Three Waters ditched, but how will the new Government’s water reform policy work?

Mayors representing Communities 4 Local Democracy at Parliament during a visit to voice concerns about Three Waters back in late 2021. Photo / Mark Mitchell

OPINION

The new Government was elected to dismantle the unpopular centralising Three Waters regime, pledging to replace it with the Local Water Done Well policy from the National Party manifesto.

At Castalia, I led an alternative water reform design for Communities 4 Local Democracy (C4LD), a coalition of 30 councils opposing the previous Government’s plans.

This design, underpinned by Castalia’s global experience, including work for Internal Affairs, Local Government New Zealand, many councils and Watercare, was presented in select committee submissions and is referenced in National’s Local Water Done Well.

Post-election, critiques have surfaced regarding the new policy’s ability to address financial challenges in the water sector.

Wellington Water’s CEO claimed the infrastructure asset management company needed a separate balance sheet from its parent councils to finance a claimed $1 billion spending per year.

Watercare’s CEO has called for a Crown guarantee of Watercare’s debt. Other mayors say financial support is needed. However, these concerns stem from misunderstandings of Local Water Done Well.

The policy, as envisioned by Castalia, proposes to address financing challenges with a mix of standard utility financing and targeted government support.

Balance sheet separation

Contrary to some sector opinions, balance-sheet separation is not a prerequisite for high-quality, resilient and customer-responsive water services at least cost. Once Local Water Done Well’s framework is established, financing will become more straightforward. The model mirrors the global standard for utilities including:

• Creating separate corporatised water service provider (WSPs) owned by individual councils or groups of councils, or under long-term contracts.
• WSPs maintaining independent accounts, separate from their council owners.
• Regulation by the Commerce Commission to improve the quality and quantity of expenditure.

This will improve access to finance.

WSPs will not be able to submit unconstrained wish lists of investments (such as Wellington Water’s $1b per annum list) but will be focused on the least-cost approach to meet water-quality bottom lines set by Taumata Arowai (the regulator and Crown entity with a ministerial-appointed board,).

This in turn ensures water rates remain reasonable.

This method is not just theoretical. It is a globally tested and effective approach for regulated utility service providers in the water and energy sectors. It was successful in the 1990s electricity distribution business reforms.

There is very little public discussion of unaffordable electricity infrastructure nowadays.

WSPs will emerge as credit-worthy entities. This will attract capital from lenders and credit-rating agencies are likely to adjust their ratings as the model proves to be just as robust as for the electricity sector.

If water utilities are regulated well and attract sufficient revenues, there is a good chance that lenders and credit-rating agencies would re-evaluate their approach.

Targeted assistance for councils

We have suggested that Local Water Done Well should involve the Government guiding an opt-in process to help willing councils meet their regulatory obligations by the deadline.

The basic framework of options could be laid out. Proposals that do not comply with the framework should be rejected.

Local communities can be better reflected in the new model than under Three Waters, Andreas Heuser argues. Photo / Neil Reid

The Government should provide technical assistance under Local Water Done Well if financing issues remain.

The assistance would be case-by-case, depending on WSPs’ or councils’ challenges.

Innovative solutions can be co-developed, building on existing work, and could include:

• A ratepayer assistance scheme (developed by Cameron Partners for several metro councils).
• Revenue bonds.
• Conventional Local Government Funding Agency finance within relaxed debt limits given the improved regulation of water.
• Crown support through equity finance in some cases.

There will be challenges but local communities should be involved in solving them.

We are aware that Auckland poses particular issues as Watercare’s financing is limited because it sits under Auckland Council, which has exhausted its council-wide borrowing capacity.

A key advantage of Local Water Done Well is it allows specific circumstances of the local communities to be reflected in the design.

Auckland Council could make tough choices, including revising its debt cap, reprioritising financing from other areas for Watercare or separating Watercare from Auckland Council.

Each of the choices has advantages and disadvantages.

Aucklanders should decide on those matters, not the central government.

Local Water Done Well can be a major advance in New Zealand’s water services. We look forward to supporting this practical and effective method.

Andreas Heuser is the managing director of Castalia, a strategic adviser on infrastructure, natural resources and social service provision.