Melbourne households will have to cope with higher bills and weaker water infrastructure as the Andrews government rips more than $700 million from the city’s water retailers to help bolster the state budget.
Most of the money will come from an unusual accounting manoeuvre, that experts warned would weaken the water companies, and will reap the government more than $500 million in a three-year period out to 2024.
The payments, called capital repatriation, come on top of dividends the government is also taking from the companies and were revealed in an analysis of annual reports and corporate plans for Melbourne’s three water retailers as well as government-owned Melbourne Water.
Victorian Treasurer Tim Pallas signed off on the strategy and will redistribute the money through the state budget, which is labouring under record debt.
The annual reports tabled in September show the four public water companies — Melbourne Water, South East Water, Greater Western Water and Yarra Valley Water — paid $90.7 million in dividends in the last financial year.
The companies paid the government a further $210 million in repatriated capital in the same year, and most have committed to collectively paying hundreds of millions more in the same way in the coming two years.
South East Water ($194.36 million over the next two years), Greater Western Water ($71.76 million) and Melbourne Water ($80.82 million) forecast the future payments in their corporate plans. Yarra Valley Water did not provide the same guidance.
Experts told The Age the payments lacked transparency and could harm the financial viability of the companies, ultimately adding to household bills or limiting infrastructure investments which could affect service quality.
Macroeconomics Advisory managing director Stephen Anthony likened capital repatriation to “cooking Victoria’s books”.
He said ordinary dividends could be spent like cash while capital repatriation would instead improve the state’s central balance sheet by improving its debt load at the expense of the water corporations.
“On the face of it, it looks to impinge on [a water company’s] operating business so is something to be avoided. The question is why the government would do this … on legitimate grounds,” Anthony said.
“This isn’t the sort of decision-making of a steward focused on the operating position of a business, this is something that is going to constrain a business.”
Capital repatriation has been used before with the water companies but rose significantly in 2021-22 compared to previous years and did not appear to track the annual performance of the companies.
A government spokesman said the withdrawals were reinvested into the state budget.
“Distributions from government business enterprises are reinvested through the budget, helping to fund important infrastructure such as schools, hospitals and roads and vital services that Victorians rely on,” he said.
Dr Erin O’Donnell, a senior lecturer in water law and policy at the University of Melbourne Law School, said the process should be more transparent and warned the payments could limit what water corporations could deliver, beyond the necessities, at a time when significant infrastructure investment was needed.
“It reduces the money that water authorities can invest in themselves [and] can invest in the programs that their customers tell them that they want to see them spending on,” O’Donnell said.
“Every bit of money that goes out the door that’s not achieving those things is making that a bit harder.”
Most likely, the strategy would mean consumers would end up paying more, she said.
The Essential Services Commission, which regulates prices after taking submissions, lifted bills by 1 per cent this year, well below the inflation rate. If that approach continued, that would further limit the water corporations’ ability to invest, O’Donnell said.
Associate Professor Brad Potter, the head of accounting at Melbourne University, said the government appeared to have embarked on a “curious cash management strategy” particularly in circumstances where the water companies were forced to borrow.
He said the repatriated capital payments were “really non-trivial amounts”, and inexplicably higher than in previous years, but could not say that was untoward on the available information.
“At the same time, I would be interested as to whether or not approaching it this way is consistent with financially sustainable water authorities,” Potter said.
“In an era where water sustainability is absolutely crucial and investment and planning and all these sorts of things are absolutely critical, it’s interesting how a financially sustainable water authority can get rid of tens of millions of dollars a year in capital repatriations.”
South East Water, in its 2022-27 corporate plan, warned the requirement would force the company to dramatically increase its debt.
“We will require an additional [$1.42 billion] in new borrowings over the planning period to fund capital expenditure outlays, dividends and capital repatriations. Overall, debt levels are expected to increase from [$2.31 billion] as at 30 June 2022 to [$3.73 billion] at 30 June 2027.”
Capital repatriation was the main reason the company’s gearing, the amount of debt it was carrying compared to its assets, would increase from 54.4 per cent to 65.9 per cent over the same period.
South East Water gave the government $97.2 million in capital repatriation in 2021-22, while making just $78.4 million in profit after tax.
Greater Western Water also operated at a net loss of $525 million in the financial year, mainly due to the merger of City West Water and Western Water. Still, the government sought $35.9 million in capital repatriation in the year.
Melbourne households typically have lower water bills than in other Australian capital cities.
Retailers told The Age capital repatriation does not form part of the pricing framework the ESC used, and the government had the authority to seek repayments of its capital contribution at its discretion.
“This is at the government’s discretion and can be redistributed as part of the Victorian government’s budget,” South East Water and Yarra Valley Water both said.
Melbourne Water said capital repatriation was standard practice.
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