Don’t go chasing water reforms

By Andreas Heuser

Featured in Capital #80
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Andreas Heuser is a Director with Castalia, an international strategic advisory firm headquartered in Wellington. Castalia has advised Department of Internal Affairs, Local Government New Zealand, and a range of councils on the current water reform proposals.

We all know Wellington water needs some serious TLC. Andreas Heuser looks at the current water reform proposals, and explains why bigger is not always better.

For much of our history, Wellingtonians have not cared much about the pipes, pumps, and sumps that make up the city’s water system. We didn’t think about them until we had trucks carting treated waste around the south coast, and sewage in our main streets. Havelock North (campylobacter poisoning) and Karitane (lead contamination) have had recent distressing failures. We generally agree that we need safe, resilient, reliable, customer-responsive water services, at least cost.

Against this background, the government wants to centralise the 67 council-owned and operated water services into four mega-entities. The greater Wellington region councils’ services will be rolled into the imaginatively titled “Entity C”, together with council water services from Tairāwhiti and East Cape to Takaka and Farewell Spit and everything in between, including the Chatham Islands.

The logic goes that bigger water entities will save money and improve management. The government reasons that Entity C, not councils, should own and directly manage the assets, raise the necessary finance, and charge the water rates. The councils contributing their assets will not own shares. Entity C will be a statutory entity. Oversight and control will be via a 12-person professional board. Six board members will be nominated by the 22 councils indirectly via a two-step process. Six board members will be nominated by mana whenua.

The mega-merger is based on data and assumptions from the UK. The government’s consultants claim that evidence from Scotland, England, and Wales shows that massive investment is needed here ($120–185 billion over 30 years). They also claim that mega-mergers will reap similar outcomes to those in Scotland.

For a number of reasons it is wrong to rely on Scotland and the UK as a model for New Zealand’s water reforms. A major reason is differences in our geography. New Zealand is highly urbanised, but has big distances between towns. Almost all our drinking and wastewater networks are separate from one another. Scotland, by contrast, has 80 percent of its population in the narrow band from Glasgow, Edinburgh and Dundee, and consequently more opportunity to save money from the centralised management of water services.

The government also proposes a new regulatory system. It has already created the new water quality regulator to replace the Ministry of Health. This is positive, because the Ministry pursued only one prosecution in 60 years of responsibility for water quality. Other regulatory reforms lack detail. The government has said it wants to introduce an economic regulator but the detail has not been provided.

Many mayors and other local leaders are unhappy with the proposals. They say the mega-merger, by centralising control, removes accountability to local residents. There are concerns with the speed, and lack of final details like the regulatory framework. Many councils are concerned with the quality of the analysis behind the mega-mergers, and what they consider implausible investment and cost-saving estimates.

Councils that have invested appropriately and managed their water assets question the fairness of being required to surrender these assets and control because other councils have performed poorly. For example, Kāpiti Coast and Upper Hutt are widely regarded to have invested appropriately and adopted sound management practices. The mega-entity proposal will take away assets and put them under a governance and management regime that is not yet fully designed.

Almost all the council leaders in our region have voiced concerns about the proposals.

Key decisions are due to be made within the next month by government: whether to push through its mega-entity model, or cooperate with local government for a mutually-acceptable solution.

We should hope the government chooses cooperation. Cooperation could yield simpler and locally appropriate reform options. It might at least allow time for the regulatory details to be designed in concert with asset owners, to shape a regime that delivers appropriate investment levels for better quality services at least-cost.

For locally appropriate options, we can look to our own Wellington region for lessons in making incremental yet important changes. We have a regional management entity – Wellington Water. It covers a region that has shared water resources and networks for decades. It is owned by five councils plus the regional council. Wellington city’s water has come from Wainuiomata since the late 1800s, and the regional council currently supplies bulk water and oversees wastewater discharge compliance, so shared management within the local region has an underlying logic. It works well, but like many things could be improved. For instance, Wellington Water as the asset manager could have more say in the investment decisions (currently made by councils), and therefore be accountable for compliance.

Locally appropriate regional ownership and management models could be rolled out elsewhere without needing a centralised mega-entity. Having a slightly larger scale, but shared ownership by councils, might improve management capability by pooling expertise.

Accountability to voters could be secured through a direct shareholding in the entity by councils. Investment decisions (or failures) would then still be accountable to customers (ratepayers).

Larger entities, while not as big as the mega-model, could ensure management and operational capability was increased – either by directly employing staff or by outsourcing. This improvement in capacity is needed to meet the oncoming water quality and environmental regulations.

Pressing pause on the reforms to work with councils could give time to develop the regulatory framework. It is great that the government has already created the new water quality regulator (Taumata Arowai). But an economic regulation regime should be designed by policymakers.

It would clarify the accountability and compliance framework for investment levels and maintenance by water providers. This would provide incentives to lift investment even in the face of opposition from water consumers and ratepayers to rates rises or more borrowing. With that in place, councils and the government could identify where regional ownership or shared management models on a smaller scale than mega-entities are needed.

It is unfortunate that the debate over water reform has become reduced to the mega-entity model or nothing. A mega-merger from East Cape to Farewell Spit just does not add up. Equally, the status quo is not an option.

Usefully, the reform process has produced an immense amount of data about current water services. It has also lifted awareness among councils and their communities that improvements on the current system are needed. It would only take a bit more effort – and a collaborative approach – to build on this knowledge and ensure that reforms based on sound evidence endure for the benefit of all.


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