Five big problems with Three Waters

OPINION: The need for reform in the New Zealand water sector is beyond debate.

Regulation must improve, management capability needs to be lifted in many localities, and investment levels need to match consumer demands and minimum service standards.

Yet successful reform can be achieved without at least one controversial aspect of the government’s proposal – merging 67 water services currently owned by councils into four large pan-regional water utilities.

The Water Service Entities Bill is currently progressing through Parliament, with the Select Committee receiving a mammoth 88,000 submissions.

It will be hearing oral submissions from some of them, including Communities 4 Local Democracy, a group of 31 councils, over the next weeks.

The water sector is critical to health and wellbeing, so it is important New Zealanders’ views are heard and understood.

The debate should be based on credible evidence and open inquiry. Unfortunately, the selected reform model is highly flawed.

It adopts a globally unique governance structure, it will increase fiscal risk, and similar inefficient mega-amalgamations in other countries have failed.

The flaws with the mega-merger model come down to five factors. First, while most people agree that billions of dollars of investment are needed, the government’s modellers used Scottish investment levels and implausible assumptions to present a false choice between the megamergers and an unrealistic alternative with an overstated $185 billion of investment.

Second, the claimed merger cost savings do not withstand scrutiny, especially in light of the zero job losses promise, and few (if any) physical networks joining up.

Third, the bill says councils are nominally owners, but they have no conventional ownership rights, and are prohibited from providing equity capital.

The Byzantine governance structure and reporting mechanisms reduce accountability to the public – a valid criticism the Auditor-General has also made.

Fourth, the mega-entities’ debts will ultimately become Crown liabilities. This is concerning since the entities will be some of New Zealand’s largest corporations with significant planned borrowing.

With the four entities controlling such large balance sheets (with corresponding risks), it is highly likely that a future government would want to impose more central government control. Indeed, this happened in England and Wales after the 1972 merger of hundreds of local water services into ten regional water boards.

Fifth, government officials failed to consider alternative lower-risk reforms options, or properly take into account the impact of better regulation of the water sector.

For these reasons, Castalia has developed a constructive alternative reform model for Communities 4 Local Democracy. The alternative model requires both central government and local government to step up.

Central government would set regulatory benchmarks on water quality, economic performance and environmental outcomes. Councils would then act to comply with those regulatory benchmarks within a strict five-year timeframe.

During that period, we would expect locally and regionally-appropriate models to be developed in response to incentives.

A similar process was used when regional power boards were transferred to electricity lines companies in the early 1990s. The process could be supported by a commissioner, for example the Infrastructure Commission, to resolve any disputes and help facilitate agreement. This facilitation role has worked very well in recent municipal mergers in Portugal, for example.

A target end-state will emerge a!er the five years. Smaller councils will likely merge their water services into a proportionately-owned regional public water company.

Localities that can reach compliance may opt to stay standalone. Councils will be held to account to ensure water quality, financial performance and environmental outcomes are met.

The result is reform where local and regional differences are accommodated.

Community accountability is retained, management and governance incentives are enhanced, access to finance is improved, scale and scope efficiencies are exploited and the model is flexible for future developments such as climate or demographic change.

Castalia’s alternative model can finance the same planned $97 billion of capital expenditure as under the government’s mega-model for the next two decades without changing current water charges or councils’ borrowing conditions.

With modest changes to borrowing conditions, the alternative model would be just as financeable as the government’s proposal.

The model also ensures the untagged $2.5 billion offered to councils under the government’s reforms would be applied to water infrastructure only.

One positive outcome from the water reforms is a greater awareness of the role of this critical service.

With this greater awareness has come a realisation for many that the Water Services Entities Bill creates significant risks. We hope the Select Committee, or a future government, takes on board our constructive proposal for a better reform model.

 

*This is an unabridged version of an opinion editorial written by Andreas Heuser that appeared in the New Zealand Herald on 2 September 2022.