Eric has pointed out the problems with the current way we allocate capital and why we need a "circuit breaker" in the allocation of capital.

Eric points out the monopoly profits from water (and the petrol tax, and other resource taxes, gambling taxes, cigarette taxes) are used as sources of revenue by governments of all persuasions and they are very addictive. A radical change to put control over capital directly in the hands of the population rather than leave it up to our bureaucrats to decide is going to be difficult to achieve and it will only come from politicians. Howevever there is some hope because there are some excellent ideological reasons for the politicians to go with it.

The economic rationalists should like it because it brings the "market" to natural monopolies albeit in an unconvential way of a market for capital rather than for goods. Those of all persuasions who want people to "save for our retirements" could see it as a way of bringing capital to consumers who behave in socially acceptable ways. Those who like the idea of an equitable society can see it as a way of distributing capital from those who want to consume to those who want to save.

The marketing sell for politicians is to work on the idea of distributing capital to those who behave in a socially responsible ways.

I will respond and agree with Sylvia but show why the scheme solves the issue she raises. Unfortunately I have used up my comments vouchers for today:)

Sylvia makes the excellent point that alternative infrastructure investment is inherently risky because the monopoly supplier can always undercut your prices. This is mainly because they have paid nothing or a very low price their capital.

The proposal eliminates this hidden advantage by making ALL groups who wish to provide infrastructure get access to capital on the same terms as the existing monopoly supplier. The rewards MUST be used for infrastructure. A person with a reward can sell it or – more likely - they can use it to get equity in the business.

This means the ownership of the infrastructure is distributed throughout the community and we get the population deciding the best way to invest money. The amount of capital available is NOT the difference in price between buying and selling but is the total amount of the reward.

The issue is the ownership of new assets purchased with monopoly profits.

People will put their rewards with the infrastructure supplier who gives them the best return. What this means is that if someone comes up with a better mousetrap they will get access to funds on the same basis as everyone else including the monopoly supplier. At the moment monopoly suppliers effectively stop all competition for alternative ways of doing things until they decide that it is in their interests to do so.

By using rewards we put the decision of what infrastructure to build in the hands of millions of participants which will result in the more efficient allocation of capital for infrastructure.

The other political issue is who gets rewards and by rewarding people who conserve and save we get a double benefit from the rewards. At the moment we reward the incumbent supplier and we reward them by encouraging the consumption of the resource be it petrol or water.

Try as I might, I still cannot see how this will work.

The original article said that the vouchers were transferable, and can be sold. In that scenario, as I've indicated, I cannot see how any benefit would accrue.

Let's assume instead that they cannot be transferred or sold, but that the only thing that can be done with them is to provide capital to some sort of water project.

There is no technology around that's capable of competing on price with the exiting monopoly provider when that provider has any water to sell. The only way the consumer is likely to get any return on their voucher is to give it to the monopoly provider in return for a right to a proportion of the future profits. It can't even be in return for equity in the provider, because that equity could be sold, thus converting the voucher into cash.

There is a more fundamental problem. There are two parts to Sydney's water infrastructure. There's Sydney Water, which distributes water to consumers, and there's the Sydney Catchment Authority. Sydney Water buys its water from the Sydney Catchment Authority.

Most of the cost of water to the consumer is the cost of delivering it through Sydney Water's pipes. Only about 20c per kilolitre is paid for the water itself.

Sydney Water is a natural monopoly, but The Sydney Catchment Authority isn't. The real problem is not the monopoly behaviour of Sydney Water, but simply that normal market functioning does not guarantee a continuing supply of any commodity whose major source fluctuates unpredictably.

To get such a guarantee, one has to look outside the market, and impose solutions that do not make finanicial sense in normal market terms.

Sylvia.

Whether it is dams or pipes the capital currently comes from money existing consumers pay and the existing suppliers of water get that money free.

If a council wants to put in a local area grey water recycling plant for watering ovals then they have to come up with the capital for the infrastructure. For such a scheme to get off the ground requires the existing monopoly suppliers to do it because they are the only ones who get free capital.

All we are doing is giving an opportunity for other bodies to compete for the money that is available. It brings competition to the use of capital. The existing monopoly suppliers could do different things but the evidence is that they don't and they go for the "big fix".

The fact that rewards can be transferrable is just an artefact to help make it all work. It does not change the idea.

The fact that people get rewards for saving water is just a way of deciding who gets the capital in a socially acceptable and equitable way.

Using the current approach Sydney will build more dams, or pump water from elsewhere or build a desalination plant and all are expensive. It IS more economic to build recycling systems or to use storm water. We just need to release the capital to make it happen.