PROJECTS

Advice on Water Sector Reform, New Zealand

The problem

The New Zealand government is proposing a major reform of the water sector which would merge the water services owned and operated by 67 local authorities into four mega-entities. The local government sector required a trusted independent economic and strategic advisor to provide constructive analysis of the government’s water reform proposals and provide complementary analysis where gaps existed in the government’s advice.

How we helped

Castalia was separately hired by Local Government New Zealand (LGNZ, the body representing all local authorities), several individual local authorities in each of the mega-entity zones, including Whangārei District Council (WDC) and Timaru District Council (TDC), and a group of 24 local authorities (Communities for Local Democracy, C4LD). We provided a range complementary advice and analysis:

For LGNZ: Castalia defined the international best practice evaluation parameters for choosing institutional water delivery forms. We studied the extent of economies of scale in water services available in New Zealand, and assessed whether the government’s evidence base and the economic analysis supported the Government’s case for reform. We carried out comparative institutional analysis (including international and local case studies) of the four major water service delivery models, which improved the government’s evidence base.
For WDC and TDC and other councils: Castalia examined the government’s consultants’ modelling of costs and potential cost savings from the administrative mergers. We found that the cost savings were implausible and based on faulty assumptions. We also provided a rebuttal to the government’s response to Castalia’s report to WDC.
For C4LD: Castalia highlighted flaws and risks in the government’s proposed water sector reform. We identified misestimated investment needs, flaws in estimates of household water bills, financing risks and governance weaknesses. We then developed a superior alternative reform proposal based on sound regulation, and a time-limited period for councils to meet regulatory standards through several structural reform options. We also provided expert insight on economic regulation in the water sector for submission to MBIE.

Impact

Castalia’s advice has highlighted serious flaws in the mega-merger proposal. The local government sector has used Castalia’s advice to highlight deficiencies. The government appointed a working group to address some of the governance and representation concerns voiced by local authorities. Our evaluation framework has shaped option selection, and shifted the public debate. Our economies of scale analysis exposed the faulty assumption that amalgamation is a necessary ingredient in achieving financing and scale benefits. Finally, our analysis has highlighted numerous lessons missed from overseas.

The clients

Local Government New Zealand

Whangārei District Council

Timaru District Council

Communities for Local Democracy, C4LD

Our team

Andreas Heuser

Managing Director

David Ehrhardt

Chief Executive

Find out more

Report to C4LD on flaws with the government’s model is here

Report to C4LD on a superior reform model is here

C4LD also published our reports here

Our January 2022 report on Alternative Options to Water Reform is here

Our December 2021 submission to the Ministry of Business Innovation and Employment, on Economic Regulation of Water Services is here

Our August/September 2021 reports to local authorities:

Whangārei District Council here and Timaru District Council here. These are representative of similar reports to several other local authorities located in all of the proposed mega-entity zones.

We prepared responses to the Department of Internal Affairs comments on Castalia’s analysis for Whangārei District Council here and here

The three reports to Local Government New Zealand from 2020 are:

Parameters to evaluate water services – July 2020

Economies of scale in New Zealand water services – October 2020

Comparative analysis of institutional forms for water services – October 2020