By Patrick Durkin and Kanika Sood
The Victorian Coalition has urged Premier Jacinta Allan to come clean about the government’s plans for the state-owned Melbourne Water, saying voters deserve to know before the November 28 election.
The Australian Financial Review revealed on Thursday that Victoria’s Labor government had sought advice from EY on strategic options for the business, which operates nearly $18 billion worth of pipes, plants and other infrastructure, after approaching a handful of accounting and advisory firms earlier this year.
No investment bank has been appointed, and there is no suggestion a complete privatisation is under way. The state government declined to comment on the move. EY also declined to comment.
A full privatisation of Melbourne Water is restricted by Victoria’s Constitution, requiring a three-fifths majority or 60 per cent support in both houses, but other options, including a securitisation of the $2.1 billion revenue stream, would avoid the need for a vote.
“Victorians deserve to know exactly what the Allan Labor government is planning for Melbourne Water, and they deserve to know now, not after a deal is already done behind closed doors,” said opposition water spokeswoman Jade Benham.
“This is a government that has proven time and again it cannot manage the basics. Victorians have a right to be asking what any changes to Melbourne Water will mean for their water bills.”
The government-owned authority operates a vast network of infrastructure across five main service portfolios, including the water supply, waterways, drainage, sewerage treatment and catchment management, with a revenue stream of $2.1 billion a year.
Former Victorian treasurer Tim Pallas ruled out selling Melbourne Water’s sewerage treatment system before the 2018 election after Victorian Liberals proposed leasing the business for 50 years to raise up to $5 billion. Pallas said the plan was flawed, and household budgets would rise by up to $100 a year.
The potential privatisation of Sydney Water became a major political headache in the lead-up to the 2023 NSW election, with Labor claiming a re-elected Coalition government would sell off the asset, after a leaked KPMG report showed it had advised on long-term ownership models and structural changes.
Thames Water bailout
Economist Saul Eslake said the sale of state-owned water assets had been problematic for governments around the world.
“Water has been particularly problematic, partly because water storage and supply assets have multiple uses,” he said.
“The reason most governments baulk at it is that it is operationally a very difficult thing to do, as well as politically.
“If any Australian government were to think of selling their equivalent of Melbourne Water, they would immediately be inundated with stories of what a disaster Thames Water has been in the UK.”
The 1989 full-scale privatisation of water in England and Wales is regarded as a controversial and troubled experiment that led to higher bills and crumbling infrastructure.
Thames Water, the UK’s largest water supplier serving more than 16 million people, is facing collapse and a government bailout due to its unmanageable debts.
Eslake said a potential securitisation would be a more palatable, political option because the government could maintain ownership and control.
“Let’s say they sold the rights to those revenue streams, it would be a sort of accounting trick where they could bring forward 10 years of revenue,” he said.
Bob Officer, the auditor who examined Victoria’s finances during the 1990s, as well as auditing Victorian Labor’s election campaign in 2014, said he was asked to look at the option for two former state treasurers, Labor’s Pallas and Liberal, Alan Stockdale.
“We decided there were easier assets to sell,” he said. “However, with new circumstances, certainly they are doable.” He said if a sale alleviated the debt it would be a sufficient condition for sale and if it alleviated the debt and the business was poorly run, it should be sold.
“The state has such a narrow tax base that I don’t believe they can stop the growth in debt and associated cost without either federal intervention and/or asset sales.”
Financially, there may never be a better time for Labor to seek to maximise any sale with water commodities in hot demand among investors.
$29b in value to unlock
Nick Kelly, portfolio manager for WAM Alternative Assets, who holds 12.5 per cent of water investments in his portfolio, said water is one of the best diversifying assets an investor can hold within a broad portfolio.
“There’s never been a better time for a government to sell a water asset,” he said. “There is absolutely demand for an asset like this, so from a financial perspective, it’s a no-brainer.”
He said that an asset like this would typically sell for 1.2 to 1.8 times the priced regulated asset base, which in Melbourne Water’s case was about $15 to $16 billion, making a full sale worth up to $29 billion, making a sizeable dent in the state government’s forecast $200 billion debt.
Victorian Labor governments have long decried asset sales but the current Andrews and Allan Labor governments have privatised or leased the Port of Melbourne, the Land Titles Office and VicRoads licensing and registration business.
Under the 2022 VicRoads deal, Labor entered a 40-year joint venture with a consortium which included Aware Super, Australian Retirement Trust and Macquarie Asset Management, to operate the registration, licensing, and custom plates business while maintaining ownership, fees, and regulatory control, bringing in $7.9 billion.
The Allan government also sought to sell the operating rights of the state-owned ski resorts at Mount Baw Baw and Lake Mountain, and canvassed a long-term lease for the public-owned Melbourne Market, a 67-hectare fruit and vegetable wholesaler in Epping.
It came under fire in the May state budget for its decision to award a 40-year extension to the state’s lottery licence, amid criticism the $1.15 billion deal had been shrouded in secrecy and was four times longer than the previous contract.
On the flip side, the Allan government announced a plan to “bring back the SEC” [State Electricity Commission], the Victorian-owned energy operator, to much fanfare in the lead-up to the November 2022 state election, after it was broken up and privatised by the Kennett government in the 1990s.
The Financial Review revealed in late 2024 that the Allan government was paying speciality consultants Ad Astra Corporate Advisory for a scoping study to identify possible asset sales and monetise its revenue streams to pay down the state’s forecast $200 billion debt.
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