on a hitherto fragmented and uncoordinated water sector. The process involved amalgamation, where possible, on a regional or catchment basis. In ¡1989 the Latrobe Regional Water Authority was established as a model authority, merging bulk water supply, reticulation and river management. At the start of 1995 Melbourne Water was split into five separate legal entities. The first step in the reform was to establish clear, consistent, stable objectives as a necessary condition for efficient operation. The next step involved the establishment of Melbourne Water Corporation as wholesale supplier of quality water, and wholesale waste receptor, treater and disposer. For an interim period it will also provide drainage. Three separate retail corporations, with geographic boundaries which almost mirror the preceding met,. ropolitan regions, provide water and sewerage services at a retail level. They will bill the end users and be responsible to them. A separate Melbourne Parks and Waterways Corporation is responsible for water-based recreation and stream management.. The Office of the Water Regulator General will set prices and manage licences. While the Water Industry Bill initially makes provision for three water and sewerage operating licences, there is scope for up to five types of licences covering operation of headworks to retail of water, sewerage collection, treatment and drainage. Tasmania. The state authorities provide bulk water schemes and control all the irrigation sector. Urban water, sewerage and drainage services are provided by the local government sector. Differences of opinion over the ownership of the bulk water supplies are a reflection of the growing conflict between resources management and water consumption. Australian Capital Territory. The Australian Capital Territory Electricity and Water Authority was formed in 1988 to gain efficiencies of scope in management, foster an efficiency-oriented culture and gain efficiencies from regionalisa tion of operations. It supplies water and sewerage services, owning and operating the infrastructure. It has responsibility for preventing water pollution in the Murrumbidgee. Northern Territory. The Power and Water Authority was established in 1987. It includes a Directorate of Water Resources with clear demarcation between water resource management and provision of water and sewerage services. Drainage is generally undertaken by local government authorities South Australia. On the surface the Department of Engineering and Water Supply administered the whole spectrum of the water industry. In practice local governments undertook drainage and non-metropolitan sewerage 16
with the support of state government grants. The potential for conflict between the objectives of regulator and service provider are ¡ acknowledged and separation is under way. However, the benefits of direct involvement in policy are seen as greater than any losses of efficiency. Western Australia. The Water Authority of Western Australia has a virtual monopoly in that state. It is charged with managing water resources and providing water services. Its failure to attract private capital in the 1980's to sewer backlog areas may be an indication of the reluctance of private funds in Australia for investment in water infrastructure. In view of the Western Australia case other states cannot be complacent as their infrastructure ages and water supply sources are compromised. This is especially true of the increasing areas of marginalised land where the community is increasingly under a variety of stresses. General. Currently ownership, control, management and operation of the core water assets are still within the public sector realm in Australia. In New South Wales and Victoria the situation is witness to a pressure for change. What is required, however, is reform. Sustaining and improving environmental values and lifting the water industry performance standards requires increased industry regulation with centralised co-ordination. Ownership, control, management and operation are separable issues but require a coordinated approach. There exists the potential for great conflict in the allocation of water to different uses within the current institutional framework of many states. New South Wales is the only state with the appropriate independent regulatory framework to ensure authorities (or corporations) meet economic, social and environmental objectives.
Can Competion Help? Watson and Johnson (1993) indicated that recourse to the 'invisible hand' of the market to overcome the industries problems is simplistic. For efficient outcomes in the market model it is necessary that there be a contest for customers in the market, conducted on the basis of the price charged or quality of service. To meet the contestability requirement the private and social costs and benefits must equate. This cannot occur if there are strong monopoly characteristics, as with water. One of the assumptions of the competition model is a homogeneous good. Water supply is heterogeneous in time, space and quality characteristics. Different users and uses of water will require or tolerate different water qualities and supply guarantees. The very nature of water services forms a barrier to competition based on homogeneity. The institutional structure within which a market-based system can fine-
tune water management will need to be designed to reflect this heterogeneity. In practice contestability can be created through explicit competition in noncore, non-monopoly sections. There are many successful examples already in the water industry. Just two are the leasing of maintenance of treatment plants by the (Sydney)Water Board, and out-sourcing of a whole range of functions by Melbourne Water: However, where the core business remains a natural monopoly then price regulation and performance indicators have to be used to simulate the information and sanctions of the market, whether or not the entity remains in government or is transferred to private control..
Is Privatisation an Advantage? The hoped-for benefits of privatisation are that the discipline of the market on the water entity will enable consumers to enjoy lower prices, enhanced water quality and the benefits of share ownership. Benefits for the government would be reduction of public borrowing and public debt. The trade unions would lose their monopoly power, thereby removing a historical source of high costs. The economy would enjoy reduced prices and costs through more efficient technical and distributive allocation of resources and therefore a higher standard of living. For the water service entities themselves the hopes are for simplified objectives, investment not politically restrained and reduced information collection and reporting. • However, Johnson (1993) (Chapter 8) indicated that these conclusions are not borne out by international experience (see below). Watson and Whelan (1990) defined the processes of privatisation, corporatisation and commerialisation of the Australian water institutions, and their paper suggested that the most effective management structure is one in which the corporate culture is changed to meet new efficiency objectives without losing the benefits of control over operational outcomes. The claim that privatisation is the solution to reform has serious consequences for the long-term management of the water industry.There are a number of critical issues in the appropriate management of water resources. The values of water resources must be sustained. Water policy makers and water service authorities seem to have fallen behind the current social consensus on the importance of environmental quality. A sustainable renewable resource such as water in a fit state and, sufficient for the growing claims on its uses is one important environmental quality. Definitions of sustainable development which allow the replacement of natural capital with built capital ignore the possibility nf jeopardising the system through depletion of one WATER MARCH/APRIL 1995