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Changes in the pipeline for the water sector

July 26, 2018

Contacts

Partners Padraig McNamara, Matt Conway, Bill Loutit, Sally McKechnie, Jonathan Salter, Sarah Scott
Senior Associates Warren Bangma

Water management Government reform and public policy Local government

Local Government Minister Nanaia Mahuta’s speech to the Local Government New Zealand (LGNZ) Conference in Christchurch last week suggests significant changes may be on the way for the water sector in New Zealand. In this FYI we set out what may be in the pipeline, focussing on the issue of aggregated, dedicated water suppliers.

Background

Both the Government Inquiry into Havelock North Drinking Water (following the outbreak of gastroenteritis in Havelock North in August 2016) and the broad-ranging Three Waters Review commissioned by the previous Government in mid-2017, identified a number of failings with the status quo delivery of drinking water in New Zealand, and broader challenges facing the water sector.

The Labour–New Zealand First coalition government’s response to these challenges, and the Havelock North inquiry in particular, has been slower than many anticipated. This is despite relevant commitments in the coalition agreement, including introducing higher water quality standards for urban and rural areas, and a public inquiry into the drivers of local government costs and its revenue base. 

In that context, Ms Mahuta’s speech to the LGNZ Conference last week, and the release of a Cabinet paper on the Review of Three Waters Infrastructure: Key Findings and Next Steps, represent important milestones in this Government's response to these issues. The Cabinet paper indicates that the Government’s policy agenda will be progressed under four work streams:

  • oversight, regulatory settings and institutional arrangements (to be led by MBIE);
  • funding and financing mechanisms (to be led by DIA);
  • capacity and capability of decision-makers and suppliers (to be led by DIA);  and
  • information for transparency,  accountability and decision making (to be led by MBIE).

The Minister of Local Government intends to report back to Cabinet in October 2018 with a package of measures covering all four work streams, and that will inform the Government’s budgets in 2019 and 2020. 

Dedicated water suppliers

One of the most interesting questions under the oversight, regulatory settings and institutional arrangements work stream will be how hard the Government is prepared to push for consolidation of water suppliers. Consolidation potentially cuts across the Government’s tentative support for LGNZ’s “localism” agenda, and could undermine this Government’s improved relationship with local government. 

Further, to the extent that all four works streams, and the institutional arrangements workstream in particular, address wastewater and stormwater as well as drinking water supply, local authorities may question whether the reform agenda goes further than necessary to respond to the Havelock North inquiry. Ms Mahuta’s speech to the LGNZ Conference highlighted concerns with freshwater quality in urban and rural areas, and gave every indication that the Government intends to address challenges across the “three waters”, not just in the provision of drinking water. 

The Cabinet paper states that “Government should make a decisive and definitive assessment of whether to mandate, or persuade, suppliers to establish aggregated dedicated water suppliers”. Ms Mahuta’s speech to the LGNZ conference expressed support for aggregated, dedicated water suppliers “as a way of lifting capability within water suppliers, and providing a more sustainable funding model.”

The provision of water, wastewater, and stormwater infrastructure is a core service for local authorities under section 11A of the Local Government Act 2002. Safe and efficient delivery of these services underpins community social, economic, environmental, and cultural wellbeing. Local communities also care passionately about the delivery of water and wastewater services, as clearly demonstrated by debates about fluoridation and chlorination of council drinking water supplies, and concern with bathing water quality in urban areas like Auckland. However, the “report card” for the provision of water (and wastewater) services by stand-alone territorial authorities as a whole has not been positive, as both the Havelock North inquiry report and previous government’s Three Waters Review illustrate.

Minister Mahuta’s speech appears to foreshadow that greater use of aggregated water suppliers could be part of the solution to these difficulties. New Zealand has limited experience with aggregated municipal water and wastewater providers. In Auckland, Watercare has been the vertically integrated owner of bulk and retail water and wastewater assets, and provider of water and wastewater (but not stormwater) services to the Auckland region since November 2010. Since September 2014, Wellington Water has managed drinking water, wastewater and stormwater services on behalf of its five local authority owners, the Greater Wellington Regional Council and the Hutt, Porirua, Upper Hutt and Wellington City Councils.  Significantly, water sector consolidation in Auckland required legislation, whereas in Wellington it did not, and was undertaken voluntarily by the local authorities concerned.

Potential benefits

Reflecting on the use of aggregated, dedicated water suppliers in Auckland and Wellington, the potential benefits of this model for other areas in New Zealand include:

  1. Economies of scale (ie reduced costs) from running larger water supply and wastewater operations, and the ability to combine and aggregate asset management, engineering, financial and “back office” expertise and functions;
     
  2. A broader funding base, of most benefit to small communities where the cost of upgrading water supplies to meet drinking water standards, or to safely treat and dispose of wastewater in accordance with relevant resource consent requirements, is potentially prohibitive if funding is sourced from that community alone;
     
  3. Greater resilience in the provision of water supply and wastewater services through a larger, more diversified asset base. For example, in a large urban area, a “diversified” water supply network may involve a range of water sources and treatment plants, meaning low water levels in one water source or the failure (or even scheduled maintenance) of one water treatment plant can be “covered” by other water sources or treatment facilities;
     
  4. Greater consistency and equity in the provision of water and wastewater services, with likely reductions in service level disparities between large and small, urban and rural (serviced) communities.

Watercare and Wellington Water are different examples of what this model could look like. Each is governed by an independent Board of Directors.  Each company is able to recruit talented staff and develop a distinct organisational culture that is separate and distinct from its local authority owner(s). They have both been successful when measured against a range of price, quality and customer service metrics. 

Potential concerns

For most of New Zealand’s territorial authorities, with the exception of Auckland Council and those in the Wellington region, aggregated water suppliers (possibly as few as five nationwide) will be a challenging prospect. A key question is whether the full extent of the benefits experienced by Auckland and Wellington can be shared by regions with large rural areas, low urban populations and rating/funding bases, and widely dispersed townships, each with their own stand-alone water and wastewater networks.

Key concerns for  introducing aggregated, dedicated water suppliers more widely across New Zealand include:

  1. A perceived loss of political control over the provision of water and wastewater services. Two related concerns may be raised. First, governance of three waters infrastructure and services could shift from democratically elected councillors to an unelected board of directors appointed by, or with input from, councils in the districts or regions serviced by the new consolidated entity. Secondly, if aggregation is synonymous with centralisation, decisions about local water supply, wastewater or stormwater services will not necessarily be made in, and by representatives of, the local community affected. However, assuming the aggregated water supplier was a CCO, it would still be accountable to its local authority shareholders through the statement of intent and annual plan.
     
  2. Affordability issues for parts of the community could be raised if consolidation is accompanied by dedicated funding streams for water and wastewater services (including volumetric charges for water and /or wastewater services). There are a variety of responses that could  alleviate this concern, including the potential for cost savings to be passed on to customers if efficiencies can be achieved under aggregation, and the ability to assist low income or other vulnerable consumers through an entity like Auckland’s Water Utility Consumer Assistance Trust.

Regulation

An obvious potential response to affordability concerns is price regulation. The Cabinet paper highlights the need to identify and assess potential mechanisms for better regulation of three waters, such as through an independent industry regulator, environmental regulator, and/or economic regulator. We discuss the potential scope of industry regulation in our next FYI, to be published shortly.

To discuss water industry reform, or for assistance in responding to these policy proposals, please get in touch with one of the contacts at the top of the page.