Brian Fallow: Giant-sized water bills on the way

Workers check a soak-hole that appeared on Wellington's Jervois Quay. Photo / Mark Mitchell

OPINION:

Arresting as they may be, the latest estimates of how much investment New Zealand's water infrastructure will need over the next 30 years are probably still on the light side.

The Government this week released the latest modelling commissioned from the Scottish water regulator, the Water Industry Commission for Scotland (WICS). It benefits from more detailed information from councils about their projected population growth, investment plans and the current state — to the best of their often deficient knowledge — of the pipes in the ground.

The various modelling approaches WICS has used to estimate the investment requirement over the next 30 years deliver a range of $120 billion to $185b in today's dollars. Roughly half of that amount is for "asset replacement and refurbishment" — or less politely, the cost of decades of underinvestment in infrastructure that is out of sight and out of mind, except when sewage eruptions in Wellington, water restrictions in Auckland or a public health emergency in Hawke's Bay make the news.

The other half is needed to accommodate projected population growth and "enhancement", that is, raising standards of water quality and service to what the citizens of a First World country should expect, from what the current fragmented and myopic system delivers.

These estimates would require spending $4b to $6b a year on average nationwide over the next 30 years in today's dollars. That compares with a historical average spend by the councils of around $1.4b a year, set to rise under their current long-term plans to around $2.7b.

For metropolitan councils, average annual costs would need to increase by between 1.5 and seven times in real terms to meet the required investment. In some metropolitan councils, average household costs in 2050 could reach between $1700 and $3500 per annum in today's dollars, officials have told Local Government Minister Nanaia Mahuta.

For provincial towns the increase would be between two and eight times and for rural councils — often facing a depopulating trend — between three and 13 times. "For some small rural authorities average household costs in 2050 could reach as high as $9000 in today's dollars and would be unaffordable for many households," officials said.

Yet even those estimates are likely to be conservative according to a report by the engineering consultancy Beca, which was asked to reflect on the things that make a difference between the New Zealand situation and benchmarks that WICS would be familiar with, after reforms of three waters provision in Scotland and the United Kingdom more broadly.

For one thing, New Zealand environmental regulation is in a state of flux.
In addition to "three waters" reform — drinking water, wastewater and stormwater — there is a Water Services Bill now before the health select committee to regulate drinking water standards.

There is the prospect of a Climate Change Adaptation Act among the three proposed legislative successors to the Resource Management Act, as well as the Zero Carbon Act and various amendments to the Local Government Act.

"Taken as a whole it is very difficult at this time to predict their impacts on the New Zealand three waters segment and on the timeframe and total costs (capital and operating) of subsequent changes in standards which apply to the proposed aggregated Water Services Entities," Beca says.

These entities are the yet-to-be-determined but small number of specialist water authorities to which the 67 councils with three waters responsibilities are invited to offload that burden. Think Watercare-plus.

Notwithstanding all the uncertainty, Beca says the direction of travel is clearly for greater regulatory discipline to apply to both the economic and environmental performance of the three waters sector than has historically been the case.

Important to that discipline will be the Māori role in the governance of the new water authorities, as a voice not only for environmental stewardship of waterways but for intergenerational equity. Any resulting higher standards would come at some cost.

Local Government Minister Nanaia Mahuta. Photo / NZME

An important omission from WICS' brief is the impacts of climate change. Yet it has inevitable impacts for stormwater — historically the lowest priority and least understood of councils' water assets.

Climate change will also have implications on the supply side. Only last week the statisticians informed us that average precipitation (rain and snow) nationwide over the past five years was 3 per cent lower than the five years prior, and down 12 per cent on the second half of the 1990s, since when the population has increased by nearly a third.

Overall, WICS assesses New Zealand's three waters sector to be in a broadly similar position to Scotland in 2002 in terms of relative operating efficiency and levels of service. Since then Scottish Water, the single national provider, has lowered its unit costs by 45 per cent and closed the gap in levels of service on the best-performing water companies in the UK.

It reckons New Zealand could achieve similar outcomes over the next 30 years, with the best odds for doing so coming from scenarios with consolidation into between one and four entities.

As with any infrastructure investment, the costs have to weighed against the benefits. The Government also released the results of modelling by Deloitte of the economic impact of its proposed reform approach, using WICS' estimate of the likely investment requirement.

The takeaway conclusion is that the proposed reforms could increase gross domestic product by between $14b and $23b in present value terms over the next 30 years compared with the counterfactual in which councils continued to deliver three waters services. That would lift GDP by 0.3 to 0.5 per cent per annum on average.

Provincial and rural regions would enjoy the greatest benefit, including job creation.

Mahuta said it was clear the affordability challenges facing water infrastructure were too great for councils alone.

Key decisions have yet to be made on the number, boundaries, governance and funding of the new water authorities. They can be expected over coming months.

But for the councils, on these numbers opting in — assuming it remains their choice — should be a no-brainer.