Australian Urban Water Reform Story with Detailed Case Study on New South Wales

Urban water services in Australia are recognized as delivering efficiency, productivity and security of supply as well as upholding robust environmental standards. This has not always been the case, and how Australia has reformed urban water supply services has yet to be fully documented. The story of reform in the Australian urban water sector is varied and multifaceted. It is a story of government policy leadership together with sector-driven changes and adaptations, in response to shifting institutional, economic and environmental conditions and demands. To assist in understanding this story of progress, this report focuses on highlighting the important context for each of the significant Australian reforms, and emphasises why unique and varied historical circumstances (along with the influential figures involved) in this process matter. The report begins by outlining the study background, including the aims of the study, the framework used, and the research methods. The report describes reforms in the Australian urban water supply services in four main parts: • Historical context and chronology of reforms • Drivers of reforms and formal responses by governments • Development of a retrospective framework for reforms by exploring how they were translated into actions • Exploration of the experiences of states and utilities in the reform process Through these components of reform, the roles of institutions, structures, and stakeholders are considered, including (a) the national, state, and local governments; (b) in-service delivery models in the urban water sector; (c) regional utilities; (d) economic regulations; (e) financial incentives; (f) the private sector; and (g) a growing focus on customer service and engagement. Part II provides a deep dive into the reforms that took place in New South Wales. This deep dive allows the reader to understand how the broader national reforms played out at the state level. A summary of the history of reforms in the Australian context over a 30-year period from the 1980s through 2010 is provided. The narrative covers the transition from the traditional model of “build and supply” urban water utilities—based on a rigid structure of state-owned bodies, which were highly fragmented across the nation—through isolated attempts at pricing reform, and subsequently, a series of national economic reform agendas that enabled transformation of the urban water sector. Over the decades the drivers of reform varied: the first phase focused on improvement of water supply performance and outcomes, the roles of the states and the federal government, governance reform, and corporatization of the water sector. The second phase was to a greater extent driven by the impacts of drought. Responses included the adoption of integrated water resource management approaches, including consideration of the challenges and pathways for achieving security of supply. The research herein provides an understanding of the factors that were relevant at different times, and in different places, in the reform process. The research shows that three core sets of activities underpinned the initial state- or utility-led reform programs, and of the later national-level reform agendas of the Council of Australian Governments (COAG) and the National Water Initiative (NWI). These core activities included the following: • Reforming the pricing of urban water services and supply • Modernizing institutional arrangements and structures • Improving environmental and resource management The report then outlines the reform framework as defined by COAG, exploring the workings of institutional reforms that not only increased utility efficiency and return on investment but also helped to broaden the skills and “water knowledge” of utility management. Differentiation occurred across the states, and the report highlights the state-level evolution of the implementation approaches to match the challenges in each jurisdiction. Hence, while reform was guided by a common vision, and directed toward a common goal, reform was achieved while respecting the need for unique approaches among states. The World Bank and its client countries in Latin America, Africa, Asia, and Eastern Europe can learn lessons from the Australian water reform process. As described in this report as well as in the New South Wales analysis (part II), the Australian water sector reform involved difficult and forward-looking changes at the institutional, policy, and regulatory levels that spanned a number of decades. The process involved an important and mostly amicable interplay between the federal and state governments, including performance-based fiscal transfers to states that undertook reforms— and therefore required the necessary budget at the federal level to provide sufficient incentives (i.e., $A 5.7 billion over a seven-year period). Independent regulation was put in place, limiting political interference and enhancing financial sustainability in the sector. There were clear champions at the political and top posts in the utilities who were ready to undertake tough and wide-reaching changes, including reacting quickly to immediate needs, such as drought. The World Bank operates in countries with quite different enabling environments and economic contexts than Australia. The types of challenges low- and middle-income countries (LMICs) often face in the water sector include: • Insufficient financial resources to make the investments required to increase access and improve service delivery • Lack of incentives on the part of service providers to improve service quality and efficiency • Inequity in coverage between rural and urban areas • Challenges with ability or willingness to pay (at least once connected to a network) • Inability to sustain service level improvements • Management of extreme circumstances, such as very constrained water resources or floods Contextual factors that were important in Australia may or may not exist in Bank client countries. For example, the establishment of an effective forum for developing intergovernmental agreements (i.e., COAG) and the relatively small number of states and territories participating in the negotiation of national strategic agreements can be challenging in many LMIC environments. The ability to establish a regulatory system removed from political interference and, therefore, make fairly predictable and consistent decisions to support financial sustainability can also be challenging. The World Bank’s World Development Report 2017: Governance and the Law states that commitment, coordination and cooperation (“the three Cs”) are critical for appropriate governance to effectively deliver services. Many LMICs have far to go on establishing and implementing institutional, policy, regulatory, and other interventions that enhance the three Cs, whereas Australia’s water sector already embodies these principles. Nevertheless, being cognizant that there are really no “best practices” (WDR 2017 encourages development practitioners to move away from this notion) and that each enabling environment is quite different, there are lessons to learn from the reform process in Australia’s water sector. In particular, countries organized in the federal-state model can learn from the reform process in Australia, which clearly has involved mechanisms and practices enhancing some degree of commitment, coordination, and cooperation from both the federal and state levels. Further, Australia’s sector is dominated by corporatized state-owned enterprises; therefore, there are good lessons for LMICs that rely heavily on publicly owned utilities, including on how to incentivize, regulate, and monitor them. The common process steps observed from the Australian experience are distilled in this report, and may help inform development practitioners seeking to take a similar reform journey toward greater efficiency and effectiveness in the urban water sector.