This paper has argued that the implementation of urban markets would substantially improve the performance of the urban water sector. It is true that many of these reforms have not been attempted before. However, reform of this sector is more urgent in Australia than elsewhere because of forthcoming climate variation and demographic change. Australia’s climate is likely to vary, whether this is due to anthropogenic climate change or just natural variations in weather patterns. Australia needs an urban water sector that can rapidly and efficiently adjust to such changes more than most countries. Similarly, demographic changes and industrial structural adjustment mean changes in water demand. The current regime has not proved capable of dealing with this. Opening up water networks to competition will provide incentives for all market participants to adjust efficiently to the myriad changes ahead. The alternative would appear to be lurching from water crisis to water crisis.

The greatest impediment to the implementation of competitive urban water markets is inappropriate or inadequate regulatory reform. If water markets are to be introduced effectively prospective participants must have unencumbered access to either water or infrastructure. There cannot be artificial obstacles (legal or bureaucratic) to entry that increase the cost of access. If this is not the case then incumbents (such as existing water utilities) will be given excessive market power, and this will limit the gains from introducing water markets.[6]

Any reform must also deal with past poor infrastructure decisions. If, for example, the desalination plant in Sydney indeed turned out to be a high-cost bulk water source, its market value would be much lower in a competitive urban market than its capital cost. In this environment, if the NSW government were either to sell it or contract out its operations it would make a considerable paper ‘loss’ on the transaction. There is a danger the government might try to prop it up and such actions might have the effect of interfering with the efficient operation of the urban market.

Similarly, Crase, O'Keefe and Dollery are correct in arguing that in any reform to create an urban water market the government must resolve the issue of interconnectivity of the rural and urban water sectors. Rural water is almost certainly the cheapest available source of new water for urban areas. Many prospective bulk water projects could not compete with the relatively inexpensive water from rural sources. However, the issue here is a failure of government to provide the appropriate regulatory framework to establish interconnectivity between markets, not that urban water markets cannot work.

[6] For instance, the costs and delays that Services Sydney faced in gaining access to Sydney Water’s infrastructure represent a significant barrier to entry. If these costs and delays remain, they will deter many prospective entrants, and thereby decrease the competitiveness of any future market.