Water prices going up, should we panic yet?

TL;DR – Water does fall from the sky, but it’s getting more expensive.

Minister for the Environment and Water Resources Masagos Zulkifli announced that water prices will increase in Singapore this year. He didn’t specify how much the increase will be. But he did say that more details would be revealed during Budget 2017. By the way, Budget Statement will be out on 20th Feb.

Increased financial burden on the low income?

The announcement came at a time when the economy is facing much headwinds, and when people are worried about jobs. How much more pressure will this put on people’s livelihoods? For those with lower income, this could lead to a significant increase in their household expenditure. Would belts, already drawn very tightly, need to be tightened even more?

Against this backdrop, there are people who are questioning whether this price increase is necessary. Minister Masagos explained that the increase in water price is needed to ensure that we continue to have a sustainable water supply.

How will the increase in water price help us to ensure that our water supply is sustainable? Maybe people with lower income may consume less water if there’re higher prices, but those who are rich probably won’t.

So does this mean that our sustainable water supply would only be ensured by making those with lower income suffer? That is a valid concern.

But are there alternatives to increasing the water price? Let’s examine the current situation.

But price increase is needed

Singapore gets a significant proportion, about 50 to 60 percent of our water from Johor’s Linggiu Reservoir. Water levels at the reservoir have dropped from 84 per cent at the start of 2015, to 49 per cent at the start of 2016, and the lowest recorded level of 20 per cent in October last year.

What’s worse, there is a “significant risk” that the water supply from Johor’s Linggiu Reservoir may run out in 2017 if it turns out to be a dry year.

If that happens, where is Singapore going to get our water?

Even though water does fall from the sky, Singapore just doesn’t have enough space to catch all the water we need.

Some people say, “But we are surrounded by water!” Unfortunately, that’s sea water. Even though technological advancements have made desalination more affordable, the process is still not as cheap as just treating rain water.

But to ensure that we do have enough water, we have no choice but to rely increasingly on desalination, despite the high cost.

That’s why we are considering building a fifth desalination plant. That, and the need to dig deeper to lay pipes due to increasing urbanisation, as well as the need to renew old plants and transmission pipes, are reasons why the cost of ensuring a sustainable water supply is increasing.

The increase in water price is to match this increase in cost. If we don’t do that, the consequences could be dire. In case you’re wondering, the last revision in water prices was back in 2000, some 17 years ago.

As Minister Masagos said:

“In countries around the world where water is not priced properly, the water ministry is not able to recoup the costs enough to build new assets to replace old assets and sometimes assets are left in disrepair. Even if they do have water, water cannot get to where it’s needed”

This idea of recouping the cost of water production isn’t novel. It’s not as if Singapore came up with the idea. The cost recovery ratio, or what’s essentially the global average of the ratio of revenue to cost is 105%.

Water utilities in Europe reported an average figure of 100%, whereas those countries in Southeast Asia reported an average figure of 140%. England reported a cost recovery ratio of 160% because its water utilities have been privatised.

What would happen if the cost recovery ratio is too low? It was reported that Hong Kong’s water prices could be about ten times less than ours. By some estimates, Hong Kong’s water prices is about 6% of Zurich’s. At such a low price, Hong Kong’s cost recovery ratio is about 30%. It might sound like a great thing for Hong Kong residents. But it’s not.Where did you think the money to fund the money come from? Yup, from taxes. Yup, there are no free lunches in the world.

Hong Kong draws most of its water supply from the Dongjiang river. That same river is also the main supply for Shenzhen, Dongguan and Huizhou. The demand on the river has reached unsustainable levels. As a result, quality is fast deteriorating.

So how?

So yes, we do need to have a water pricing model that brings in enough revenue to maintain the infrastructure needed to sustain a high quality water supply. At the same time, we need to balance that with ensuring that we don’t put an unbearable financial burden on those with lower income.

How will we square this circle? We’ll have to wait till Budget 2017 to find out.