04 November 2021

Three Waters: The wrong solution to the right problem...

I've already written about what the problem is and what is wrong about the Three Waters proposals and what an alternative could be.  So let's be brief here...

There is a major problem with the status quo

The records of territorial authorities in managing fresh, waste and stormwater infrastructure vary wildly, and some are absolutely dire. People have died as a result, and annually thousands get sick.  Anyone who says the status quo is ok is kidding themselves.

Local authority democratic management of the Three Waters is democratic socialism at work notice the Greens are opposed to Three Waters because it challenges their own philosophical point of view.  This is not a model anyone who believes in capitalism, free enterprise, individual rights, user pays and less government should ever support. So National and ACT supporting winding back the reforms is one thing, but it is pure political opportunism to not suggest that there needs to be fundamental reform.

ACT after all was once founded by some of the greatest reformers in New Zealand's history, but that seems to have been forgotten in favour of tinkering which only has merits around the edges.

In the 1970s and 1980s, electricity blackouts were far more common, primarily because the incentives and governance around local authority politically controlled power retailers and distributors, receiving power from a central government politically controlled generator and grid operator, were appalling. Gold plating in some places, underinvestment in others, with undercharging of residential consumers, overcharging of commercial consumers.  That's democratic control of the means of production, distribution and supply, and it's a failure. Chronic underinvestment, lack of innovation, service breakdowns and no serious accountability. 

This is in spite of Labour giving us in 2002 the Power of General Competence for local government in the Local Government Act 2002, which gave local government to pursue any activity to advance the social, economic, environmental and cultural "well-being" of their community. That statist mumbo-jumbo encouraged local government to take the eye off of core infrastructure, and engage in whatever they liked that they thought was good for everyone. It is hardly a surprise that water wasn't that sexy to politicians who were empowered to get involved in any sector they saw fit.

The Clark and Key Government's effectively endorsed the status quo.  The current system is a FAILURE of the philosophy of this government, that political control of infrastructure and funding services through taxation, not user fees, and running services based on bureaucratic and political incentives, not commercial, is preferable to the much-hated model of free enterprise, private investment and capitalism.

You're absolutely deluded if you think there is real accountability in a local authority politicians risking being voted out because the sewers are broken.  After all they are ALL responsible, and ALL pass the buck either to officials or central government for not giving them more of other people's money. By and large, many local politicians are statists more often than not they distrust markets, distrust the private sector and don't like losing control. It is not surprising that in some cases the lack of water infrastructure hold up property development, because far too many local politicians want to allocate infrastructure through central planning funded by taxes, not commercial incentives funded by user fees.

Water should not be subject to political control from either local or central government.

So what about the Iwi involvement in governance?

So why is Minister Mahuta and the Ardern Government looking to turn water on its head, to take it off of local government (in practice) and to share governance with Mana Whenua? Presumably because she sees this as a way of strengthening the application of the Government's philosophy around the constitutional arrangements of the country, by implementing the concept of Te Tiriti partnership in governance of a sector of the economy, even if it doesn't involve any assets owned by Mana Whenua. 

Obviously water in rivers, lakes, harbours and other waterways are deemed a taonga, but these do not define water infrastructure assets. Those assets affect waterways, in particular either drawing from them or discharging into them, but that's a reason why Mana Whenua should absolutely NOT control Three Waters, but have a role in applying their property rights up against water service providers.

There is an obvious role for any entities in the water sector to consult and engage with Mana Whenua regarding the use of public waterways, and discharges into them. Indeed, the idea of Mana Whenua having ownership rights on at least some such waterways that need to be respected by water entities is entirely consistent with private property rights and a free market economy.  However, to blur this by giving them a say in governance of the water entities blurs this, and weakens accountability regarding outcomes over waterways. Although Peter Cresswell is right to consider providing some Mana Whenua control as a form of privatisation, it is a fiction because they can neither sell it, nor hold any financial accountability for failure (nor benefit from success). Mana Whenua are obviously consumers of water infrastructure as most everyone else is (whether as individuals consuming water and waste water services, or property owners protected by stormwater infrastructure). 

There is no more reason to include Mana Whenua in governance here than in other sectors of the economy. Either be transparent about it, set up companies and hand over shares (and let them get dividends and pay tax on that income), or just ensure the consultation and engagement process obligations exist for the new entities.  It is difficult to see what is added by including them in an opaque governance process other than the potential for cronyism, indecision and blurring of interests between consumers, property owners, custodians of waterways and the provision of infrastructure distinct from those waterways. The irony is that this Government has pushed and pressured local authorities to introduce separate ethnically defined Maori wards for local government, but is now seeking to dilute local authority power, and so the scope of influence of those elected to such wards. It would be much more effective to include Mana Whenua participation with the regulator, as this ought to be the key entity monitoring and enforcing performance around drinking water quality and discharges from waste and stormwater. Good public policy avoids conflicts of interest, so it is much better if Mana Whenua do not have a governance role in water assets, but rather a regulatory role as property custodians of waterways.

This appears to be an opportunistic move by Mahuta to appease the Maori caucus and sideswipe Te Pati Maori (or even ingratiate herself with it, if Labour needs Te Pati Maori support after the next election, which is an entirely plausible scenario).  

It's a poor governance model for water and for Maori, as consumers of water services, but also custodians of waterways.

Success depends on getting the right level of investment and in ending taxpayer funding of water infrastructure

Is there a case for reform? Sure there is.  In fact it is palpable.

So reform of water is needed, the current model is broken, and reform ought to take water away from being funded by ratepayers and be funded by consumer, through user pays of some form of another.  Matt Burgess from the NZ Initiative is right that a mix of commercial incentives and user pays are necessary to achieve the purported goals of the reforms.  He further notes in NZ Herald (paywall) how local authorities have used the inability to pay for water infrastructure as a reason to delay or oppose property development, harming housing supply. 

However, Labour politicians have for years been distancing themselves from successful reforms their predecessors implemented in other sectors that have never been seriously revisited, such as in electricity.  The bogeys of unpopular privatisations from the 1990s haunt the 2020s, even though this isn't privatisation, there is great fear there could be privatisation.

However, there are two approaches to this.  One is simpler, just leave it up to local authorities to decide whether or not to own shares (Three Waters "rules out" shares!) in water companies, or to divest themselves of it to use in other sectors.  This has happened with ports, airports and bus companies.

I much prefer issuing shares to both water consumers of fresh and waste water (those who own property or rent properties they live in) and property owners (for stormwater), and let them decide whether the public wants to own water infrastructure.

This is a complete anathema to Labour, the Greens and doesn't even seem to warm the cockles of much of the National Party - genuine PUBLIC ownership by giving the public shares. Shares in companies that charge for the use of their infrastructure, of both private and government landowners (Councils will have to pay for stormwater infrastructure protecting their roads, for example).  

I believe the public would embrace being given shares in these companies. Now they will need to raise capital, but they will be in a much better position to do this with the powers to borrow, powers to directly charge for water infrastructure and to raise capital in markets.

Watercare Services are already partway there, but the 2002 Local Government Act diluted the provisions for Local Authority Trading Enterprises, hindering their ability to borrow against income.  Watercare services could fairly easily be converted into the shareholder model.

We've been here before - with roads - and Labour abandoned reform initiated by National, to take control of local roads off of local authorities.

The case for reform of water has parallels to the case for reform of local roads that the Shipley Government tried to implement up till 1999.  

The Shipley Government had a proposal called Better Transport Better Roads which sought to take local roads off of territorial authorities and placed them into half a dozen or so roads companies.  The difference being that central government was looking to put its own roads (the State Highways) into a roads company too.  The roads companies would be required to deliver high standards of service to road user, and would be fully funded from road user fees (road user charges and fuel tax), but empowered to let road users choose between paying road user taxes or paying them directly.

A major flaw of the proposal was that it wouldn't regulate rates down after removing rates funding of roads, but you can see the parallels with the Three Waters proposal.  The merits were that National saw that councils in many cases didn't adequately fund local roads, and that there was too much diversion of council attention onto politically sexy activities (stadiums, conference centres, art works and sports events), moreover it wanted to move to a model of full user pays - and that roads ran as businesses, with the ability to borrow and directly charge road users, would do that.

Local authorities HATED it, SO DID LABOUR. Labour complained that it was taking away local democratic control and would be a precursor to privatisation.  Of course roads companies weren't going to be sharing governance with Mana Whenua either.

This is a chance for worthwhile reform that engages the public and gets incentives right

But the Ardern Government has been dishonest with local government. It consulted, and didn't like the response it got, so it is doing what it wants anyway. Minister Mahuta claimed on TV that 30 options were looked at, but only a handful are depicted in the consultation documents. 

It is also completely uninterested in letting the allocation of resources and investment be determined by user preferences and market forces.  Water reform in the UK has been extraordinarily successful, with similar issues to New Zealand, through commercialisation and privatisation. It's pure blinkered ideology to ignore that, but Labour need not privatise water to get many of the benefits of a commercial model that applies user pays.

Three Waters reforms as they stand risk creating entities with poor incentives for efficiency, poor incentives for high quality customer service and poor incentives to avoid gold-plating or green-plating investment from funding provided by central government. There will be poor incentives for users to use water more wisely, and without generating a return on capital little indication as to what are the most efficient use of resources across the sector.

However, given the grotesque level of malinvestment being directed into other sectors (see Kiwirail), it's hardly surprising that the Government doesn't really understand the merits of stepping back and letting a sector be professionalised away from political and bureaucratic control of investment.

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