Three Waters

The Government is proposing four new, large water service delivery entities to manage our drinking, waste water and storm water. The scale of the entities means they would be able to borrow enough to fund the investment needed in water services and infrastructure over the next 30 years

Three Waters – drinking, waste and storm

Everyone agrees that more investment is needed in water infrastructure to meet the environmental and public health aspirations of our communities. The local government sector has been asking successive Governments for water reform, long before Havelock North.

Enforced standards (particularly in wastewater), growth and climate change will create unsustainable pressure on the status quo, with significant investment needed over the next 30 years. The scale of investment would be almost impossible for councils to fund on their own.  

This investment is required to meet water quality standards – and to meet our communities’ expectations. Not just in drinking water, where current standards are not being enforced, but also wastewater and stormwater.

Get quickly up to speed:

 

Dig deeper

The process so far

The model and the data

The new regulatory status quo

Ownership and governance

Your top questions – and answers

The package agreed between LGNZ and the Government

What’s happening now?

 

The process so far

Over a year ago, National Council agreed that the status quo of three waters service delivery was unsustainable. We agreed to work with the Government on their preferred model that included the perspective we bring from our communities, and to ensure the policy proposal worked within the broader local government “operating” system.

The Joint Steering Group, created in mid-2020 to provide feedback on the Government’s reform proposals, has shared the sector’s concerns with DIA and challenged and tested policy as it’s been developed. This has significantly influenced the shape of the reform. LGNZ also commissioned a report by Castalia that significantly influenced our advocacy around the model.

 

The model and the data

The Government is proposing four new, large water service delivery entities.

Their scale means they would be able to borrow enough to fund the investment needed in water services and infrastructure over the next 30 years.

Scale also creates operating efficiencies over time, especially in terms of procurement. The larger entities would have more power in the contracting market than 67 disparate councils, and be better able to fund and demand levels of service.

The economic benefits of reform have been modelled by the Water Industry Commission of Scotland (WICS). Farrierswier reviewed the WICS methodology. Beca reviewed the relevance of the modelling to New Zealand. Deloitte analysed the effects of the proposed reform on the economy.

More evidence-base reports can be found on the DIA website.

 

The new regulatory status quo

At the moment, standards aren’t being enforced or breaches prosecuted.

The new regulator – Taumata Arowai – will enforce existing standards, with significant penalties proposed, including fines and criminal proceedings. The Water Services Bill is going through parliament right now.

An economic regulator will also be introduced. The purpose of an economic regulator is to ensure it’s no longer possible to under invest, or to charge consumers too much or to deliver poor quality service.

If a council “opts out”, it would find itself operating in a very different landscape, with large and growing proportion of expenditure and energy eaten up by three waters investment and compliance. It would be exposed to three new areas of regulatory focus:

  • Taumata Arowai ensuring stringent compliance with current drinking water safety standards. Complying with these standards may require infrastructure investment. But councils will not be able to defer crucial upgrades on the grounds of cost.
  • Taumata Arowai working alongside Regional Council regulators to provide national oversight on the performance of wastewater and stormwater networks;
  • Economic regulation to ensure fair, affordable pricing for water consumers as well as appropriate levels of investment across three waters services.

Read more about the changing regulatory environment on the DIA website

 

Ownership and governance

The water services assets remain in public ownership and aren’t being sold.  The entities would own and operate three waters infrastructure on behalf of territorial authorities – they would hold all three waters assets and associated debt. The new entities would be collectively owned by councils, on behalf of communities.

Independent, competency-based boards would govern each entity.

To choose who sits on these boards, councils and mana whenua would appoint a Regional Representative Group. This group would appoint an Independent Selection Panel, which would appoint the Entity Board.

The Regional Representative Group would provide the entity with a Statement of Strategic and Performance Expectations that would influence the Statement of Intent that the water entity produces and delivers to.

Each entity would also have to meaningfully engage with communities on key documents.

The Government is asking for feedback on whether its proposal includes the right mechanisms to allow community feedback. For example, should there be a water ombudsman?

This DIA A3 includes a diagram of the governance model

You can also read more detail about ownership and governance in this Cabinet paper

 

Top 11 questions – and answers

 

1. Who would own the water assets under the reform proposal?

Local authorities would be the owners of the entity, on behalf of their communities.

The entities would own and operate three waters infrastructure on behalf of territorial authorities – they would hold three waters assets and associated debt

The assets aren’t being sold – the new entities would be collectively owned by councils, on behalf of communities.

 

2. How would councils and the community be involved in governing the proposed entities?

Independent, competency-based boards would govern each entity.

This is how these boards would be chosen. Councils and mana whenua would appoint a Regional Representative Group. This group would appoint an Independent Selection Panel, which would appoint the Entity Board.

But each entity would also have to engage with its communities on key documents that set its direction. The entity would actively report on how consumer and community feedback was incorporated into decision-making.

 

3. How would mana whenua be involved in governance? I’ve heard talk of a “veto”

A mana whenua representative group would be part of the structure that selects the entity boards. It would help appoint a Regional Representative Group, which would appoint an Independent Selection Panel, which would appoint the Entity Board.

This is totally different from having “a power of veto”.

As outlined in this Cabinet paper, no single local government or mana whenua representative would have a veto right or ability to exert negative control over decisions for the Representative Group.

 

4. Does the proposed model make privatisation likely?

Water services would be more difficult to privatise under the proposal than they are right now.

The reform proposals combine a series of measures that together help safeguard against future privatisation, including:

  • The councils that constitute each entity would be the owners of that entity
  • There is no shareholding structure in the proposal and a prohibition on dividends
  • There would be statutory restrictions on the sale or transfer of material, strategic water assets. This is current approach in the Local Government Act 2002, which prevents local authorities from selling or disposing of strategic assets or the infrastructure necessary for providing water services.
  • As a further safeguard, any proposal for privatisation would have to be endorsed by the Regional Representative Group (75% majority), put to a public referendum (75% majority), and put through the legislative and select committee processes.

 

5. How will the proposed entities be funded?

Like now, an entity would fund its operations from a combination of user payments and borrowing.

The key thing is that entities would have larger borrowing capacity to fund the necessary investments – they would be able to borrow significantly more than councils can.

They will also have more strategic procurement and investment plans. This means they would invest at the most efficient point in an asset’s life, generating cost savings.

 

6. What alternatives were considered to the proposed model?

30 unique scenarios were modelled, ranging from a 2-entity model to a 13-entity scenario (similar to the regional council boundaries).

If you’re thinking more in terms of alternate funding models, these are discussed in DIA’s Regulatory Impact Analysis.

 

7. Will my community get the same level of service under the proposal?

The Government has made an explicit commitment that staff working primarily on water would retain their salary, conditions and – critically – location if they transfer to the new water entities.

Individual communities have significant potential gain from the proposal. At the moment, small contracts on ad hoc basis give contractors no incentive to invest in specialised plant, for example, especially outside cities.

At the moment, the supply chain has more market power than your average council. With four entities, the market power would switch around to the buyer.

 

8. Will my community subsidise other communities’ water services?

Like many other infrastructure models, this model is built on cross-subsidisation – which means investments could be made in places where the population is too small to afford it on their own.

Because entities will have greater efficiencies that drive lower operating costs, it’s not comparing like with like, in terms of the status quo.

 

9. Can we still opt out of the reforms?

Our understanding is that following this 8-week engagement, the Government will consider next steps, including the decision making and consultation process.

In terms of LGNZ’s position, we passed a motion at our July AGM that did not support the reforms being made mandatory and acknowledged that individual councils remain able to express their own views on the reforms and make their own decisions.

 

10. When do we consult with our community?

Formal consultation is not required yet. That’s because the proposal from the Government hasn’t been finalised.

At the moment, we’re in an 8-week review period so you can investigate the reforms, assess the potential impact on your council and suggest ways the proposal might be strengthened. Only once the reforms are more finalised will consultation obligations be triggered.

 

11. Why did LGNZ sign an agreement with the Government and does this bind councils?

LGNZ agreed with the Government a $2.5+ billion package for councils, to wrap around the reform proposals.

This agreement puts something on the table for councils that wouldn’t otherwise have been there. It doesn’t bind individual councils in any way.

 

The package agreed between LGNZ and the Government

LGNZ agreed with the Government a $2.5+ billion package for councils, to wrap around the reform proposals.

This agreement puts something on the table for councils that wouldn’t otherwise have been there. It doesn’t bind individual councils in any way.

The package has three financial components:

  1. Support for local government to invest in communities’ wellbeing. This means all councils and their communities will be better off under reform. This part of the investment totals $2 billion, with $500 million being available from 1 July 2022.
  2. Targeted support to ensure no councils are financially worse off as a result of transferring their three waters assets. This is designed to protect councils from any negative financial consequences of the asset transfer.
  3. Cover of reasonable transition costs. This is intended to make sure council service delivery (including of water services) during transition isn’t compromised by the work needed to make the transition happen.

The package covers more than money. It includes commitments to partnership, both now and in the future (including on the Future for Local Government review), and to finding a way forward on aspects of the reform that concern councils.

Read the Heads of Agreement

 

What’s happening now?

Until 1 October, councils have space to understand the proposal and how it affects them and their community. This period is also an opportunity to identify issues of local concern and suggest possible ways to address those.

The purpose of this 8 weeks is to understand the model – and how it can be strengthened. It’s not a decision-making period. So it doesn’t require formal consultation.

Read guidance to councils about this 8-week period.