In this blog, two Castalia staff comment on the evidence base for the New Zealand “Three Waters” reforms. Andreas Heuser, who has lived mostly in New Zealand, and Lewis Whitelaw who has lived mostly in Scotland, describe how the government’s advice and analysis has included inappropriate comparisons between New Zealand and Scotland and why this is important in the context of New Zealand water sector reform. Although New Zealand and Scotland share unspoiled natural landscapes and picturesque lakes (or lochs for Scottish readers) their urban geography and urban water networks are quite different.

The New Zealand government is proposing a major reform of drinking, waste, and storm water services (Three Waters). The Government appointed the Water Industry Commission for Scotland (WICS) to provide analysis that has underpinned the reform proposals. WICS isthe economic regulator of Scottish Water, the publicly-owned monopoly water service provider in Scotland. WICS has drawn key conclusions for the New Zealand reform proposal from Scotland’s geography and water service experience. Conclusions like: “Scotland and New Zealand share many common geographical features – it seems likely, therefore, that the level of expenditure (before consideration of the potential for efficiency in asset management and capital expenditure delivery) required to achieve particular outcomes should be broadly similar …”. The government relies on WICS modelling for two claims:

  • That significant capital investment is needed in the New Zealand water sector,
  • The amalgamation of the water services of the 67 local authorities into four separate entities is the only way to achieve the cost-efficiencies to make the reform affordable.

The image below shows the Government’s proposed four entities and predicted household bills based on WICS’ modelling.

Figure 1: Government’s proposed four entities and predicted household bills based on WICS’ modelling

Castalia has advised local authorities on the reform proposal

Castalia has advised several local authorities located in all of the four entity zones on whether the reform scenario will deliver the claimed benefits. We provided each with a robust understanding of the underlying assumptions that underpin the claimed benefits and uncovered key risks associated with the reform proposal. This included a detailed analysis of the geographic comparisons between Scotland and New Zealand made in the WICS modelling.

WICS justifies using Scotland as a model on the grounds that New Zealand has a low level of population density. WICS also assumes that the amalgamated New Zealand entities will achieve a 50 per cent capex efficiency improvement based on the single observation of claimed capex efficiencies in Scotland between 2002-2021. WICS suggest amalgamation will drive economies of scale efficiencies by “asset optimisation” (that is, the ability to consolidate water networks between towns).

Is New Zealand really like Scotland?

New Zealand and Scotland have comparable populations, 4.8 million and 5.3 million respectively. But the similarities start to end there.

New Zealand has a land area slightly larger than the whole of the United Kingdom, and therefore a much smaller population density. New Zealand is also highly urbanized. The population mostly lives in urban towns with significant distances between them. Of the total New Zealand population, 87 percent live in urban environments. New Zealand’s urban population increased by 8 percent between 1996 and 2018.

In Scotland, 83 percent of the population lives in urban environments. The urban population of Scotland is declining, according to the Scottish census agency.

The image below shows the population densities and significant distances between towns in the proposed Entity C. The residents live across a wide geographic area, in a mixture of mostly urban settings. More than 500km by air separates Tairāwhiti and the East Cape from Takaka and Golden Bay (including the Cook Strait).

Figure 2: 3D population density map: Reform proposal Entity C

The towns and cities in Entity D are also separated by large distances, as the next image shows.

Figure 3: 3D population density map: Reform proposal Entity D

In comparison, most of the Scottish population live in towns and cities that are relatively close to one another. Around 80 percent of the Scottish population live in the central belt area that includes three of the four major Scottish cities Glasgow, Edinburgh, and Dundee as shown in the image below.

Figure 4: 3D population density map: Scotland central belt

The differences between Scotland and New Zealand lead to implausible findings in the water reform modelling

WICS claims similarities between parts of New Zealand and Scotland based on levels of urbanisation. However in the modelling, population density is used. As these images demonstrate, the population density is very different.

In water services, geography is important for the cost and quality of service. Denser urban areas tend to have lower average costs of service. Water services with more dispersed customers must distribute drinking water, and pump wastewater over longer distances with more pipes, dispersed treatment infrastructure, and higher costs.

If New Zealand is to achieve the cost savings that WICS says have occurred in Scotland, then these key differences in the geography must be acknowledged. The distances between New Zealand towns mean that any benefit of physical joining of networks will not be justified due to the cost of transporting water (pipes and pumps). Water is valuable, but unlike oil and electricity, its value-to-weight ratio is low. To get economies of scale in water networks, network mergers only make sense where communities are close enough so that the transport costs of moving water, chemicals, and water engineering and technical staff from one place to the other are low.

Unfortunately, WICS’ modelling assumes that cost savings are largely driven by the number of people served by a single entity, ignoring the question of how far the residents are from each other. This is inconsistent with the economic literature or the reality of running a water utility. The WICS efficiency claims cannot be reconciled with the urban geography of New Zealand. In some cases where water networks are close together and the administration is merged, efficiency gains are possible. However, such instances have already been mostly exploited in New Zealand, like in Wellington and Lower Hutt which have shared a water network for over 100 years, and have been under shared management since 2014 or Nelson City and Tasman District which share a wastewater treatment plant. The administrative amalgamations of disconnected and distant water networks in the New Zealand reform proposal are unlikely to produce the significant efficiency gains claimed in WICS’ modelling.

About the authors

Andreas Heuser is a Director at Castalia and New Zealander. He has led the Castalia analysis on New Zealand’s water sector reform.  Andreas has stressed the importance of geographical considerations on the claimed benefits of the reform proposal.

Lewis Whitelaw  is an Analyst at Castalia, Scotsman, and a New Zealand resident. He has contributed to Castalia’s water sector advice since his arrival from Scotland. Having lived in both Scotland and New Zealand, he was surprised to see the geographical comparisons made by WICS.

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Given significant decreases in costs and the ability to provide flexible power, Concentrated Solar Power (CSP) is expected to play a key role as a local and renewable source of power to cope with increasing amounts of variable renewable energy (vRE) in power systems.

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Click to download the Flexibility of CSP-White Paper.

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Shannon Riley and Lisa Nations delivered a webinar on the topics of financing facilities and non-revenue water (NRW) performance-based contracts (PBCs). These could be two viable options to help utilities secure the resources they need to continue operations in response to the massive decrease in collections they are experiencing due to COVID-19. This webinar was hosted by RockBlue, an organization that partners with water and sanitation utilities in the developing world, empowering them to grow and optimize their operations.

You can watch the webinar and the Q&A session here. Below the two videos, you will also find a list of the questions and the time in the video at which they occur is listed.

1.1          Presentation

1.2          Q&A Session

  • Question 1: “In Kenya, the problem with facilities is that the investment rules (ticket size, creditworthiness of borrowing entities, etc.) are misaligned with realities of the local market. Do the facilities proposed here address that in any way?” Answer: 1:01.
  • Question 2: “Are there currently liquidity facilities operating in response to COVID-19?” Answer: 3:10.
  • Question 3: “What about the option of bundling electricity and water liquidity facilities together? Target customers are likely to be the same and they are all critical services with similar tariff structures. Are there examples out there?” Answer: 4:23.
  • Question 4: “One of the issues for NRW contracts is an accurate baseline. Many utilities/municipalities have a water balance that is not wholly accurate and it’s hard to get a handle on those estimates. How do you ensure in setting up an NRW-PBC that you can achieve an objective baseline that is transparent, that provides the incentives for both parties?” Answer: 6:28.
  • Question 5: “One of the things we’re addressing is trying to respond to a pandemic which hopefully will come to an end and we’re facing cash constraints today. Are these mechanisms realistic answers to immediate cash concerns? Is it more appropriate looking at a 2-3 year, mid-term approach? Or are we talking about a long-term resilience mechanism for whatever the next crisis might be?” Answer: 9:43.
  • Question 6: “Are utilities receptive to innovative financing? Do they have bandwidth to address this? Is there an uptake/willingness to spend time/energy/resources in structuring innovative contracts to address their short-term or medium-term financial constraints?” Answer: 13:18.
  • Question 7: “Are NRW-PBCs appropriate/can they be used in utilities that are under-performing?” Answer: 18:07.
  • Question 8: “A concern with liquidity facility model: you have assumed a v-shape recovery. Many utilities are taking severe long-term impacts in their performance so you’re going to see a u-shaped recovery. How long is the timetable of disbursements? What would be repayment periods? How would we address something with a longer trailing leg of recovery?” Answer: 22:00.
  • Question 9: “The reforms that you envision in the liquidity model usually require some form of CAPEX investment to drive that performance improvement. Will most utilities that are not recovering costs currently going to be able to achieve substantial improvements on their own that would be necessary to receive additional disbursements? How are the utilities going to repay the financing unless it’s on a grant basis if these reforms don’t achieve recovery levels?” Answer: 24:37
  • Question 10: “Your illustrative model demonstrates a potential 6-year payback period. There’s a concern where the lending markets aren’t willing to take on long-term risk. There’s a risk that even a 6-year payback period is out of line with the financial investors that are currently out there. Do you believe those are possible? In testing your model, have you looked at countries in that circumstance?” Answer: 28:39.

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WASHINGTON, DC
+1 (202) 466-6790
1747 Pennsylvania Avenue NW, Suite 1200
United States of America

SYDNEY
+61 (2) 9231 6862
Suite 19.01, Level 19, 227 Elizabeth Street
Australia

AUCKLAND
+64 (4) 913 2800
74D France Street, Newton South
New Zealand

WELLINGTON
+64 (4) 913 2800
Level 2, 88 The Terrace
New Zealand

PARIS
+33 (1) 73 44 26 97
6 Rue Duret
France

BOGOTÁ
+57 (1) 508 5794
Calle 81 #11-08, Piso 5, Oficina 5-127
Colombia

Thinking for a better world.

Castalia-logo-negative-2col
PROJECTS        NEWS        BLOG        CONTACT
© Copyright 2019 Castalia. All rights reserved.
Terms | Privacy | Credits | Sitemap