Eco Innovator November 2011

Government Policy

Productivity Commission on Water

Commercializing innovations in the water sector is not easy, despite a Productivity Commission report saying the government should encourage innovation in water supply sourcing, treatment, storage and discharge.

One of the options the report considers is contestability in bulk water supply and wastewater treatment in urban areas. This option would extend competition to wastewater treatment and discharge, and provide strong incentives for innovation by wastewater treatment service providers, including the production of recycled wastewater products.

It also says that disaggregation of a single retail–distribution utility into smaller but still efficient scale geographic utilities would support competition between utilities, and further strengthen innovation, competition and contestability between bulk water and wastewater treatment service providers. It would also facilitate a market for managerial expertise. However, a downside is that system coordination and transaction costs would start to increase.

Another issue is that government agencies that deliver water services have weaker incentives to minimize costs and seek out new and better ways of doing things compared to private sector counterparts.

Private businesses that do not minimize costs may be driven out of business by more efficient rivals or disciplined by the capital market, while government agencies including the corporatized do not face market tests for survival.

A second reason is that the profit motive drives efficiency and innovation in private businesses, but does not operate in the same way for government agencies. Where a government agency is also a monopoly, these problems can be compounded by inefficiencies, it says.

Regulation is also an issue. "Regulation of distributed water systems, such as greywater systems, that are inconsistent, impose unnecessarily high compliance costs and stifle innovation," it says.

"The Commission sees the primary policy challenge is to ensure ongoing innovation in the sector, and ensuring that distributed systems developments are not obstructed by the attitudes or business processes of incumbent utilities. As such, there is a role for State and Territory Governments to consider legislating jurisdiction-based third party access regimes in the manner that New South Wales has done."

The report, Australia's Urban Water Sector, examines the case for microeconomic reform in the sector.






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