Kate MacNamara: How to reform the Three Waters Reform

A sign opposing the Three Waters restructuring is seen alongside State Highway 1 south of Whangārei. Photo / Michael Cunningham

OPINION:

Last month Prime Minister Chris Hipkins was pictured in the NZ Herald proudly displaying a little novelty desk-top plaque, given to him by his family, that reads “FIXER of EVERYTHING”.

These little plaques are widely available for sale and other variations on the theme include: “the MAN in charge”, “CEO, master of getting things done”, “Genius at work”, “Cookie Addict” and “Not my problem”.

Which moniker the new Prime Minister actually earns in the job remains to be seen. His fix-it powers will certainly be put to the test and nowhere so immediately as on the Three Waters file.

The Three Waters machine at the Department of Internal Affairs (DIA) showed that it was pushing ahead at pace last week when it announced the new heads of three of the four new Water Services Entities (the candidate for the fourth WSE dropped out of the running late in the process).

The unit in charge of transitioning to central control of water services at DIA may already be planning a bit of a public relations overhaul for the unpopular policy this year: in November it quietly cut ties with its PR shop of record SenateSHJ and confirmed that it now relies on Sweeney Vesty for outside comms work.

But Hipkins will need a lot more than a bit of lipstick and a superficial reset of the Three Waters policy, now partially legislated, and aimed at agglomerating the water assets of 67 local councils (drinking water, storm water and wastewater) under the control of just four Water Services Entities (WSEs).

On Monday he shuffled Nanaia Mahuta - the driving force behind the reforms including their complicated Māori co-governance provisions - out of the Local Government portfolio and replaced her with the heretofore Associate Minister of Local Government, Kieran McAnulty.

Neither of these measures achieve anything substantive. Setting aside the various ways in which the Three Waters plan offends basic democratic principles (the equality of citizens, for example), the grave risk at its centre is the complexity of the system proposed, including two new regulators and the many, many masters the WSEs must serve.

The Government has told New Zealanders that the primary goal of the Three Waters reform is to deliver good water services and related infrastructure in an efficient and financially sustainable manner. And the Auckland floods have certainly underscored the importance of reliable water infrastructure (though whether it is advantageous to wrest the responsibility for stormwater away from local councils, where it sits rather logically alongside urban planning, and centralise it, is an open question). The problem is that next to nobody believes that the plan that’s on the table is going to do the trick.

The WSEs will be so encumbered by a toxic combination of debt and dictates and directives that there is a risk that good water services in New Zealand are never delivered at a reasonable cost. And moreover, there is also considerable risk that one or more of the entities staggers under its massive debt and falls foul of the attendant covenants while in the midst of a multibillion-dollar build programme (recall that the plan is for these WSEs to quickly shoulder debt that amounts to some 8x their Ebitda, a load which S&P describes as “highly leveraged”).

DIA has said that it thinks a distress situation is very unlikely but it doesn’t appear to have sought any rigorous answers on that count. Certainly, a complex governance structure with competing demands and directives will exacerbate the WSEs’ ability to manoeuvre and manage debt.

These entities’ co-governance provisions mean that Regional Representative Groups, comprised in equal half measures of local councils’ representatives and iwi choices, will appoint the WSEs’ boards (though it’s not clear how iwi and councils will choose these representatives).

Prime Minister Chris Hipkins. Photo / Dean Purcell

The competencies on the boards will need to include mātauranga Māori, or traditional Māori knowledge. And it’s not hard to imagine how a contemporary interpretation of Māori knowledge might find itself in conflict with some of the other public goods the WSEs are supposed to pursue: efficiency for example or financial discipline.

And there’s more. All iwi and hapū in the area covered by each of the WSEs will have the right to formulate directives, known as “te mana o te wai statements”, for their respective WSE. The scope of these is very loose and could extend to anything from employment and investment goals to environmental protection. We have little idea of how these directives will be used, only that the cost of improving the skills of Māori to participate in guiding the delivery of water services is, according to the DIA, an uncalculated cost and one that it will be borne by the new WSEs and therefore paid by water ratepayers.

There are hundreds of iwi and hapū in each of the water services areas (with the possible exception of area D, the lower South Island), and there may be hundreds of such directives, possibly conflicting one with another or with Wellington’s Government Policy Statement for the entities, or with the strategic direction from the Regional Representative Groups, or with the priorities of local councils and ratepayers, or with the stipulations of either of the two water regulators (economic and water quality).

Everybody from S&P to the Treasury expects that in a distress situation the Crown would step in, making taxpayers the lenders of last resort even as private debt holders schemed and negotiated in the context of a debt restructuring, which would almost undoubtedly be very expensive for ratepayers, whose bills, after all, will be used to pay the interest on that mountain of debt.

Hipkins might have a difficult time unwinding the dilution of local government control over WSEs. The plan for Māori to choose half of the Regional Representative Groups is both a co-governance goal and also a way to achieve “balance sheet separation”, much emphasised by officials.

This separation ensures that the debt, revenue and expenditure of the WSEs is excluded from ratings agencies’ assessment of local councils, and it will allow the WSEs to ratchet up debt from capital markets.

“Te mana o te wai” directives, on the other hand, serve no financial purpose, so, technically, they’d be easier to alter. Under legislation passed late last year the WSEs must “give effect to” all of these statements, but Hipkins could easily amend that provision such that the entities need only give the statements consideration.

It would reduce complexity for the boards and management and while it might not remove the curse of muddy governance and heavy debt it could soften it. Hipkins would need a powerful spell to get it past his Māori caucus, but it could earn him a new desk plaque. A cursory search of the internet’s novelty shops for options throws up: Suck less. It’s not much of an election slogan but in the age of aspirational goals in politics, it’s a start.