sector businesses. The level of dividends would only constrain investment if the water businesses were not able to access sufficient financing for capital projects. However, the strong balance sheets and ability to raise additional revenue demonstrate that none of the major water businesses is under any immediate cash constraint.

  3. By contrast, many of the smaller regional and council-owned water businesses operate under far tighter cash constraints. These organisations would have to increase prices significantly to pay for major new water supply investments. This raises serious questions about affordability, particularly in those areas where the economy has already been affected by drought and in regional towns with a relatively high proportion of low or fixed income residents.

  4. A more immediate concern is that most water businesses are effectively subsidiaries of State Governments, with the result that increased expenditure, and consequent borrowings, translate into the State budget and may impact the State’s financial ratios and thus the State’s credit ratings.

  5. There appears to be some conflict between the assumptions of economic regulators that a ‘BBB’ credit rating is adequate and the realities of the impacts of water business debt levels on the aspirations of most States to achieve or maintain ‘AAA’ or ‘AA’ credit ratings. The effect of these aspirations is potentially to reduce the appetite of the State governments for additional debt and infrastructure expenditure. The evidence suggests that the State Treasuries have, in the past, acted to constrain investment in water infrastructure, but that these constraints have been lifted once water supply investment has become a clear priority. This empirical question may warrant further attention.

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