Three Waters is designed to overhaul freshwater, wastewater and stormwater infrastructure. Photo / Jack Crossland
OPINION
After years of squabbling, we finally have two Three Waters policies to compare. One, from the Government has been bogged down in questions of co-governance and local control, the other from National is facing allegations from Labour that it is tantamount to a rate hike. Thomas Coughlan looks at the detail.
Everyone agrees there’s something wrong with Three Waters - the awful, and now apparently cancelled, name by which we refer to our freshwater, wastewater and stormwater infrastructure.
As of National’s water policy announcement on Saturday, we know there’s quite a bit of political agreement on how to fix the problem: it involves water charging, borrowing, and amalgamation.
And yet while our major political parties Labour and National agree on the basic building blocks of what Three Waters reform looks like, both are desperate to make it look like they don’t.
And that’s fair - while they’re agreed on the building blocks of debt, amalgamation, and charging - the marginal issues on which they disagree, like governance and how we get to the end point are significant.
It’s probably a good idea to precis the problem politicians are trying to solve.
New Zealand has inadequate water infrastructure - that’s stuff like pipes and reservoirs.
Poor freshwater infrastructure is making people sick and it’s been linked to people dying. It’s also getting to the point where it’s quite difficult to maintain. In cities like Wellington, pipes burst with frustrating regularity.
The reason is largely down to investment and regulation. On the investment side, councils have underinvested in water for decades. They’ve kept rates artificially low, and sweated assets to cover the cost.
Some councils are also up against their statutory borrowing limits, meaning they’re unable to borrow the kind of fund necessary to fix their ailing pipes.
The other problem was regulation. There was little enforcement of councils’ duty to adequately invest in infrastructure for their residents and the Ministry of Health, who was the former regulator of drinking water, was fairly lax in enforcement.
Labour’s been working on Three Waters reform since it got into office. It’s delivered nearly all the detail of this plan in the subsequent five years, but has done such a poor job of selling this to the public that it’s now gone back to the drawing board - with tweaks to the governance elements of the plans likely.
Below, is the plan as it currently stands.
On the regulatory side, there’s consensus around what needs to change. In Labour’s first term, it passed (with support from across the House) legislation creating Taumata Arowai, the new water quality regulator.
Both Labour and National have it at the heart of their regulatory regime, enforcing water quality standards in their respective systems.
But there is some disagreement about how to meet the standards that the regulator sets.
Labour’s plan for the water assets themselves is to take them from their councils and give them to four massive water entities that will be responsible for Three Waters in the north, west, east, and south of the country.
The boundaries are a bit awkward - one water service entity (they’re known by the acronym WSE, for now) will serve Napier, Wellington and Marlborough.
Those entities will be owned by the councils whose pipes they have absorbed, but (remember this for later, because it’s important) they will have balance sheet separation from the councils that own them.
This, means that ratings agencies, who effectively determine how cheaply an entity can borrow by rating the quality of its debt, consider the WSEs separate enough from their council owners that they are able to issue their own debt.
This is crucial to the model working because in order to build new water infrastructure the WSEs need to be able to borrow more than councils and do it at low cost.
The WSEs will be governed by a board that is appointed by and accountable to a regional representative group that is co-governed by Mana Whenua and local councils. This gives councils very limited say in how their water is managed, despite owning a share of the entity that manages it.
Most controversially, after trying to get councils to voluntarily sign up to the reforms, Labour eventually decided to take matters out of their hands. Three Waters legislation makes participation mandatory - no ifs, no buts, every council’s water assets are going to be a part of the reforms.
How the WSEs will pay for their borrowing has not been definitively established. It’s likely to be through water bills charged to households, much like Aucklanders currently receive from Watercare.
The Government has introduced legislation that will regulate these charges, via the Commerce Commission.
In opposition, Labour campaigned hard against the Trans-Pacific Partnership trade deal. MPs marched in the streets against it.
Shortly after being sworn in as the new Government, Labour swiftly signed up to the tweaked and helpfully renamed Comprehensive and Progressive Trans-Pacific Partnership.
National’s Three Waters proposal has elements of this. For all the party’s huffing and puffing about Three Waters, its proposal is painfully similar on certain points - and where it differs, it is not immediately clear that the party has found a solution better than what the Government is putting up.
There are two headline distinctions: there’s no co-governance, and councils have a choice over what happens to their assets.
The water quality regulator stays. In comes a new regulator that will force councils to invest an appropriate amount in their infrastructure, with the minister acting as the ultimate enforcer if all fails.
Within a year of repealing the Government’s Three Waters legislation, National wants councils to come up with a plan to transition to a new model that meets water quality and infrastructure investment rules, while being financially sustainable in the long-term.
The minister will sign off on those plans and will not mandate any kind of model for how councils meet those targets.
If this fails, there is a “regulatory backstop”, which would allow central Government to take charge if councils are unable to deliver on what the regulator demands.
It’s not clear what central Government would actually do in this circumstance. Watts told the Herald it would depend on the specifics of a situation.
“Steps could be appointing commissioners to oversee the transition process if councils are genuinely unable to mediate such transitions,” Watts said.
National acknowledges that many councils will be unable to afford the level of investment their regulator will require.
Those councils, and there will be many, will be allowed to form regional groupings, merging their water assets into a new entity.
Forgive me if this sounds familiar.
These new entities will use their water assets to borrow up large to pay for investment in water infrastructure.
Those charges will be recouped in some form, probably through water charges or rates passed onto consumers via councils.
If that looks familiar, it’s because it probably is.
Some councils, like Auckland and other large councils may be able to hold on to their water assets and manage them directly under National’s plan, but for many, they’ll be forced to end up in some form of water entity similar to what Labour was planning, right down to the balance sheet separation.
Crucially, local government spokesman Simon Watts said he’d spoken to a ratings agency that said National’s merged entities would be able to achieve balance separation so long as one council did not own more than half of the entity. That means that they would have access to borrowing costs similar (though not necessarily the same) as Labour’s mega entities.
“We’ve had conversations with rating agencies in the preparation for this policy. The threshold, in terms of meeting the threshold of an off-balance sheet transaction, is that no one owner of the CCO has a greater than 50 per cent shareholding,” Watts said.
“It’s our expectation that the majority of councils will meet that threshold and that then allows them to be off balance sheet and that allows them to be able to attain the long term funding and financing, which in effect is the equivalent but at a different scale to Labour’s mega entity model,” he said.
There are still three key differences between the two entities: these entities will not be co-governed, they’ll probably have more direct council input, and they’ll probably be smaller - it’s hard to see many councils signing up to entities the size of Labour’s.
Small, but significant in other words.
Before Three Waters became a story about co-governance, it was a story about money: how could we afford the immense cost of water infrastructure without slapping households with unaffordable bills?
Comparing Labour and National’s plan on cost is difficult.
Labour’s reforms are based in large part on research done by the Water Industry Commission for Scotland.
It found that $120b-$180b of investment in water infrastructure would be needed over the next three decades to bring our pipes up to scratch.
It also modelled the best way to achieve cost savings from the current balkanised system of 67 councils delivering water services.
WICS modelled thirty different amalgamation scenarios including one in which the whole country was absorbed into one massive water entity, and another in which the country was divided into 13 entities.
It settled upon the current four-entity model. Labour has pushed back on proposals from the likes of the Greens (who have made the case for seven entities) that the cost savings of the four-entity model are so great they override any localist arguments for a model that had more entities.
The Department of Internal Affairs reckons that without water reform, households would be hit with costs of $1900 to $9000 a year to fix broken water infrastructure.
With reform, those costs drop to $800 to $1640 a year.
Labour has seized on these cost savings and National’s inability to present its own estimates of how much money it would save ratepayers.
Local Government Minister Kieran McAnulty called National’s plan a “policy of higher rates in the middle of a cost of living crisis”.
“After four years to think their solution is the status quo - the very thing councils don’t want,” McAnulty said.
They are setting high standards but putting in place none of the economies of scale to pay for them. This will mean councils have to hike rates to pay for the requirements set by National,” he said.
WICS’s modelling is not the last word on the matter.
Castalia, the group employed by Communities 4 Local Democracy, disputes some of its modelling and argues that the actual amount of money the water entities plan to invest in water services is much lower than the $120b-$180b figure.
Castalia argues the actual figure the new water entities would invest is closer to $97b, which is the actual capital expenditure in the models published to get to the post-merger rates bills the Government claims will be charged.
Castalia reckons that if existing water rates and charges were increased by 0.6 per cent a year, below the rate of inflation, it would be possible to fund the $97 billion price tag of the Government’s water reforms.
In reality, many acknowledge that it’s very difficult to know what level of investment will be needed over the next 30 years.
The difficulty with National’s scheme is that in leaving councils to come up with their own arrangements, it is unable to offer any certainty about what the policy will mean to rates.
Councils might be able to form themselves into arrangements that save more money when compared to Labour’s proposal, they might equally form themselves into an arrangement that is more costly.
But in leaving it to councils to work out, Luxon is in no position to claim with any certainty that his model will be any cheaper than Labour’s
On Tuesday morning, he almost conceded this confusion, telling RNZ that it wouldn’t lead to costs over and above Labour’s policy, but telling Newshub that some councils that mismanaged their assets might have to charge more
“You might have to have people within a particular council that hasn’t managed its assets well, having a slightly higher charge,” he said.
For all the criticism levelled at Labour’s proposal, this sort of scenario is unlikely as councils wouldn’t have the ability to manage the assets well or otherwise.
There’s a trade-off with the number of water entities and the level of local control. Fewer entities means greater cost savings through efficiencies, more entities means the opposite.
Because National doesn’t know what councils will decide to do under its model, it means there is significant uncertainty over whether councils will be able to find a solution that balances the local control vs cost-saving efficiency trade off better than Labour.
The most obvious flaw in National’s plan is its process.
When the plan succeeds, it ends up in essentially the same place as Labour’s: with councils placing their water assets into regional water entities.
Because National’s process of getting to these entities is so liberal, it opens up a considerable risk of failure.
What if councils need to merge but don’t want to?
Considering a large part of the plan has been devised to placate councils’ bruised feelings - can we have confidence that a future minister will not hesitate to force mergers if required? And can we really trust councils, who have failed so often up to this point, to suddenly turn things around?
Considering that both Labour and National’s plans end up in more or less the same place, might it not be best to bite the bullet, avoid any potential chaos unleashed by National’s plan, and forge ahead with Labour’s mergers?
But there’s stuff that’s fairly good here too.
While the merged entities look similar, there are significant differences. Even the Government concedes it has argued the case for co-governance poorly. If it isn’t your thing, you won’t find it in National’s plan.
Councils will probably have more control over these entities and some councils, like Auckland, may not need to be a part of any merger at all.
It also placates tensions among councils, by listening to their concerns more.
This is more important than it sounds. Relations between central and local government are worse than they have been for some time. Soothing them is an important part of delivering other things that both Labour and National agree on, like planning reform.
National plans to re-emphasise the importance of dedicated water funding by ring-fencing water revenue.
It also intends to lean on the Crown balance sheet more, by offering targeted “one off” funding to councils that need it.
Labour has done a bit of this with its “no worse off” grants to council, but many commentators have rightly scratched their heads at why our beleaguered cash-strapped councils have been left to sweat their water assets, when our wealthy, central Government hoards its strong credit rating and low borrowing costs.
There’s a strong argument to be made for the Government to step up more in this area.
At the heart of the Three Waters dilemma is how to access the cheapest funding possible for water investment - there’s no funding cheaper than Government borrowing.
Ultimately, Labour has a plan that has rightly or wrongly lost the confidence of councils and the public. It answers the questions of how much is needed and who will pay - but it hasn’t answered those questions to the satisfaction of voters (recent polls have cemented the unpopularity of the reforms).
National’s plan answers these questions in broad strokes, but it isn’t able to give certainty about cost and what happens when things go wrong, as they inevitably will.
Whether those trade-offs are worth greater levels of council control (and they may well be in large urban centres like Auckland) is a question for voters.
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