THE EDGE | June 25, 2018
When Tan Tiong Peng started a laundromat in Singapore eight years ago, customers complained that his imported washing machines spat out too little water as they put their clothes to wash. It took Tan almost a year to convince customers that his Europe-imported models used a lot less water for the same load of laundry than conventional washing machines, as water tariffs were much higher in European countries. “With our washing machines, water now makes up only 5% of our cost, even if water tariffs go up by 30%, it is not a lot for us,” says Tan, who owns the Wonder Wash and SQ Laundromat brands as well as other franchises with a total of 88 shops across the island.
It was the right decision for Tan to get those European washing machines, with Singapore raising its water prices by roughly 30% after 17 years. The first hike came last July and the next will take effect next month. For non-domestic users, water prices went up from $2.15 per cu m to $2.39 per cu m last July, and will go up to $2.74 per cu m from July 1 this year.
For Singapore, water has always been an existential problem. Malaysia supplies 50% of Singapore’s water demand, under the terms of the 1962 Water Agreement. That lapses in 2061, but Singapore already has a jump-start on water self-sufficiency. By 2060, 85% of its water needs will be met by desalination and NEWater plants, which currently can supply up to 65% of Singapore’s water demand. The city state has five NEWater plants, three desalination plants and two more desalination plants on the way. It is also building a $6.5 billion underground sewage tunnel system.
So, as Singapore ramps up its water production capacity, it will need a lot more investment than it did in the past. Already, the Public Utilities Board says it needs to invest $4 billion between 2017 and 2021. It invested $7 billion in water infrastructure between 2000 and 2015. According to PUB’s latest annual report, operating expenditures have gone up 65% from FY2007 to FY2016, to $1.27 billion, partly owing to maintenance and depreciation costs. Meanwhile, operating income has only increased 35% to $1.2 billion, mainly from water sales and used water services. The water agency has been recording losses, before [receiving] government grants, since FY2010.
“The PUB has been managing its costs over the years by improving technology and productivity. However, much of the incremental improvements have already been reaped. What remains are longer-term technological breakthroughs that may take years to be proven operationally and become deployable. Hence, the need to revise the price of water to reflect the latest costs of our water supply,” says PUB in a statement.
HIGHER COSTS OF WATER PRODUCTION
While raising water prices is necessary, experts say managing the demand for water across industries is equally crucial. By 2060, the demand for water in Singapore is expected to almost double, with 70% coming from industries.
The cost of producing water is also on the rise around the world, especially for land-locked areas. The Organisation for Economic Co-operation and Development estimates that global investments in water infrastructure may rise to US$6.7 trillion ($9.1 trillion) by 2030, and US$22.6 trillion by 2050. Global capital investment in the water sector was estimated to be worth US$246 billion in 2015, according to Global Water Intelligence. In Japan, the government forecasts that water facilities would cost them at least US$580 billion by 2050, potentially exceeding its available funds by 2025.
“Water is becoming more scarce, as a result of overuse and water pollution, resulting in higher treatment costs,” says Roy Brouwer, executive director of the Water Institute at the University of Waterloo in Ontario, Canada.
“[Water infrastructure] fixed costs can be high. The costs of water supply usually decrease marginally as the supply capacity is being used more efficiently over time, but these costs may rise sharply again once the supply capacity has been reached,” he explains.
Conventional treatment plants typically require annual maintenance costing roughly equivalent to 10% of the cost to build them, according to Raul Lejano, associate professor at New York University in the US. But maintenance costs for desalination plants are a lot higher, owing to their energy requirements. That means the production cost of desalinated water could be as much as three times more than the cost of importing water from Malaysia, according a 2003 study by the Institute of Southeast Asian Studies. “Cost-effective ways of sustainably managing water resources are high on the agenda, both in academic research and in policy and decision-making,” Brouwer adds.
Still, experts who spoke to The Edge Singapore do not expect any further price hike beyond the two announced anytime soon. There are some countries that are faced with ageing utilities or population booms, and therefore require significant increases in water infrastructure investments. But this is not the case for Singapore, says Cecilia Tortajada, senior research fellow at the Institute of Water Policy, part of the Lee Kuan Yew School of Public Policy.
“Singapore is one of the rare cities that upgrades its infrastructure all the time. They have been planning for self-sufficiency for the last 20 to 30 years. Whatever investment it has [had] to do has been divided [over that period of time], so it does not need to make investments on an urgent basis,” she says. Tortajada adds that she feels the recent price hikes will be used to support major water projects such as the deep sea tunnel systems.
“But because the climate is changing around the world, every city is trying to become more climate-resilient [and] there will be a need for long-term planning,” she adds. “At the current stage, the water price is not likely to go up. But for the longer term, it would depend on demand and the impact of climate factors and on the responses to ensure continuous supply of clean water.”
WATER SMALL PART OF BUSINESS COSTS
Economists who spoke to The Edge Singapore say the price hikes have not actually “moved the needle” for most businesses here because Singapore does not have many industries that require the heavy use of water. Singapore’s Consumer Price Index — the main measure for inflation — went up 0.1% m-o-m in April. This was below economists’ forecast of a 0.4% increase. From January to April this year, CPI edged up 0.2% y-o-y, with fuel, utilities, healthcare and education bills rising the most.
“As the 2017 and 2018 [water] price increases only barely caught up with inflation over the last 17 to 18 years, the effects should not be large,” says Ng Yew Kwang, a professor of economics at Nanyang Technological University. “Where the usage amounts are large, the market will adjust accordingly, partially saving some water usage, and partially reflecting the higher costs in prices of products. Overall, no serious effects will be likely.”
At the current rate, local economists believe water is still underpriced. Ng says that a 30% increase over a 17-year period is still below the broader rate of inflation.
“[More than 90% of water] is used for less essential purposes including cleaning and gardening, and non-domestic usages,” Ng says. “At least from the viewpoint of economic efficiency, a good should be priced at the cost of the highest cost source, to encourage efficient saving. If the government makes money from this policy, it could then levy lower taxes in other areas.”
Water tariffs in Singapore are calculated based on usage and the type of water used. For instance, households that use more than 40 cu m of water will be charged a higher rate of $3.69 per cu m. For businesses, the use of NEWater and industrial water are 15% and 42% cheaper than potable water.
But there are of course drawbacks for businesses that are already facing margin pressures. “There are limits to how much water can be saved and replaced by other types of inputs in the production processes of [businesses such as food, agriculture and textiles]. In addition, competitive advantages may be lost if the price of water differs from one industry to another. A global level playing field is needed to ensure water pricing does not disadvantage specific sectors,” Brouwer says.
For Tan, the cost of water can still be managed. His shop rentals, on the other hand, which account for nearly 50% of his business costs, are rather more out of his control. “Our washing machines are programmable, so we can tweak the water usage accordingly,” he says. “But we may raise our prices, not because of water, but because of factors like rental.”
This article was first published by THE EDGE, June 25, 2018.