Rethinking water service funding for a resilient future

As our cities expand, the climate shifts, and community expectations evolve, Australia’s water sector is facing mounting financial, operational, and social pressures.

Ricardo was proud to chair a timely and thought-provoking panel discussion at Ozwater 2025 exploring a critical question: How will we fund water services in the future? Click here to watch the full recording of the panel session at the bottom of this page.

The session, chaired by Chris Olszak of Ricardo, featured insights from policymakers, regulators, and utility executives, highlighting the need for long-term planning, regulatory evolution, and customer engagement amid rising costs and climate uncertainties.

The looming water affordability challenge

Ricardo’s Richard Cawley set the scene noting that water utilities are facing a "triple squeeze"—falling revenues, rising capital demands, and intensifying climate and customer pressures.

Over the past decade, revenue per property has dropped by 31% in real terms, while CAPEX has increased by 19% (See Figure 1). Many utilities facing water security investment and price pressures during the Millennium Drought deferred asset replacements, and now face a "bow wave" of renewals. Inflation and higher interest rates are compounding financial pressures.

Add to that regional inequities—where some utilities face infrastructure backlogs worth 18 times their annual revenue—and the urgency becomes clear. Regional utilities, often council-owned and serving sparse populations, struggle with cost recovery. In NSW, local water utilities face a $31 billion infrastructure gap against just $1.7 billion in annual revenue. Customers in remote areas pay more for lower-quality services—a clear equity issue.

Finally, new infrastructure is needed for climate resilience (e.g., flood mitigation, drought-proofing) and urban expansion (e.g., Western Sydney’s growth). Traditional funding models have generally been based on steady and predictable demand patterns. However, as climate change introduces greater variability, there is an opportunity for regulatory frameworks to adapt and provide utilities with the flexibility they need to manage these changing conditions effectively.

Long-term planning over short-term fixes

The panel discussed Australia’s traditional five-year regulatory and funding cycles in relation to the multi-decade lifespan of water infrastructure. The challenge lies with utilities sometimes focusing too narrowly on the immediate five-year period rather than integrating their longer-term strategies. Some of the best utilities develop comprehensive long-term plans and then extract five-year investment slices to align with regulatory processes. The priority moving forward is to strengthen incentives and mechanisms that better connect long-term infrastructure planning with regulatory determinations, ensuring smoother price paths and improved resilience. Corinne Cheeseman from the Australian Water Association underscored the importance of transparent customer engagement, emphasising that clear communication and stakeholder buy-in are vital to navigating the inevitable trade-offs between affordability and service reliability.

However, the conversation revealed tensions around political realities. It was acknowledged that election cycles and shifting political priorities often disrupt continuity.

Richard Cawley noted that price shock of stepped price increases is more damaging to customers than gradual price rises, as customers can adjust to incremental increases but struggle with sudden spikes. The panel agreed that smoothing price paths through extended line of sight to long term expenditure requirements is essential.

"Price shock is worse than overall price rise. Customers can adapt to gradual increase – but don't like sudden spikes."

– Richard Cawley, Manager, Economic Advisory, Ricardo

Modernising regulation for a new era

Regulatory frameworks, long viewed as rigid and risk-averse, emerged as a key battleground.

Rebecca Billings of the Essential Services Commission argued that the current system is fundamentally robust with its overarching objective of being in the long-term interests of consumers aligning to the concerns raised about long-term resilience. However, she noted the need recalibration toward “lowest sustainable pricing” rather than what may be perceived as “lowest possible pricing.” This subtle shift would better accommodate necessary investments in resilience without compromising service quality and affordability.

"The system must evolve to focus on ensuring 'lowest sustainable price’ — balancing affordability with long-term resilience."

– Rebecca Billings, Commissioner, Essential Services Commission, Victoria and South Australia

Contrasting views surfaced around the extent of reform needed. Some panelists, like Richard Cawley, advocated for more flexible approaches, including reconsidering the methodology for the Weighted Average Cost of Capital (WACC) to reduce volatility in returns and exploring mechanisms such as “future funds” to buffer against sudden price spikes. Others urged caution, warning that excessive deregulation could jeopardize public trust and health standards.

The debate extended to risk allocation. Regulators emphasized that utilities must retain ownership of delivery risks to avoid moral hazard, while government representatives acknowledged that utilities alone cannot shoulder the financial burden of climate-driven projects without support.

Zahra Anver from NSW’s Department of Climate Change, Energy, the Environment and Water highlighted programs like NSW’s $1.8 billion Safe and Secure Water Program that aim to provide targeted subsidies, particularly for struggling regional utilities.

Rethinking funding for regional Australia

The plight of regional water utilities was a recurring theme. Panelists painted a stark picture of small, often council-owned utilities grappling with aging infrastructure and sparse populations, where recovering costs through user fees alone is impossible. NSW’s reported $31 billion infrastructure replacement gap against an annual revenue of just $1.7 billion starkly illustrated the scale of the challenge.

"In regional NSW, the remoteness and low population density make cost recovery incredibly challenging. The regulatory framework must adapt to support these communities."

– Zahra Anver, Director, Urban Water Strategy, Policy and Programs, NSW DCCEEW

Consensus formed around the need for blended funding models combining user charges, government grants, and potentially community service obligations to ensure affordability and sustainability in these regions. Yet, this raised politically sensitive questions about fairness and cross-subsidisation between urban and rural areas.

The notion of consolidating small utilities was discussed but met with caution. While consolidation could deliver efficiency gains, political resistance and local identity concerns often complicate such moves. Niall Blair from Sydney Water stressed the delicate balance required: ensuring cost recovery without alienating communities or exacerbating inequities.

Collaboration, not silos

Perhaps the clearest consensus was that solving Australia’s water funding crisis requires breaking down silos between utilities, regulators, governments, and communities. The panel stressed the importance of joint stewardship, where transparent customer engagement, integration of First Nations knowledge, and adoption of digital asset management tools become standard practice.

This collaborative approach is not without its difficulties. Differences in priorities and perspectives between stakeholders emerged as a barrier, alongside challenges in harmonising urban and regional strategies. Yet the panelists agreed that only through shared responsibility and coordinated planning can Australia’s water services meet the demands of climate resilience, population growth, and affordability.

"We’re such a collaborative industry... we need to work more closely with regulators, governments, and communities to navigate uncertainty."

– Corinne Cheeseman, Chief Executive, Australian Water Association

A call to action

The current regulatory system is not broken – but it needs recalibration. Australia’s water sector doesn’t need wholesale reinvention; it needs modernisation rooted in realism, resilience, and equity.

Ultimately, the panel agreed that the existing model remains fundamentally sound. The focus should be on working more effectively within it – this includes strengthening long-term planning, embracing regulatory flexibility, ensuring equitable funding, and fostering collaborative stewardship.

"We don't need to throw out the model — but we must adapt it."

– Hon. Niall Blair, Former NSW Water Minister, Chair of Sydney Water

To avoid a future of crisis-driven price hikes and failing infrastructure, we must:

• Plan beyond political cycles—align funding with 30-year needs.
• Reconsider regulatory approaches—balance affordability with sustainability.
• Prioritise equity—ensure no community is left behind.
• Collaborate boldly—across governments, utilities, and sectors.

The future of water funding is not just about dollars—it’s about decisions. And those decisions will shape whether water remains an enabler of growth and wellbeing or becomes a constraint.