Water affordability and state water concessions in Australia

Crawford School PhD Conference 2014 Water affordability and state water concessions in Australia This presentation is part of my PhD thesis ‘Utility affordability and State concession in Australia” (work in progress) 19 November 2014

(Noel) Wai Wah CHAN Supervisor panel: Prof. Quentin Grafton (Chair), Dr Hoa Nguyen, Dr Karen Hussey, Prof Michael Ward (advisor), Dr David Stanton (advisor)

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Thank you everyone for attending my presentation ‘Water affordability and State water concessions in Australia’. This paper is mainly abstract from my PhD thesis at the Crawford School of Public Policy at the ANU. This paper presents the preliminary findings of my thesis. I here also want to thank my supervisors Quentin Grafton, Karen Hussey, Hoa Nguyen, David Stanton and Michael Ward.

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Background: Water consumption trends

Source: National Performance Report: Major urban utilities (WSAA 1995/96 – NWC2011/12)

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In Australian, statistics shows that there has been a declining trend in average household water consumption since 1998-99 in all Australian major cities. The declining trend has resulted from the introduction of water consumption charges in the 1990s, and water restriction policies impacting household behaviour on water conservation

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Water & sewerage expenditure (after adjusted with CPI) trends in major cities

Source: National Performance Report: Major urban utilities (WSAA 1995/96 – NWC2011/12)

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However, this declining consumption trend does not result in a declining water and sewerage expenditure, nor the water burden. This provokes concerns regarding water affordability among low income households.

Motivation of research Lower income households have a disproportionally higher

burden than average and high income households lower average water consumption mostly related to non-discretionary use State water concessions: the major policy instruments for

alleviating water affordability among eligible households lump sum rebates or percentage discounts of water bills insufficient empirical research on state water concession

Q1: Who are the vulnerable groups that need assistance? Q2: Does the state water concession equitable and efficient?

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Low-income households have lower average water consumption, and their use is mostly related to non-discretionary purposes such as drinking, cleaning, cooking, and personal hygiene. This means that these households are more susceptible to the risk of associated financial stress and hardship when faced with increasing water prices. In Australia, water concessions provided by state and territory governments are regarded as the major policy instruments for alleviating water affordability. However, insufficient empirical research has been done to evaluate equity and efficiency of state water concession policies. To address the research gaps, I demonstrate various frameworks to answer the following research questions. Q1: Who are the vulnerable groups that need assistance? Q2: Does the state water concession equitable and efficient?

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Section 1: Changing social functions in urban water sector

Framework to inject social aspirations into urban water pricing

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At the present time, urban water pricing objectives are undergoing a transition from predominantly social objectives towards economic efficiency, full cost recovery and environmental sustainability. Despite this, social aspirations can still be integrated into the urban water pricing framework within the various layers of policy principles or instruments (e.g. pricing objectives, tariff design, affordability outcome, targeted social assistance).

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Note: TPT means two-part tariff; IBT means increasing block tariff; FC means fixed charge

Water and sewerage tariff structure and average water and sewage bill of major city in 2011-12 City Water tariff

structure Sewerage

tariff structure

Average water use (kL)1

Average W&S bill ($)

Fixed water charge ($)

Fixed sewerage charge ($)

Fixed charge component

Variable charge component

Sydney TPT FC 193 1090 145 540 63% 37% Melbourne IBT

(3 steps) TPT 144 910

120 322 49% 51% Canberra IBT

(2 steps) FC 180 1073

96 555 61% 39% Brisbane IBT

(3 steps) FC 139 1013

167 476 63% 37% Adelaide TPT FC 179 1148 235 325 49% 51% Perth IBT

(6 steps) FC 250 1128

187 313 44% 56% Darwin TPT FC 471 1417 197 616 57% 43%

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In Australia, the urban water utilities has applied various pricing structures in water and sewerage tariffs. Although TPT is regarded as a more economically efficient and fairer tariff structure (Sibly 2006), final water bills in cities with TPT were not lower than those using the IBT structure (Table 2). Column 4 of this Table summarises the average water and sewerage bills in major Australian cities, which range from $900 to $1400 in 2011-12. This cross-jurisdiction comparison shows that Darwin households pay $500 more than Melbourne households on their annual average water bills. The capacity of households to further reduce their water expenditure depends on the variable component of tariffs. At present, the fixed component of water and sewerage charges account for 45-60% of the total bills for most households (Table 2, column 6). Pricing sewerage based on consumption (as is the case in Melbourne) rather than as a fixed charge, will be fairer to average and small-sized households. That would give water consumers more capacity to reduce their final water bill by engaging water conservation behaviour.

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Section 2: Measuring water affordability & identifying households in affordability stress

• Traditional burden ratio method (AR3) Water is unaffordable if W&S expenditure-to-income ratio > 3% (OECD 2003, Fankhauser & Tepic 2007)

• More fuel poverty and housing stress research consider both objective and subjective indicators (Price et al. 2002; Moore 2012; Hills 2011; Blamey 2012).

• Households’ ability to pay to pay for water and other goods & services depends on water bill, residual income (i.e. after housing costs), and family composition (i.e. equivalised income)

• ABS HES 2009-10 surveyed households with reported indicators of material hardships and financial stress

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Despite the fact that ‘water affordability’ has become increasingly important, there is still no agreed standard for its measurement. Traditionally a burden ratio method and a 3% threshold have been commonly applied as the affordability standard in the UK, OECD, ADB project (OECD 2003). It is debatable whether this method is appropriate within the Australian context. Recently there is more fuel poverty and housing stress research calling to consider both objective and subjective indicators. The reason is that households in affordability stress or hardship will restraint their utility consumption (which cannot to reflected in AR3) In this section, I apply a triangulation method, which accounts for household water consumption, residual income after housing cost and family composition, and subjective deprivation indicators (i.e. households that reported with material hardship and financial stress) to define water affordability.

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BHCWAS EQAHCWAS AR3

Benchmark % HH in BHCWAS

Benchmark % HH in EQAHCWAS

% HH in AR3WAS

NSW 1.53 25% 2.54 18% 18% Vic 1.34 26% 2.39 12% 12% Qld 0.89 37% 1.46 35% 34% SA 1.45 26% 2.32 13% 16% WA 1.16 21% 1.80 12% 9% Tas 1.08 44% 1.98 31% 34% NT/ACT 2.17 16% 3.93 13% 14% AUS 1.38 27% 2.33 19% 19%

Table 3: Average water burdens, before and after housing costs, among households with material hardships or financial stresses, 2009-1

Income variable Poverty line Benchmark

BHCWAS Disposable household income Bottom 40% in eq. disposable income Derived by state, households in deprivation

EQAHCWAS Equivalised disposable household income after housing costs

Bottom 40% in eq. disposable income after housing cost

AR3WAS Disposable household income Bottom 40% in eq. disposable income 3%

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Table 3 shows the average water burden ratios among households that reported financial stress or material hardship and also within bottom 40% of income distribution. For BHCWAS method (first colum), disposable household income is used to derive water burden ratio and income distribution. For EQAHDWAS method (second big column), household income is adjusted with housing costs and family composition (i.e. modified OECD scale). The last column AR3 represents the traditional 3% affordability benchmark. The analysis is based on 2009-10 ABS Household Expenditure Survey data. The table shows that about 19-27% of Australian households experienced water affordability stress and hardship (WAS). The proportion of households at WAS is the highest in Queensland and Tasmania. Using triangulation method, the derived water affordability benchmarks were lower. The EQAHCWAS method, which accounts for housing cost and family composition, produced consistent results with 3% water affordability threshold (AR3).

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BHCWAS EQAHCWAS AR3

Family type Couple only 27% 17% 17% Couple with children 19% 20% 12% Single parent 41% 32% 32% Lone person 40% 18% 30%

Tenancy type Owner outright 37% 19% 20% Purchasers 15% 13% 9% Renters 31% 25% 28%

Dwelling type Separate house 26% 19% 17% Semi-detached house 30% 18% 21% Flats 33% 21% 28%

Location Capital city 24% 15% 15% Non-capital city / rural 34% 26% 27%

Main income source Wage/salary 11% 10% 8% Pension/allowance 63% 39% 44%

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Table 4 presents the proportion of households that were at risk of WAS under different methods. The results highlights that certain household types are particularly vulnerable to WAS, they are Single parent with children Renters Households who are living in flats Rural households government income recipients The results highlights that the above household types are more likely in need of target assistance.

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Section 3: Equity implications of State water concessions

• Horizontal equity: people with similar circumstances should be treated equally • Vertical equity: people with different circumstances should be treated differently

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Proper state water concession design can have significant impacts on targeted households to address water affordability. However, the equity of these instruments in practice is yet to be analysed in detail. The handout you have summarises the details of state water concession in each jurisdiction in 2011-12. In a social policy context, there are two dimensions of equity : Horizontal equity means that people with similar circumstances (e.g. similar economic resources) should be treated equally; Vertical equity means people with different circumstances (e.g. with larger household size, lower income, or medical conditions) should be treated differently In this section, I will demonstrate various framework to analyse horizontal and vertical inequity in water concession entitlements and eligibility criteria.

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• Compare water concession benefits and discount from original W&S bill for households with average consumption across jurisdictions

Horizontal inequity in entitlement design

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Inequity of concession entitlements between jurisdictions is assessed by the ‘concession value’ - the percentage discount of the water rebate relative to the annual pre-concession water and sewerage bill. The figures shows that horizontal inequity exists within water concession values between jurisdictions. For eligible households with average levels of water consumption, water rebates account for 30-50% of the original annual water and sewerage bills for all cities in 2011-12. In terms of concession amounts, Darwin and Sydney households received the highest water rebates while Melbourne and Adelaide households received the lowest amount. In view of concession benefits (i.e. percentage discount from original bill), Sydney (53%) and Darwin (46%) households received the highest benefits, while Adelaide (33%) and Melbourne (33%) households received the lowest values. Despite the horizontal inequity in concession values, state water concession schemes have significantly reduced the differences in final water and sewerage bills among eligible households residing in different jurisdictions.

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Vertical inequity in entitlement design • Compare water concession benefits and discount from original W&S bill for households with different levels of water consumption

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Vertical equity within concession entitlements means that households with high consumption, such as those with more family members or with young children, would not be disadvantaged. These three figures illustrate that vertical inequity exists in concession entitlements and highlights that concession discounts decline when water consumption level increases. For households in Sydney, Melbourne, Canberra, and Perth, the amounts of concession benefits remained unchanged when the amount of water use increased. The reason is, in these jurisdictions, they apply lump sum water rebates or percentage discounts with an annual cap, while the capped rebates were too low for large-sized households that have high consumption. Except in Darwin and Brisbane where concession benefit were responsive to the amount of water used.

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Vertical inequity in eligibility criteria

Poor households with water bill

Non-poor households

Eligible to concession Eligible to concession

Yes No Yes No

NSW 34.4% 65.6% 29.0% 71.0% Vic 37.8% 62.2% 25.1% 74.9% Qld 25.9% 74.1% 21.7% 78.3% SA 21.0% 79.0% 10.1% 89.9% WA 54.2% 45.8% 34.2% 65.8% TAS 52.8% 47.2% 46.3% 53.7%

NT/ACT 20.7% 79.4% 19.7% 80.3% Australia 36.7% 63.3% 26.3% 73.7%

• Using 2009-10 ABS HES data, • Poverty line is defined as 60% median eq. disposable household income • Households that are eligible for energy concession, and further adjusted with tenancy types in each state

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The inequity within concession eligibility criteria is assessed by whether poor households with similar economic resources are eligible to water rebates. I used the 2009-10 ABS Household Expenditure Survey for this analysis and I used 60% median eq. disposable income as poverty line. Poverty targeting outcomes concluded that vertical inequity exists in state water concessions. About 63% of income disadvantaged Australian households that paid for water were excluded from receiving concessions, while 26% of non-disadvantaged households were eligible for water rebates. Across jurisdiction, WA and Tasmania water concession schemes had the highest successful targeting, but also higher inclusion error.

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Vertical inequity in eligibility criteria

Renter PCC/ DVA

HCC CSHC SSC Other

Canberra Y Y Y Sydney Y Melbourne Y Y Y Adelaide Y Y Y Brisbane Y Perth Y Y Y Y Darwin Y Y Y Y

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When comparing the eligibility criteria across jurisdictions, this Table illustrates that there were few types of horizontal inequity. Firstly renters who pay water bills were excluded from receiving water concessions in Sydney and Brisbane. This is a serious concern as renters generally have lower income and higher risk of unstable income or being unemployed than home owners. Secondly, household members with Low Income Health Care Cards (HCC), who generally receive smaller government benefits than aged pensioners (PCC/DVA Gold Card), were ineligible to water concessions except in Victoria and the ACT. Thirdly, State Seniors Card (SCC) holders or Commonwealth Seniors Health Card holders (CSHC), who might not be poor, were eligible to water concessions in Perth and Darwin. The results correspond to the vertical inequity and poverty targeting found in the previous analysis.

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Section 4: Targeting efficiency of water concessions • 2007 Victorian Household Utility Consumption Survey • Evaluate targeting outcome of ‘category-based’ concession towards households in low-income and high Consumption (LIHC) • LIHB households are those with pre-concession W&S burden exceeds 3% of disposable household income; and eq. disposable income below 40% of income distribution

Water burden ratio and Poverty status

LIHC Households Non-LIHC households

State utility concession program

Received water concession

Success targeting Inclusion error

(leakage)

No water

concessions

Exclusion error

(under-coverage) Success exclusion

Source: adapted from Dutrey (2007)

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This final section demonstrates the frameworks to analyse whether the current ‘category-based’ concession is efficiently targeting those households that are most in need. This analysis is based on 2007 Victorian Utility Consumption and Expenditure Survey data. In this analysis, we define households that need assistance are those have a relatively low-income (i.e. within bottom 40% of income distribution) but a high water burden (i.e. above 3% water burden ratio). By this Low Income High Conusmption (LIHC) method, we eliminate those non-poor households that have over-spent on water.

Targeting efficiency of Victorian water concessions

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This Figure illustrates that more than 80% of the LIHC households were successfully targeted and received water rebates during winter time, but the successful rate was lower during summer (76%). Surprisingly 65% of the households without water affordability problem (non-LIHC households) also received water rebates. The results imply that (1) lump sum water rebates with max cap is less effective to alleviate the summer water burden; (2) using concession cards as a selectivity mechanism in state concession contributes to low exclusion errors but large inclusion errors.

Original Beckerman’s model of poverty targeting expenditure efficiency

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Modified Beckerman’s model of LIHB targeting of concession expenditure

Source: Beckerman (1979)

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Next we proceed with a target efficiency analysis modified from the Beckerman (1979) model (on the left) in evaluating social spending in poverty targeting program. The modified framework (on the right) compares the performance of state concession expenditure relative to the estimated budget required to alleviate all LIHC households to below water affordability benchmark (r*).

Targeting expenditure efficiency to Victorian LIHB households

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Unit Amount Total concession expenditure (O) $ 93,353,672 Successful targeting expenditure $ 24,000,000 Vertical expenditure efficiency (VEE) % 25.7

Spill-over (S) Excess benefits $ 6,244,204 Spillover Inefficiency % 6.7

Inclusion Error (IE) Inclusion error $ 69,400,000 Inclusion error inefficiency % 74.3

Benefit inadequacy (BI) Concession shortfalls $ 14,945,273 Concession shortfalls inefficiency % 16.0

Optimal targeting expenditure (E) $ 45,143,149 Saving = (O-E) $ 48,210,524 Percentage saving from optimal targeting % 51.6

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This analysis allows us to compute the vertical expenditure efficiency (VEE), which is the percentage of total concession expenditure that were received by LIHC households to relieve their water burden to below 3% threshold. Preliminary results in Table 7 show that VEE from the Victorian water concessions was 26%. Inefficiency due to exclusion error (7%) and concession shortfall (16%) were relatively low. However, inefficiency caused by inclusion error accounted for almost two-thirds of Victorian water concession expenditure. If optimal targeting of households identified as LIHC were possible, such as via the Centrelink income supports system, the estimated expenditure on Victorian water concession could be reduced by half.

Key findings & conclusions • An increasing concern of water and energy affordability in Australia

• Australian urban water sectors apply a mixed method to address water affordability

• Certain tariff design would improve the low-income households’ capacity to address affordability problem

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Presenter

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Firstly I want to draw your attention to the key findings of this paper. In Australia there is an increasing concern of water and energy affordability in recent years. The paper found that the Australian urban water sectors has applied a mixed method to integrate water affordability objectives in various layers of water pricing and hardship policies. We found that certain water and sewerage tariffs design could improve the capacity of low income households to address water affordability.

Key findings & conclusions • Single parents, renters, flat occupiers, rural

households are more vulnerable to water affordability stress and hardship

• Both horizontal and vertical inequity exists in current state water concession eligibility criteria and entitlements

• Large-sized households are disadvantaged; and large proportion of poor households were not eligible to water concessions

• ‘Category-based’ concession has low target expenditure efficiency. Significant savings can be made from ‘need-based’ targeting design

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In addition, the paper found that certain household types are particular vulnerable to water affordability stress and hardship. They are single parents, renters, flat occupiers, and households living outside capital city. In evaluating state water concession policies, we found that both horizontal and vertical inequity exist in the concession entitlement and eligibility criteria. Large sized households are unfairly treated and large proportion of poor households are not targeted. Finally we found that the current category based concession has low target expenditure efficiency. It is estimated that large savings can be made if using ‘need-based’ targeting. In the following, I will explain how I reach these conclusions

Thank you.

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Thank you for your attention. I am very happy to receive any question, comments and suggestions.

Water affordability and state water concessions in Australia

Economy & Finance

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