Andreas Heuser: Best laid plans for water reform can be saved

The Government's proposal to merge 67 council water services into four new mega entities is proving controversial. Photo / 123RF

OPINION:

The great Scots poet Robbie Burns said "the best laid plans of mice and men often go awry". So it is that the Government's proposal to merge 67 council water services into four new mega entities based on Scottish advisers' modelling is proving controversial. Councils are concerned that local accountability and control of key assets will be lost.

Castalia has publicly criticised the quality of advice given to the Government. Yet the overall intent, and many of the key pillars of the reforms are worthwhile. If done right, reform could introduce stronger technical and economic regulation, make needed investment more affordable, professionalise water providers' management, improve access to finance, and ensure meaningful representation for Māori.

Reform is necessary. The Havelock North contamination tragedy showed up poor management and inadequate regulation. Recent high-profile asset failures in some parts of the country reinforce the need for change, including additional investment to meet higher quality standards and improve resilience.

Some form of amalgamation makes sense. But the mega-merger aspect of the reforms is based on selective interpretation of UK water sector history, and misuse of New Zealand data by the Government's advisers.

The advisers overstate the investment needed and claim it will only be affordable if council water providers merge into UK-style mega-entities.

There are head-scratching differences between the claimed future water rates bills for the mega-entities and the councils if they opt out.

The overly complex modelling for these massive numbers does not square with the New Zealand reality. The debate has become polarised, partly because only the mega-merger option is on the table.

The good news is that the Government does not need to bet the house on the mega-mergers. Most councils recognise that they will need to give up some control, and that regional groupings make sense.

The Government should be open to considering a wider range of locally relevant structural options, provided the key pillars of its proposal are retained.

Instead of seeing widespread concern with the mega-merger plan as a threat, the Government should recognise the opportunity.

Councils and the Government can build on all the work done at the local and regional level to define structural options that achieve the Government's objectives and preserve water service accountability to local water customers and iwi.

As we have repeatedly pointed out, professionalisation and improvement in efficiency of water services delivery does not require the mega-entities proposed by the Government's advisers.

Mega-entities are also not needed to attract a more stable and highly skilled workforce. More localised co-operation and sub-regional entities (or outsourcing) can achieve these objectives without centralising all administration in Auckland, Hamilton, Wellington, and Christchurch.

The financing pillar of the reform programme is to take water entities off the council balance sheets. This lets the water entities borrow without being constrained by each council's borrowing limits.

Again, this pillar does not depend on the mega-mergers. More borrowing is possible if each council's shareholding is reduced below 50 per cent in a reformed regional entity.

Innovative financing mechanisms are also available where a council remains majority owner of the water entity. New borrowing for water investments can be paid back over the decades-long useful lives of the assets at a very low cost of borrowing. Right-sized, regionally relevant amalgamations can achieve this too.

Regulatory reform, another key aspect of the Government's proposal, is not dependent on the structure of amalgamations.

Taumata Arowai will regulate drinking water quality, environmental regulation will improve, and these factors coupled with economic regulation are all expected to ensure water suppliers invest appropriately and set prices sustainably.

However, the Government is misguided in believing that economic regulation is only effective when applied to a small number of entities.

International experience, and our own Commerce Commission, show that it is possible to successfully regulate the likely 20 or so locally relevant entities that might emerge. In fact, a higher number of entities enables benchmarking, comparisons and superior regulatory outcomes.

Finally, iwi representation is a key priority for the Government. Yet, many iwi will not get direct representation on the proposed mega-entities because there are only six board seats in each.

A larger number of smaller regional or sub-regional water entities with reserved Māori board seats would give more meaningful iwi governance participation and a closer connection to local Māori communities. This will represent local cultural values far better.

Overall, it is unfortunate and entirely unnecessary that the Government's advisers have straight-jacketed these very important reform proposals into the mega-merger format.

A more localised model, with fit-for-purpose corporate forms - but all subject to the new regulatory regime and Māori governance obligations - would ensure the best-laid plans mobilise strong support.

- Andreas Heuser is a director with Castalia.