- Exclusive
- Politics
- Victoria
- Victorian budget
This was published 8 months ago
Water companies soak up millions in debt – and pump it into state budget
By Rachel Eddie
Victoria’s water corporations have taken on more debt to prop up the state budget after Treasurer Tim Pallas pulled hundreds of millions of dollars from Melbourne’s water retailers, in a move that has raised questions about the impact on prices and investment in essential infrastructure.
The Age revealed last January that Pallas had previously ripped $210 million from the four water corporations — on top of the dividends they paid — and redistributed the money through the state budget, which is labouring under debt expected to reach $177.8 billion by 2027.
The Victorian government has pulled hundreds of millions of dollars out of state water authorities.Credit: Brook Mitchell
Experts warned that the unusual accounting manoeuvre, known as “capital repatriation”, weakened the financial viability of Melbourne Water, Greater Western Water, South East Water and Yarra Valley Water and could limit their investment in infrastructure and sustainable practices.
An analysis of the companies’ most recent annual reports revealed Pallas took a further combined $214 million from the authorities in July – on top of a forecast $112 million in dividends they paid to the government as shareholder.
Two of the corporations had to take on debt – with interest – from the government’s financing authority Treasury Corporation of Victoria (TCV) to make the payments.
The government argues capital repatriation is available because of excess equity, even though two had to borrow to fund the payments.
“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,” a government spokesman said.
Macroeconomics Advisory chief economist Stephen Anthony said the process seemed like a move to improve the appearance of Victoria’s budget at the expense of the water corporations.
“It’s designed to make the general government look more financially sustainable than it actually is,” he said.
Melbourne Water has coughed up $40.41 million in repatriated capital and another $13 million in dividends this financial year, according to Victoria’s mid-year budget update. The repatriated capital would be funded “through floating rate borrowings with TCV”, Melbourne Water said in its annual report.
Greater Western Water also had to take on debt with Treasury to pay $35.88 million in capital repatriation in July, along with a forecast $53 million in dividends this financial year.
“[Greater Western Water] will be funding the capital repatriation through floating rate borrowings with TCV,” its annual report said.
This means the two water authorities are borrowing money from a Victorian government entity, and paying interest to the government body, to help improve the state’s budget position.
Dr Erin O’Donnell, a senior lecturer in water law and policy at the University of Melbourne Law School, said Treasury appeared to be hitting the water authorities twice by first taking the capital and then charging interest on the borrowings.
“We know they don’t have the money because they’ve said they’re going to have to borrow it,” she said of the corporations.
O’Donnell said the move was likely to diminish services and sustainability efforts in the future by reducing the corporations’ power to invest – even if it did not push up household bills – in the significant infrastructure needed to protect Melbourne’s water supply for the decades ahead.
More desalination and water recycling plants would be needed in the future, she said, for example, to shore up water supply.
The government, water companies and the Essential Services Commission – which regulates prices – all denied that capital repatriation would increase household bills.
But O’Donnell said that if the water authorities had cash to spare to pay the government, then consumers could reasonably ask whether they were paying too much.
“If they can genuinely afford to pay without compromising [services or sustainability] … then we need to have a conversation about water prices in Victoria because that’s suggesting water authorities are taking more money than they actually need.”
South East Water interim finance general manager Kim Murray said in a statement the authority’s “overall capital position can accommodate this return of equity to the Victorian government as shareholder”.
The public company, which is forecast to pay a further $24 million in dividends this financial year, has previously said it would have to borrow to meet the treasurer’s requests for capital.
Yarra Valley Water also made $36.37 million in payments in July and was forecast to hand over another $22 million in dividends in 2023-24.
Capital repatriation has been used before with the water companies but rose significantly in 2021-22 compared with previous years. Melbourne households typically have lower water bills than in other Australian capitals.
The Essential Services Commission, which regulates water prices, said debt did not affect its calculation of consumer prices.
“The actual gearing and debt of a water business does not affect the calculation of prices. Maximum prices are determined based on benchmarks independent of a water business’ actual gearing or debt,” the commission said in a statement.
“Based on projections at the time of our price reviews, we consider the financial position of each water corporation is sound.”
The water companies also insisted that transferring the capital to the government would not reduce services, investment in projects or consumer prices.
“Capital repatriations are determined by the treasurer of Victoria and represent a repayment of contributed capital. Melbourne Water has made multiple capital repatriation payments in the past as standard practice. Repatriations are redistributed as part of the Victorian government’s budget process,” a Melbourne Water spokesman said.
A Greater Western Water spokeswoman said the government could request capital repatriation at its discretion.
Get the day’s breaking news, entertainment ideas and a long read to enjoy. Sign up to receive our Evening Edition newsletter.