Bold action needed to stop water infrastructure’s downward spiral

Work is already underway on a proposal to trim the country’s 67 water service providers – owned and managed by councils currently – into a small set of providers. The government says the new analysis confirms the need for major change, both to meet health and environmental needs – and prevent skyrocketing water bills for Kiwi households.

Local Government Minister Nanaia Mahuta says it is clear the affordability challenges facing our water infrastructure are too great for councils alone. The reports identify investment of between $120bn and $185bn is needed over the next 30 years to ensure New Zealand’s drinking water, wastewater and stormwater infrastructure meets acceptable public health and environmental standards.

“Together, the reports confirm the need for major reform to upgrade and maintain our water infrastructure, protect our environment, and avoid unaffordable increases to household bills.’

“Without reform average household bills in 2051 are forecast to range from $1900 to $13,900. Under reform proposals with five providers those figures range from $800 to $1800. With three providers the range is $800 to $1600.

“Our plan means the required upgrade of infrastructure for our most precious natural resource will be much more affordable for New Zealanders than continuing on the current path.”

But National’s Local Government spokesperson, Christopher Luxon says the Government’s proposed solution is already fraught with serious risks.

“What we’ve heard from mayors is that they lack information; they’re not convinced amalgamation will be positive; they believe amalgamation relies on dubious scale benefits; and they have a ‘high degree of uncertainty about outcomes’.

“Any change will be impossible if councils and communities aren’t taken on the journey. It’s vital that these reforms remain voluntary for councils, and that councils and mayors are engaged with and kept informed by the Minister,” says Luxon.

The reports include analysis of the economic benefits of reform by the Water Industry Commission of Scotland (WICS), independent reviews of WICS’ methodology by Farrierswier and Beca, and an analysis of the effects of the proposed reform on the economy and affected industries by Deloitte.

“The case for reform is boosted by an economic impact report produced by Deloitte,” says Mahuta.

“The reports highlight how the national water infrastructure reforms, will provide more jobs for people (5900 – 9300 extra jobs countrywide between 2022 and 2051), opportunities for businesses and a net increase in GDP by $14bn to $23bn over 30 years.”

Civil Contractors New Zealand Chief Executive, Peter Silcock says bold action is needed to imple-

New studies under Three Waters Reform Programme predict up to $185 billion is required in the next 30 years to get our drinking water, stormwater, and sewage infrastructure up to standard

ment the detailed solutions mapped out by the reports. This would ensure better health, wellbeing and environmental outcomes than continuing under the status quo, which it was clear would lead to a downward spiral.

“It is vital we take bold and visionary action as soon as is practical. If we do not, many parts of the country will see a further decline in drinking water quality, worsening pollution of our waterways and marine environment and increased risk from extreme weather events.

“More maintenance, better network assessment, more new water infrastructure and improvements to existing infrastructure are essential activities to shift New Zealand from a downward spiral as aging water assets reached end-of-life.

“Now that detailed proposals exploring not just the issues but also mapping out solutions were emerging, a clear vision providing foresight for future generations is required,” says Silcock.

“As the body representing those who do the work on the ground to construct and maintain our water infrastructure, we want to see the change required to ensure we have healthy drinking water and cleaner waterways. Our members see the need every day.”

Silcock says the recent reports presented detailed information that clearly demonstrated not just of the scale of the problem, but also the possible solutions.

WICS Phase 2 findings

The WICS Phase 2 report builds on the findings of the earlier report to provide a more up-to-date analysis. The key findings of the report are in three parts:

The modelling indicates a likely range for future investment requirements at a national level in the order of $120 billion to $185 billion. This investment is estimated as necessary for New Zealand to meet current levels of compliance that water utilities in the United Kingdom achieve with EU standards over the next 30 years. These standards are assessed by WICS (and confirmed by Beca) to be broadly comparable with equivalent New Zealand standards.

WICS assesses the scope for efficiency by looking at the performance of regulated water utilities in the United Kingdom and making adjustments to take account of factors specific to the New Zealand context. It demonstrates that New Zealand’s Three Waters sector is in a broadly similar position to Scotland in 2002, in terms of relative operating efficiency and levels of service. In just under two decades, Scottish Water has lowered its unit costs by 45% and closed the levels of service gap on the best-performing water

Entity D companies in the United Kingdom. WICS considers that New Zealand can achieve similar outcomes to Scottish Water over a longer period (30 years).

WICS has analysed around 30 possible aggregation scenarios, reflecting the large number of possible number and boundary configurations. The WICS analysis shows that scenarios ranging from one to four entities provide the greatest opportunities for scale efficiencies and related benefits in terms of improved levels of service and more

Entity A Entity B Entity C

$800$2170 $1220$4300 $1260$3730

$1640$4970

WITH REFORM WITHOUT REFORM

WITH REFORM WITHOUT REFORM

WITH REFORM WITHOUT REFORM

WITH REFORM WITHOUT REFORM

1.FACTORS CONSIDERED TO DETERMINE NUMBER AND BOUNDARIES A range of factors have been analysed to help determine how many entities there Chatham Is

Latest estimates indicate that the amount of investment required to: 4.PROJECTED HOUSEHOLD COSTS 2051

Potential to achieve scale benefits from a larger water service delivery entity to a broader population/customer base. Alignment of geographical boundaries to encompass natural communities of interest, belonging and identity including rohe/takiwā. Relationship with relevant regulatory boundaries including to enable water to be managed from source to the sea - ki uta ki tai. Applied economic analysis, informed by international evidence, provides further confidence that each entity would need to serve a connected population of at least 600,000 to 800,000 to achieve the desired level of scale.

The preferred approach is to create four new water services entities, and to enable all communities to 2.PROPOSED BOUNDARIES Government has agreed to a preferred set of entity boundaries. However, the 3

The map highlights the recommended boundaries. 3.OUR INTENTION IS THAT ALL COMMUNITIES BENEFIT FROM REFORM Is in the order of $120 billion to The figures presented above for household bills with and without reform set out what an average household would $185 billion be likely to pay for three waters services in 2051, in today’s dollars, based on analysis by the Water Industry Commission for Scotland. over the next 30 to 40 years. A weighted average figure is presented for household bill estimates without reform, to account for the wide variance between council pricing policies. This weighted average figure reflects the proportion of the connected population that resides in each council area relative to neighbouring councils within the relevant water services entity.

3 2 Taranaki region Which entity would include the 1 Taranaki region, taking into account ki uta ki tai, whakapapa connections, and economic geography/community of interests. Hauraki Gulf Whether to include other districts entity covering the whole of the South surrounding the Hauraki Gulf, enabling a more integrated approach to the management of the Hauraki Gulf marine catchment. Assumed connected population 2020 Entity A 1,725,850 Entity B 799,610 Entity C 955,150 Entity D 864,350

2

Auckland Mayor Phil Goff does not believe the model proposed will benefit Aucklanders

Aucklanders have invested heavily in building up Watercare’s more than $10 billion worth of assets, with a further $11 billion invested in water infrastructure in our current 10-year Budget.

Control over those assets, and our ability to ensure that Aucklanders’ needs are put first, is undermined by the reform, which proposes that Auckland Council could have less than 40 per cent of the representation in the governance of the new entity. This is despite the fact that 92 per cent of the assets of the new entity would come from Auckland, and Auckland would have approximately 90 per cent of the population served by the new entity.

The proposed governance structure lacks accountability, and therefore responsiveness to Aucklanders through their elected representatives. This risks the entity not responding to public concerns and its senior management paying itself inflated salaries.

Auckland Council has taken steps to both improve accountability and reduce exceptionally high salary levels previously paid to executives.

The new body will be more susceptible to privatisation as has occurred in the United Kingdom. Safeguards put in place against this by the current government can be easily repealed by a future government.

According to the WICS report, Auckland is already by far the most efficient and effective water supplier in New Zealand. It has already achieved the scale and professionalism in water supply that the government is seeking for the country as a whole.

The supposed benefit of cheaper water costs, projected to be half the costs of an unreformed sector by 2051—30 years out—simply cannot be relied upon as being real. And it ignores the measures Watercare is currently taking to improve efficiency, which will lower costs.

The government’s own analysis by Farrierswier—the firm it paid to analyse the reliability of the WICS report—states explicitly that the claimed lower costs under the three waters reform should not be relied on.

The basis of improving productivity appears to largely rely on a huge increase in borrowing, with a three-fold increase in debt.

This means significant risk with debt to revenue ratios increasing from 340 per cent to 700 per cent. It is hard to imagine that this will not incur higher credit risks and cost of borrowing.

Christchurch Mayor Lianne Dalziel finds it difficult to see a compelling case for change

Until we get the full package and have all the pieces of the puzzle in front of us, it is difficult to judge whether it is in Christchurch’s best interests to be part of the new entity.

Once we have that information, we will then need to engage with our communities and get their feedback on whether they want us to continue with the reform process or opt out.

It is positive to see the Government seeking to facilitate iwi partnerships and we are very mindful of the significance of our decision to others in the takiwa. affordable household bills (when compared against the likely outcomes ‘without reform’).

Farrierswier independent review of WICS findings

Farrierswier find that the overall approach WICS takes to its analysis should give reasonable estimates in terms of direction and order of magnitude.

They note that there are certain limitations associated with the analysis which decision-makers should be mindful of, which relate to estimating the level of future investment requirements and potential efficiency savings that could be realised, particularly given differences in the nuances of the New Zealand regulatory and policy context.

While their review highlights several limitations associated with the analysis, they note that these are inherent and to be expected in modelling of this kind. Farrierswier also find that WICS’ approach to addressing these limitations appears reasonable.

Farrierswier notes that the approach WICS takes to assessing the potential efficiency gains appears reasonable but care needs to be taken in translating overseas experience into a New Zealand context. They agree with WICS on the factors that will promote efficiency gains in the water sector, including the quality of management, clear policy priorities, and an appropriate economic regulatory regime.

Farrierswier also explored the relevant literature to test whether any concerns arise that amalgamation might lead to water entities becoming large enough that diseconomies of scale may emerge. Their view

is that the amalgamation scenarios under consideration – with entity sizes that do not exceed 2 million connected citizens – do not appear to include entities of a size that give rise to concerns about diseconomies of scale.

Beca independent review of WICS findings

Beca reviewed the standards and practices in the United Kingdom Three Waters industry and their relevance to New Zealand given WICS has used United Kingdom data and benchmarks as part of its analysis.

The Beca report considers that, on balance, the forecasts from WICS modelling may underestimate the estimated investment requirements and timeframes, suggesting that WICS modelling of future investment may be conservative.

Deloitte industry development study and economic impact assessment

Deloitte has undertaken a comprehensive study of the economic impacts of reform and the implications for affected industries. Key findings in their report include:

The reform is forecast to impact every corner of the economy and is estimated to increase Gross Domestic Product (GDP) by $14.4 billion to $23 billion in present value terms over the next 30 years when compared to the likely outcomes without reform. In relative terms this increased economic activity equates to an average increase in GDP of 0.3% – 0.5% per annum.

Every region is expected to be positively impacted by reform in terms of GDP and employment growth.

Reform is expected to support significant job creation

Hamilton Mayor Paula Southgate is considering the detail within the dollars

Providing sustainable three waters services is crucial and what we do now will make a difference for generations to come.

But the costs for any reform must not fall on today’s ratepayers. Hamilton has been very clear on that and Government has listened.

Hamilton City Council will be eligible for $58.6 million in new funding support. It might not be as much as Hamilton would have liked – we will always want more – but that money is likely to hasten how quickly we can address key issues in our city like housing and environmental initiatives and other long-term priorities.

Keeping our assets in public ownership is a bottom line and that has been reflected in the announcement today.

But the reform has got to be a partnership, so as Mayor, my focus now will be on getting the absolute best deal for the city. Today is a good start, but there is a lot more conversation to come.

across the economy. Relative to the counterfactual, the reforms are estimated to result in an extra 5,800 to 9,300 additional FTE jobs between 2022 and 2051.

Average real annual wages are expected to increase by 0.16% – 0.26% over the period from 2022 to 2051. The increase in real wages mainly reflects a projected increase in labour productivity.

The additional jobs are expected to be spread across a broad range of sectors. While there is likely to be changes in the configuration of jobs in the water sector and its supply chain in the short to medium term. Over 30 years significant growth of up to 80% is anticipated in the water sector workforce, presenting significant opportunities for employment growth, specialisation and increased career opportunities.

The report highlights a wide range of opportunities and challenges for the implementation of the reforms relating to the workforce, supply chain, management of the capital investment programme, innovation and productivity.

Wellington Water Committee former-Chair David Bassett sees potential long-term benefits

The Wellington Water Committee (a joint committee of the six councils that own Wellington Water) welcomes today’s announcements on sector reform proposals and additional water infrastructure funding as an opportunity to address long-standing challenges within the water sector.

In the Wellington region we have seen the advantages of a consolidated model to manage water infrastructure across multiple councils. The Government’s proposals take this a step further, and presents an opportunity to create ownership and management models that enable improved service, efficiency and flexibility with regards to funding the management, development and renewal of water infrastructure networks.

Central government funding will accelerate the delivery of valuable major water projects supporting critical public and environmental health outcomes.

We know that the challenges and costs associated with aging water infrastructure have been an issue faced by mana whenua, councils, utility companies and residents around New Zealand.

Here in the Wellington region, additional funding would enable us to get under way with key new infrastructure projects and build them concurrently. This means we would all secure the benefits of an improved water network sooner.

The proposals outlined today represented significant change for the sector, but, importantly, three waters assets would remain in public ownership.

The Wellington region’s water asset owners and managers look forward to working with the Government, its new regulator, Taumata Arowai, and mana whenua to support the successful development and implementation of water sector structural reform.

Source water neglected

The reports are all about infrastructure, says Victoria University of Wellington Senior Researcher, Dr Mike Joy. However, in the case of drinking water quality, infrastructure to treat water is the ambulance at the bottom of the cliff.

“I could find no mention of the fence at the top of the cliff, which is protecting water at the catchment scale – i.e. safeguarding the sources of the water. Missing this crucial ‘fourth water’ – the source water – seems odd.

“I note that the summary report on the workshops held for the Three Waters Reform Programme, released in March 2021, showed that in polls held during the workshop, taking a catchment view of water ranked as the second most important objective by attendees.

“Finally, I could find no mention of one of the emerging issues for New Zealand, that is nitrogen contamination of drinking water. There was no mention of it, nor just how expensive it is to remove nitrate from water,” concludes Joy.