Brian Fallow: Water reform logic flows one way


Right now the nation’s mayors and councillors face the task of getting their heads around the Government’s plans to reform the Three Waters system and what that might mean for their localities.

The debate about radically reforming the provision of potable, waste and storm water services is not assisted by vacuous talk of assets being expropriated.

The councils need to reflect on what counts as an asset.

If you own something that makes you money, or saves you money, and that you are free to sell, that is an asset. If it is only going to cost you money — and more and more each year — that is really a liability.

And in that case if someone is offering to take it off your hands, surely the response should be “Nga mihi, Minita. Thank-you Minister.”

There are four things the councils need to bear in mind, which they cannot change and which should dispel any idea that the status quo is an option.

They can’t change the past and the legacy of chronic under-investment in Three Waters infrastructure.

We don’t need the Department of Internal Affairs or the Scottish water regulator Wics, or even geysers erupting in the streets of the capital, to make that point.

The Auditor-General, an officer of Parliament with no axe to grind, has been waving red flags about this for years.

In its most recent report to Parliament on the local government sector, for the 2019/20 year, the office of the Auditor-General tells us that (excluding the special case of Christchurch, which has had to spend up large post-quake) the amount councils spent renewing pipes and other plant was 74 per cent of depreciation for water supply, 64 per cent for wastewater and just 39 per cent for stormwater.

The fact that these numbers are an improvement on, say, five years earlier only reinforces the point that they are evidence of weak and improvident governance under the status quo.

That is not surprising given the inherent tension between a three-year electoral cycle and meeting long-term challenges, like climate change or maintenance of infrastructure that is out of sight and usually out of mind.

In their defence the councils would point to higher infrastructure capital budgets in their new long-term plans. But again the Auditor-General is not reassuring, pointing out that for each of the past eight years the majority of councils have actually spent less than 80 per cent of their budgeted capital expenditure.

There is room for argument about exactly how many tens of billions of dollars’ worth of infrastructure deficit has built up.

The Whangarei District Council, which appears determined to opt out of the proposed reforms, cites a report it commissioned from the economic consultancy Castalia which is critical of the modelling Wics has done for the Government.

Castalia argues that it exaggerates the likely costs of business as usual and exaggerates the savings to be made from the proposed amalgamation into four regional water entities.

On the other side of the scales is the report the engineering firm Beca did when asked to peer review Wics’s original report and specifically the relevance of British benchmarks in the New Zealand context.

Beca concluded that Wics could well be underestimating the size and timing of the renewals wave ahead, given that the Scots are accustomed to a well-regulated sector, while Three Waters in New Zealand has been almost entirely unregulated.

“Has been” is the relevant tense here. The second thing that the councils can’t do anything about is that they are about to face a much more challenging regulatory environment.

A new agency called Taumata Arowai has been set up, whose empowering legislation is now before Parliament, to enforce water quality standards. Deaths in Havelock North, and boil-your-water warnings in Otago testify to the need for that.

Not only that. Councils can no longer expect regional councils to look the other way when they breach restrictions on wastewater discharges into rivers and the sea.

And there are plans for a new economic regulator, like the Commerce Commission, to represent the interests of consumers faced with what are, after all, monopolies.

As Local Government New Zealand puts it, “Ministers have agreed that the Three Waters sector will be subject to economic regulation that will ensure there is good service quality for the consumer, the right level of investment, and drive efficiency gains — including a requirement to meet depreciation, protect against inefficiencies and the removal of opportunities for monopoly/excessive pricing.”

Another thing the councils cannot change is demographic pressure, from both a rising national population and a well established trend for population to drain out of rural New Zealand into the main centres. The metropolitan councils have to deal with the associated growth; the rural councils face a shrinking revenue base.

Hence the proposed model, which essentially relies on a cross-subsidy from the metropolitan areas to their rural and provincial hinterlands — Northland in the case of Auckland.

The fourth thing the councils have to reckon on, and ignore at our peril, is climate change, which is especially relevant when thinking about water.

Global warming will increasingly affect how much rain falls where, and how much arrives in downpours, challenging stormwater systems, the most neglected of the Three Waters.

But it also has implications for water supply. It is ironic that a Northland council is leading the count-us-out brigade when the statisticians tell us that Northland’s rainfall over the past five years was 7.3 per cent lower than over the five years prior. Nationwide the decline between the two periods was 3 per cent.

The councils have until the end of this month to get to grips with, and recommend changes to, the proposed reform model.

It will then be up to the Minister of Local Government,Nanaia Mahuta, to make decisions about the path forward, including public consultation.

A crucial consideration will be how many councils look like taking up the option, currently on the table, to opt out. If they include metropolitans like Auckland or Christchurch, the model would be fatally compromised.

The Government would then face a difficult decision.

Should it say, “No. That is myopic, parochial, irresponsible, beggar-thy-neighbour stuff. In the national interest the reform will be mandatory” and take the political heat?

Or will it shrug and say, “We did our best. On your own heads be it.”

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