In 2011, the Queensland Water Regional Alliances Program (QWRAP) was developed as a council-led initiative to investigate alternative institutional models for urban water services in regional Queensland. QWRAP has received ongoing seed funding from the Queensland Government which has levered further investment from councils, LGAQ and qldwater.

Currently in Queensland, urban water and sewerage services (WSS) are provided predominantly by 68 local government Service Providers. In contrast, in other Australian jurisdictions corporatisation is common as is State/Territory Government ownership and regional-scale utilities.

In 2011, three independent national reviews investigating the WSS sector across Australia each recommended reform for regional Queensland and country New South Wales, the two remaining areas where individual local governments are responsible for WSS.

Reform of local government WSS is a worldwide trend. In many countries WSS have been owned and managed by local governments since the 19th century but have been undergoing continual institutional restructuring which peaked in intensity in the 1990s and 2000s.

A survey of all OECD and G20 countries shows that local government ownership, and in many cases management, remains the most common model for WSS but with a number of modifications from traditional council ownership and management. Analysis of 21 case studies of reform revealed several common trends. Evolution of WSS models generally commenced with local government-only services transforming towards regional aggregation accompanied with increased commercialisation/corporatisation. Transfers of ownership to central (e.g. regional/national) government occurred in several jurisdictions but return of ownership back to local government was also common following failure of centralisation or privatisation.

While full private ownership has seldom been successful, private sector participation via a diversity of outsourcing arrangements is universal and increasing in scale.

Also on the rise was development of regulatory economic frameworks and performance monitoring to support and stabilise these arrangements. The universal nature of the trends and the stability of the resultant models suggested that these institutional arrangements are at least partial success factors in the WSS sector. Private sector participation was considered in terms of both outsourcing/partnerships and the most extreme form of privatisation with full divestiture of WSS assets.

Full privatisation has been trialled in numerous jurisdictions over the past three decades, but sustained success has been recorded in only a small number of cases. In many jurisdictions, privatisation has been rejected or the responsibility for WSS returned to local government after the failure of the private model. It is probable that privatisation itself was not responsible for these failures as it has often been employed as a ‘last resort’ in an already unstable industry condition. Nevertheless, privatisation is clearly a risky alternative for WSS, was not recommended for Queensland by any of the national reviews of the sector, and is not considered to be an appropriate solution for regional Queensland.

In contrast, the benefits of private sector participation in the form of outsourcing are widely acknowledged although there is marked variation in the degree, length and type of contracting arrangements across and within jurisdictions. Private sector participation has been held to increase efficiency and productivity by using specialist suppliers for ‘non-core activities’ allowing local government to focus on strategic local needs. This is reflected in Australia where some activities (e.g. capital works) are usually outsourced while one to two thirds of operational expenditure is also outsourced by Australia’s largest WSS utilities.

Outsourcing in Queensland, while not as extensive as elsewhere in Australia, has been increasing for some time. This trend is likely to continue, possibly necessitating a regulatory framework to protect the interests of local communities, WSS providers and private industry. Even in the absence of private sector participation, commercialisation and corporatisation of local government WSS has been argued to improve transparency, accountability and business management, providing some of the benefits espoused for private organisations while retaining ownership by the local community.

Across Australia, corporatisation and commercialisation on a not-for-profit basis were implemented across the WSS sector as a result of ‘competition reforms’ of the 1990s. In Queensland, large local governments were required to adopt commercial practices and arms-length political oversight but some of these changes were effectively reversed following local government amalgamations in 2008. Elsewhere in Australia and in SEQ, corporatisation particularly in the form of statutory authorities, is the principal model for WSS.

Commercialisation and corporatisation (at regional scales) were recommendations common to the reviews by Infrastructure Australia and The Productivity Commission. Regional aggregation of local government WSS has become increasingly adopted both in Australia and internationally and the benefits of economies of scale in the WSS sector have been well established. Aggregation of Queensland WSS was recommended by all three national reviews but is complicated in Queensland by vast catchments, highly dispersed communities and economies of scale that can be achieved only at the expense of economies of density and scope. Successful regional approaches in other jurisdictions have generally been achieved over smaller areas with denser aggregations of population: the entire state of Victoria (where regionalisation has been highly successful) is only just over half the area of Queensland’s first regional alliance in Western Queensland.

Regionalisation in Queensland must be considered carefully along with a range of external environmental factors that are critical drivers for the industry. The final ‘success factor’ identified from other jurisdictions was the presence of broad economic regulation of the WSS sector. Regulatory and economic frameworks have been shown to have a large impact on the efficiency of WSS in many studies and are common in other Australian jurisdictions.

Queensland currently lacks such a framework in regional Queensland and regulation in South-East Queensland focusses solely on avoiding monopoly pricing of WSS and is not yet mature. The introduction of a state-wide performance reporting framework by the state government represents a positive step towards broader, transparent economic regulation through performance benchmarking.

Determining whether these general trends represent possible ‘success factors’ for Queensland WSS is difficult. While there are a large number of academic studies benchmarking the efficiency of different models, they are hampered by data availability and results have been mixed. General trends suggest that larger, corporatised entities (such as the Victorian utilities) perform better on average than local governments, but that some local governments rank well regardless of size.

A range of external factors also have a strong influence. As might be expected, the recommendations of the national reviews for regional Queensland closely reflect the trends (or success factors) identified for the WSS sector globally but each also reflected on the need to consider the external drivers in a large and diverse State like Queensland.

A particularly important factor is the large number of small, isolated communities. In regional Queensland, two thirds of potable schemes service towns with fewer than 1000 residents, and 50% service fewer than 500 people. Economic models can overlook these small towns, but they are often important as drivers of reform because their lack of capacity and small rate base challenges their sustainability putting pressure on Local Government WSS and reflecting on the industry more broadly.

Indeed, a tacit rationale for regionalisation of WSS is to incorporate small communities within larger organisations to cross-subsidise the cost-to-serve and to spread risk. Unfortunately, the costs to sustain small isolated WSS remain high regardless of the model adopted and often exceed the value of even the most optimistic projections for efficiency improvement.

Regionalisation is thus an important but only partial solution for such communities regardless of ownership model. Supporting the large and dispersed urban population in a large state like Queensland is possible only through joint local and state government action.

This report reviews these trends and their potential implications for regional Queensland to provide information for QWRAP regions that are developing regional models.

Read the report here.