03 September 2021

Three Waters Reform: The left opposed water reform in the 90s, why trust them now?

You might have noticed the childlike cartoons the Government has chosen to communicate to you about one of the most radical infrastructure policy reforms proposed for over twenty years – the Three Waters Reforms. Those cartoons might have put you off, but they shouldn’t. For all of the fluff government is involved in, one of the most important activities it unfortunately is responsible for is the supply of reticulated water and the collection of wastewater and stormwater. Forget Covid19, because if the water systems fail you really ARE in for a public health crisis. Millions of people worldwide don’t have access to clean drinking water and don’t have safe sewage collection and disposal, and it costs lives. This is important, too important to have those who use and pay for it talked down to like primary school children, and too important for you to ignore.  Bear with me, this is complicated...

What’s the problem?

The current system of managing water infrastructure is, in many parts of the country, a failure. Who could miss the regular reports out of Wellington, the capital, which has systematically failed to put enough ratepayers’ money into the water and sewage systems? Stories of drinking water from Hawke’s Bay to Otago being infected or tainted. So the case for reform is overwhelming. The Government’s own papers indicate 40,000 people lived under temporary or permanent “boil water” notices for their reticulated supply in the year 2018-2019. Four people died and over a third of the population in Havelock North became ill because Hastings District Council didn’t effectively manage the town’s water supply. An earlier study indicated 35,000 people get ill annually because of the quality of drinking water.

The Government’s own report estimates there is at least a $120 billion gap in capital spending on water infrastructure. Another stat is it is estimated that 21% of water is lost in reticulation – 1 in 5 litres of water that Councils collect to reticulate to homes and businesses is wasted in the distribution. That is frankly outrageous.  Local authorities are often reminding us all to look after the environment and not to waste water, but their own ineptitude results in enormous waste.  It is notable that there are limited statistics about the state of stormwater infrastructure, because local authorities just don't know. If your home or business has ever flooded due to rainfall, then you might care, because stormwater infrastructure is what helps protect your property.

Why has this happened?

The Government claims the problem is a matter of:

· Lack of economies of scale: 67 local authority entities supply water infrastructure (there are small private operations as well) without the capacity and capability to address issues. Career paths for those in the sector are limited with multiple small entities and small scale capital spending generates insufficient competition in the contracting sector to put price pressure on those costs. It claims water entities need customer bases in the high hundreds of thousands to be viable.  There is definitely merit in this.

· Unaffordability of needed investment: Under the current approach, the money ratepayers would need to be forced to spend to remedy historic underspending is enormous. Government estimates increases of 300-1500% in spending are needed over the next thirty years compared to current levels. This is quite credible, indicating a desperate need for both new capital and for ways to obtain efficiencies to reduce these costs over time.  However, it would be dishonest to pretend that those who use water shouldn't pay for this, albeit over many years. 

· Poor incentives and lack of effective oversight:  This is where the Government lays bear what’s REALLY wrong. It is that the model of “democratic control” of the provision of water services, and the “power of general competence” of local government in overseeing that control is a failure.  It is worth remembering that "democratic control" is a touchstone of leftwing political philosophy.  

To quote from the Government’s own report:

Local authority service providers operate in a political environment, in which investment decisions are made by elected representatives who have a duty to consider broader community interests (for example, other investment priorities and affordability of rates increases) and a constrained financial environment, in which the main funding and financing  mechanisms are via ratepayers and council borrowing. These factors combine to limit the level of three waters investment.

In short, local politicians prefer spending rates money on other stuff and prefer not to raise rates to pay for water infrastructure. It talks of misaligned incentives, which is surely a euphemism for politicians care most about being elected, second most about getting attention for shiny stuff they made ratepayers pay for, third most about other stuff they can get credit for in three years. How many local politicians campaign on fixing the pipes, especially when such work can literally take years to complete, is largely only visible as a disruption and the end result is… continuity of what you had before?

These failures are a legacy of opposition to water reform in the 1990s

Electricity, gas, telecommunications, aviation, ports, road transport, public transport, all were subject to significant reforms in the 1980s or 1990s, but water was largely left alone. With the sole exception of Auckland, with the creation of Watercare Services in 1991, all other water provision was left in the hands of territorial authorities. Water is a legacy of the Muldoon era and beyond, with the exception of some local authorities consolidating and in some cases implementing water metering, not a lot happened.

Some Aucklanders might remember the Water Pressure Group, led by the late, conspiracy theorist, Penny Bright.  One of the cause célèbre of the hard left was opposition to the commercialisation of water in Auckland seen in the creation of Watercare Services, which supplies water and wastewater (not stormwater) services in the city. The New Labour Party, later the Alliance (when it included the Greens) were loudly opposed to what they saw as the bogey of privatisation (which never happened).  As the Alliance was on the ascendancy, after the 1993 General Election, National pursued little in reform of the water sector, and as Labour went back to the left under Helen Clark, the idea of reforming water was parked.  After MMP, there was no majority for any serious reforms in the sector, and from 1999-2008 the Clark Government proceeded, with support from the Alliance and the Greens (who had now left the Alliance) to pass the Local Government Act 2002 to grant local government a "power of general competence".  In short, the left trusted local government to get on with the job. Of course the Key/English Government from 2008 until 2017 did nothing either to reverse it.

The power of general competence and community empowerment have been a failure

The implementation of the power of general competence was to usher in a new era.  Then Local Government Minister Sandra Lee said "It is both a reaffirmation of the place that local government has within our democracy, and of the rights of local people in their communities to exercise controls over their aspirations, their decisions, and the democracy that affects them."   

So communities were "empowered" which of course is code for empowering local politicians. Sandra Lee even made it clear that water privatisation was to be prevented. "We are not going to agree to allow councils to sell what is not a commodity--the access to clean water--but a fundamental human right."  I'm not sure how the people who died in Havelock North had their "fundamental human right" protected, and how asserting that right works if the Council has let the local infrastructure fall into disrepair.  Indeed then Associate Local Government Minister Judith Tizard later claimed credit for having including "cultural wellbeing" in the objectives of local government.  Not much culture if you're sick because the Council supplied water is contaminated.

Backed wholeheartedly by the Greens, the reforms were to usher in a new era of “local democratic accountability” with more powers to deliver what “the community wants”. Indeed, it is the heart of the mantra of the economic left that justice is achieved by more “democratic control” of resources. Well we’ve seen how democratic control of water has been going, and the results are in – it's been a failure.

 What needs to be fixed?

Users, in many cases, don’t pay for what they use. With the cost of water infrastructure for many hidden in rates bill, there are no incentives to manage water use, and those who need water face rationing alongside those who waste the resource. Furthermore, those who benefit from stormwater infrastructure don't necessarily pay rates reflecting the protection of property value they obtain from it (nor do insurance costs reflect that adequately).

Local authorities get paid rates regardless of how much water is used or wasted. So they have poor incentives to stop wasting 21% of the water collected and distributed, to plug leaks so that they can sell the water they collect. 

Local authorities aren't required to spend money on water infrastructure so they may levy water rates, or pay for water from general rates, but they have a "power of general competence" and they are accountable to you every three years at the ballot box.  They spend money how they like, and your power to change that is tiny.

Politicians are no better able to decide how best to spend money on water infrastructure than they are on electricity (which they don’t) or telecommunications (which they don’t) or on farms. Bear in mind local politicians are primarily responsible for housing shortages because they are the controllers of permission to build housing and to allow land to be used for housing. Expect them to make similar quality decisions around provision of essential infrastructure.

Imagine if your local power company spent the money raised from your power bill on a convention centre. The reason that, by and large, electricity and telecommunications infrastructure work is because you pay for its use and the providers spend the money on maintaining and providing the service. It’s capitalism working, because those companies borrow money based on future earnings and invest in the network to continue providing reliable service.

Given that the Ardern Government is the most leftwing government in New Zealand in nearly 40 years, you might think that with reality confronting ideology, they might actually think that this is a failure due to their own philosophy not working empirically. You see if the Douglas/Richardson reforms had NOT progressed, you’d be seeing the same malinvestment in electricity (which was beset with blackouts in the 70s and 80s before reforms), and telecommunications (which famously, before the mobile phone era, saw it take weeks to get a phone line installed).

What is proposed?

It’s curious that the Government has relied somewhat on Scotland as a source of advice for how to implement water, especially when its own report indicated much better performance in England (see above)– which DID famously reform water by privatising the lot in the 1980s. It notes that privatisation of water in England  improved productivity by 2.1% per annum over 24 years (64% all up) after adjusting for quality of service improvements. Achieving a net saving of 64% in cost over such a period has to be tempting.

That is, of course, the right answer.

It isn’t proposing that, because you see, the Ardern Government is in many ways, continuity Alliance,

It is proposing:

· A water regulator to set standards for water quality, with powers to direct water providers to act to meet its directives;

· Consolidating 67 entities into 4;

· The new entities will be owned by local government

· Two boards will govern the new entities. A professional independent board, akin to boards supplying other infrastructure (a semi corporate board) and a regional representative board, which is to be split 50/50 between local government and Iwi.

· The Regional Representative Board will appoint members to the independent selection panel to select the Board, which will then select the board. In effect local authorities and Iwi will indirectly appoint the board.

· Setting of charges must be done transparently, with no changes to how people are charged in “the initial years”. The new entities will have powers to borrow.

· Protections against privatisation, mostly by local government and Iwi having to have a 75% majority in favour of it.

· The entities be statutorily required to uphold “the principles” of Te Tiriti, with the board needing to have competence in Te Tiriti, Tikanga, Matauranga and Te Ao Maori;

· The entities must direct water users funds towards the capacity and capabilities of mana whenua to support delivery of water services

· To throw taxpayers’ money at the entities to lure in local government to agree.

So it is resisting commercialising the delivery of water, preferring to largely aggregate water into entities similar to what governs water in some parts of the country already. They will be, in effect, very large Non-Commercial Council Controlled Organisations with co-governance with Iwi.

What other options were considered?

Well not commercialisation or privatisation.

The report indicates that three other options were considered:

· Local government led reform: This of course would be consistent with the Government’s philosophy, but has no merit because there are few incentives to make it work.

· A National Water Fund, akin to how land transport funding operates. Except there are no fees charged for water use nationally, and it wouldn’t really fix anything other than enable consumers in places which have well managed water systems to subsidise those in areas that don’t.

· Regulatory reform only, in other words introducing a regulator without structural reform. This would not achieve efficiencies and achieve only limited accountability.

So privatisation wasn’t considered, but the Government should be transparent as to why – which is ideology and politics. Why wasn’t commercialisation considered, by creating genuine arms-length council owned water companies, similar to Watercare services? Why not vest those companies in shares held by ratepayers (noting that it is property owners that primarily benefit from stormwater infrastructure, which protects their property from damage) or even just citizens and permanent residents as consumers? After all, the success in England in holding companies to account for quality of service, levels of investment and addressing systemic underinvestment is considerable. Why does the Ardern Government acknowledge that success then steer down another path? It seems like it is purely ideological.

What's good about the proposals?

Large entities will be able to be more professional, achieve significant capacity building and attain economies of scale. There is no doubt that there are far too many local water entities. Having borrowing powers and the ability to levy charges on consumers is also critical, but these powers largely exist now within local government.  Regulatory oversight ought to result in better outcomes than just leaving it to local government and iwi to manage, and more money will ease the pain, but that's transferring a burden from ratepayers and water consumers to general taxpayers, with no sense of the distributional impacts of that.  

What's wrong about the proposals?

The new entities wont be companies, wont be required to make a return on capital or to pay tax, meaning it will be less transparent as to whether they are operating as efficiently as they could be, or maximising the utility of their assets. As a much larger version of the current model, there isn’t so much incentive to treat those who consume water and use wastewater and stormwater services as customers. Having a customer, provider relationship more directly would provide much more input into consumer preferences than by having an advisory board.  What's fundamentally wrong with considering water similar to electricity?

Local government will still own the entities, although this ownership effectively diluted because governance is now shared with iwi, who own none of the infrastructure, nor are accountable to ratepayers.

There are probably too few entities proposed and Watercare Services, which has fewer problems compared to many other water entities, will be required to be decommercialised and merged with Northland water provision, which may mean Aucklanders cross subsidising water infrastructure in Northland. There is no need to dis-establish Watercare Services and no options given as to the number or geography of the proposed entities. Local authorities that are successful ought not to be forced to be subsumed by entities of those that are not, noting that the three waters are NOT an integrated network like energy, telecommunications and roads. There is little need for disjointed networks to be managed together, except to achieve economies of scale and professional capacity for competency.

Governance remains highly political. With local government half responsible for appointing the panel that then selects the board, the incentives are there to offer positions to those they know and trust, in short local authority nepotism. With four entities, headquartered and dominated by Auckland, Hamilton, Wellington and Christchurch, expect the local authorities of those cities to take charge.

The introduction of iwi governance is a vast increase in power for iwi over core infrastructure that has no precedent in other industries, and which assumes that Maori as both consumers or voters is insufficient in protecting and promoting their interests, although it might certainly promote iwi interests. The iwi role will be to share oversight with local government, which already has a growing mandatory iwi co-governance role in any case. Iwi have the same incentives as local government in appointing people to select a board to govern water. The outcomes expected from this are extremely vague such as enabling mana whenua to express kaitiakitanga, but what will this achieve in terms of outcomes such as water quality, quality of investment and accountability? Embedding Te Mana o Te Wai is harmless enough, but this is hardly unique, because Te Mana o Te Wai is universal to humanity. More fundamentally, the Government is effectively proposing a transfer of 50% of the power around the water sector to iwi, with neither the responsibility of ownership, or accountability to consumers or the owners of that infrastructure. It is a significant uplift from current obligations around consultation with Iwi, to hand over an equal share of governance, with no indication of outcomes or what it means for other sectors such as electricity, gas or telecommunications. It is a form of privatisation of governance, to iwi. I

Now there IS a valuable point in “iwi/Māori have roles within the current three waters service delivery system that will need to be acknowledged. They are suppliers and/or recipients of water services (particularly to rural marae, papakāinga, and rural communities).” As suppliers, they should be subject to the same oversight as other suppliers, but as recipients they are little different from anyone else. They receive a mix of good and poor service, but it is unclear why their role as consumers is more special than anyone else. Sure, water is a taonga, but it is to all humanity. It’s ludicrous to claim that it is more special to iwi than it is to any other.

However, this is more fundamentally about the Government’s interest in what is, in effect, creeping constitutional reform, by redefining the Te Tiriti partnership of Crown and Iwi, into one that goes beyond meaningful consultation and engagement, to sharing powers over assets that do not belong to iwi (the three Waters are about infrastructure, not lakes, rivers and streams after all). There IS a role for consulting iwi about the use of property they own or control, but to privatise half of the control over ratepayer owned infrastructure, to iwi deserves to be justified in terms of outcomes, when the reforms themselves are based on addressing serious problems with the status quo. Should this really be used as an opportunity to facilitate more iwi control?

What should happen?

Reforms are badly needed, primarily because many local authorities have proven themselves utterly inept in managing and funding water infrastructure. However, the Government is proposing to consolidate existing water entities, including successful ones, into four entities which largely resemble Council Controlled Organisations and share governance with iwi. Yes, having professional large water utility entities will be a step forward, but continuing to have significant local authority governance, which has proven to fail, and using the reforms to implement iwi co-governance, with no sense as to what improvements to outcomes this could deliver, is missing an opportunity.

Government should be bold, it should transfer the water assets of local government into a handful of specialist water companies, and issue shares in them all to all property owners connected to their networks and float the companies on the share market (and as a sop to fear over foreign takeover, you could even cap foreign ownership at 49%). Let the water companies meter or flat fee property owners for their services, and force councils to drop rates proportionately and NOT increase them by more than inflation. Given their quasi-monopoly status, central government should oversee the water companies in terms of drinking water quality, but by having popular share ownership concerns over water companies gouging consumers can be ameliorated.  If the Government did this, I'd accept the value of an independent regulator, to monitor and report on performance.

 It’s time to take the three waters out of the hands of politicians and put it in the hands of consumers as shareholders, and run it like a business. You have no more reason to trust this Labour Government with water reform than you would Jim Anderton, who opposed competition and privatisation of telecommunications, electricity, aviation etc etc.

We've seen the results of having a utility sector entirely at the behest of democratic accountability to the community under local government. It's been a failure.  The water sector needs reforming, it needs bold moves resembling what happened and succeeded in England in the 1980s. Shame the Government is willfully ignorant and unwilling to even consider that model as an option.

The Government claims significant benefits from their reforms, over thirty years. This may well be credible, but is based on many assumptions around efficiency savings seen in Scotland with consolidation, and that these efficiencies wont be lost in a strange new co-governance model.  However, since the Government didn't even look at the option of following England  - even without privatising the companies - we wont know if it chose the best option, as the options analysis has clearly been politically cauterised, by people whose political ideology has so demonstrably failed in this instance.

Why would anyone trust them to get this right now?  

Local authorities are currently consulting on whether communities support the Three Waters Reforms, and many oppose it, not least because local government never likes losing power and influence.  You should let them know that you oppose the proposals, but not because it takes powers away from local communities (whatever that is), but because it puts power in the hands of people who are NOT primarily interested in delivering efficient, high quality services to consumers.

So tell your territorial authority AND tell your local MP what you think of these reforms.  Be grateful also that electricity and telecommunications aren't being run by your local authority.  Imagine the blackouts.

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