SA WATER CAPITAL WORKS

Mr WILLIAMS (MacKillop) (15:16): My question is to the Treasurer.

Members interjecting:

The SPEAKER: Order!

Mr Koutsantonis interjecting:

Mr WILLIAMS: You ought to read his budget, Tom. You might learn something. Treasurer, why has the government stripped $1.6 billion out of SA Water since it came to office in 2002, and has this put at risk SA Water's capital works programs? The Auditor-General in his report tabled in the house yesterday includes the following observation, an observation also noted in previous reports:

For the corporation [SA Water] to maintain or increase the level of capital expenditure it will have to increase its level of borrowings. The corporation's ability to generate cash from its operations is not sufficient to fund its payment commitments to the government and maintain its current level of capital works.

The Hon. K.A. MAYWALD (Chaffey—Minister for the River Murray, Minister for Water Security, Minister for Regional Development, Minister for Small Business, Minister Assisting the Minister for Industry and Trade) (15:17): In response to that question, the Auditor-General's Report for 2007 does comment, on page 1270, regarding the sufficiency of the corporation's net cash inflows in covering both the corporation's investing activities and dividend payments to government. SA Water operates in line with a financial ownership framework, that has been approved by cabinet in March 2005. The framework was developed by the Department of Treasury and Finance and benchmarked against other similar water utilities. The framework's dividend policy requires SA Water to distribute to government 95 per cent of profit after tax. The dividend distribution is only made after deducting from revenues the operating expenditure necessary to maintain assets and manage the business. This includes funds to service any borrowings and to meet taxation obligations. Based on the forward estimates agreed with government, this approach enables SA Water to finance around 80 per cent of its capital investment program and limit borrowings to around 20 per cent of the capital program.

Mr Williams interjecting:

The Hon. K.A. MAYWALD: Yes, limit borrowings to around 20 per cent of the capital program. The government has set a borrowing target for the corporation with a debt to asset, or gearing, ratio from 15 to 25 per cent, which is extremely modest. Overall the corporation's actual results and the forward budget estimates for 2007-08 to 2010-11 show that the current debt to asset ratio of around 18 to 19 per cent will be maintained. This is acknowledged by the Auditor-General. However, the Auditor-General does not distinguish between investing to maintain the corporation's current asset base, which is logically covered by the revenue generated by current assets each year, and the need for SA Water to invest in new assets to cater for growth. New assets need to be funded upfront by the corporation, with revenues to recoup the cost of these assets only coming on stream once they are in place. SA Water's borrowings are a vital element of underwriting economic growth, but there will always be a lag between the initial investment by SA Water and the resulting revenue stream. In addition, the capacity of SA Water to service the current level of debt is demonstrated by the interest to cover ratio, which is how many times profit covers interest. This ratio remains very sound.