In 2020 the government announced a suite of reforms entitled Three Waters. It was a concise, arresting title, but the path from announcement to the introduction of the Water Services Entities Bill this month has been anything but smooth sailing.

Technically the latest Bill is only one component of the wider Three Waters reform programme; the others being the creation of a new national regulator (through the Taumata Arowai–the Water Services Regulator Act 2020), regulatory reform (the Waters Services Act 2021), and economic regulation (still under development).

However, it is the service delivery reform – the plan to take the management of three waters services away from councils and vest it instead in new ‘water services entities’ – that has been by far the most controversial. The reforms are complex, not particularly well understood (including by some of their critics), and may now have become intractably political.

In this newsflash we outline what is proposed, some of the most common objections, and the likely way forward.

The case for reform – what is the size and shape of this problem?

Internationally, 600,000 to 800,000 ‘connected citizens’ is considered the minimum viable population basis for an efficient water supply network. That is largely not how things presently work here. For the most part across New Zealand, wastewater, water supply, and stormwater infrastructure is owned and operated by local councils (or council controlled organisations). There are 67 separate local authority water suppliers, and most of them service communities of fewer than 100,000 ratepayers.

Partly as a result of this, there is room for improvement in how we manage our three waters networks. Many of our towns and cities have infrastructure that is deteriorating and sometimes failing in unhappy ways, with burst pipes and flooded streets. Some of the country’s drinking water is not up to acceptable standards (with ‘boil water’ notices in effect), as most notoriously seen in Havelock North. Large parts of our national wastewater infrastructure struggle to meet RMA environmental requirements.

Such is the extent of historic underinvestment, the Water Industry Commission for Scotland (engaged by DIA to assist with the review) has estimated that catching up will call for somewhere between NZ$120 and NZ$185 billion of investment over the next 30 years.

Responding to this crisis is the essential motivation for the Three Waters initiative. The reforms are intended to avoid future anguish as the implications of historic underinvestment come into sharper focus. They are also an endeavour to help ratepayers in affected areas avert a yearly rates bill jumping from something like NZ$2,000 to NZ$9,000, which projections show to be a realistic prospect if the infrastructure deficit were to be funded solely by council rates. In addition, under our current settings, the cost burden of improvements could otherwise fall disproportionately upon smaller councils with a thin ratepayer base.

How are they proposing to do it?

An undertaking of this magnitude inevitably involves a process of proposal, review and adjustment. The reforms have been tweaked in response to a working group process (to respond to councils’ concerns), and could well change further before they become law.

The process of proposal, review and adjustment has seen the creation of three separate working groups:

• The independent working group Working Group on Representation, Governance and Accountability of new Water Services Entities (RGA), considering how representation, governance and accountability arrangements for water services entities can be strengthened.
• The Planning Technical Working Group, on integrating the role and functions of the WSEs with the resource management/planning system.
• The Rural Supplies Technical Working Group, considering the particular difficulties faced by rural water supply schemes.

The RGA reported its recommendations in March 2022, and many of these recommendations have been adopted in the Bill as introduced. The Rural Supplies Technical Working Group also reported back on 31 May 2022, recommending that mixed-use rural supplies be transferred to the WSEs, with a mechanism for transfer back to user ownership in limited circumstances. These recommendations will inform the later iterations of the Bill. The Planning Technical Working Group is yet to report back, and is likely to provide ongoing guidance as to how the Three  Waters reforms will integrate into the resource management reforms.

At present, the essential shape of the new system is as follows:

Four new ‘Waters Services Entities’ will be set up for four sufficiently large regions.

The WSEs will own and operate the Three Waters infrastructure, and be owned by the local authorities in each area. Each will serve around 870,000 people, except Entity A which will take in Auckland and cover 1.7 million.

They will be ‘self-funded’ by charges on water services, and loans borrowed against the assets themselves, with ‘balance sheet separation’ from councils as a core principle. Central government will play no role in the day-to-day funding or governance of the entities.

Governance will be in the hands of a Regional Representative Group (RRG).

Local authorities and mana whenua would establish a Regional Representative Group for their Entity. There would be no fewer than six local authority representatives, and an equal number of mana whenua representatives. Each RRG will have council and iwi/hapū co-chairs, a feature intended to ‘cement co-governance principles’.

The RRG would then appoint a Board Appointment Committee which would in turn appoint and monitor an independent board for their Entity (which would be responsible for the direct operation of the Entity). RRGs would also set, and monitor WSE performance against, a Statement of Strategic and Performance Expectations.

A recent addition to the system, adopting the working group recommendations, is to also provide for the creation of sub-regional representative groups (as advisory groups to the RRG).

Councils will now be shareholders of the new WSEs.

Adopting a recommendation of the Representation working group, councils will now become shareholders of their WSE, with one share being allocated to each council for every 50,000 people within their territory. Council shares will not carry any financial interests, and shares will not be allocated to mana whenua.

In addition to other protections against privatisation, a unanimous shareholder vote would be required to sell or privatise any of the Entity assets or functions.

There is funding to allay fears of fiscal undermining.

In recognition of the transfer of assets, the Government proposes a NZ$2.5 billion package (NZ$1 billion from the Central Government, and NZ$1.5 billion from the four new Entities) to ensure that Councils are able to continue to serve their communities and smooth the transition to their new role which no longer includes their water assets.

This is not framed as being direct payment for the transfer of the assets themselves.

NZ$2 billion of the package (termed the ‘better-off’ funding) is apportioned to each local community, based on an assessment of the population, community need, and the land area of that community.

The first NZ$500 million of this better-off funding is due to be delivered from 1 July 2022. To access this funding, Councils will be required to submit a funding proposal that supports the delivery of local wellbeing outcomes associated with climate change and resilience, housing and local placemaking. Many councils are well underway with this process.

The remaining NZ$500 million is so-called no-worse-off funding. This allocation recognises that a number of councils would otherwise be left in a significantly worse financial position following the transfer of their water assets. It would be allocated on a case-by-case basis to alleviate overheads resulting from the reforms, and ensure councils are still able to serve their communities. It’s likely it would primarily be allocated to smaller, rural communities who stand to be disproportionately financially affected by the reforms.

Additionally, various mechanisms are proposed to protect against privatisation, and there will likely be economic regulation with regard to the fees to be charged to consumers, and consumer protection regimes.

Te Mana o te Wai will be extended into all aspects of the reforms.

In addition to the overall co-governance focus of the RRGs, the legislation will ultimately include requirements for persons exercising functions and powers under it to ‘give effect’ to Te Mana o te Wai and the principles of te Tiriti o Waitangi/the Treaty of Waitangi.

But what about….?

Many critics appear to remain unpersuaded, however. We address some common objections below.

This is an asset grab.

The reforms are not designed to centralise or privatise the assets, but to smooth the transition of local councils into their new role where they no longer have to provide water services and, crucially, will no longer have to face escalating costs and/or a nightmare historic bill coming due. Central government will have no role or ownership in respect of the Entities, and does not stand to gain financially from the transfer. The assets will still be serving the local communities who ‘paid’ for them, just organised at a somewhat greater scale. Perhaps to some degree the confirmation of formal shareholding by councils will address concerns in this area.

This is undemocratic, we’re losing local control and accountability.

There is some truth to this statement, as the proposed transfer would see a much less direct role for individual councils in the three waters management and investment decisions.

However, in some respects this may be a feature, not a bug. Arguably local democracy ‘accountability’ – which can manifest as a general aversion to rates increases, and incentivises councils to focus on more visible or short term projects than maintaining underground pipes – has contributed to the historic underinvestment in three waters infrastructure.

That said, there is a risk that the sheer size of the four entities will leave them less accountable to communities at a local level, and a number of changes recommended by the working group are intended to strengthen community oversight through the RRGs and sub-regional representative groups.

What kind of bills am I going to start getting for this?

Arguably the recourse for ratepayers objecting to escalating water services costs, at present, is to vote their council out. In the absence of that accountability, and in a monopoly pricing scenario, economic regulation is clearly warranted. The Government’s preliminary position heading into the consultation process was that there is a good case for it. A discussion paper on three waters economic regulation is due to be published later this year.

Why will iwi/ Māori get so much say in this?

In some cases the proposed role of iwi/Māori appears to have been deliberately overstated by those opposed to the reforms. The reforms would not actually transfer any assets or shares in the Entities to iwi/Māori and wider issues in relation to iwi/Māori claims to water remain unresolved.

More to the point, for those actually working in this sector, consultation and engagement with mana whenua partners in relation to Three Waters projects (particularly wastewater) is business as usual. There is growing recognition of the need to meaningfully engage with mana whenua in decision making for three waters assets, as treaty partners. Equally, there a number of co-governance type arrangements in local government already, so while it is still somewhat novel it is hardly new.

The requirements in the Bill to ‘give effect to’ te Tiriti /the Treaty do go further than some comparable existing obligations (e.g. under the RMA), but are in line with other legislative reform (for example, the RMA reform proposals) which seek to provide greater recognition to te Tiriti.

This is yet more over-regulation.

This concern relates more to the wider regulatory changes than to service delivery, but is worth keeping an eye on. There have been valid concerns voiced about smaller (for example rural) suppliers finding themselves caught under the new regime by obligations to prepare water safety plans that would not have been otherwise required. Further work is being undertaken by the Rural Supplies Technical Working Group in this respect.

Conclusion

What lies ahead? The WSE Bill passed its first reading in the House in early June 2022, and will now go through the Select Committee process. A public submissions period can be expected shortly, and the Select Committee report in the latter half of 2022. As noted, a discussion document on the economic regulation framework can also be expected this year. Ultimately, the WSE’s are expected to be established, and operational by 1 July 2024.

In other developments, the first NZ$500 million of the better-off funding will be available from 1 July 2022. While the funding allocations have been earmarked for the respective councils, it remains up to the individual councils to apply for and secure that funding. The remainder of the funding will be available to councils after the establishment of the WSEs in 2024.

The refinements following the working group consultation process will perhaps mollify at least some of the objections. No doubt there will still be room for improvement in the Bill through the Select Committee process, and room for constructive debate around the details and system design. Equally, we can expect that a high level of in-principle opposition will remain, seemingly focused on the asset transfer away from councils, and a greater (or perhaps any) role for iwi/Māori.  Even if the reforms are passed we will wait to see if they are implemented, given the Leader of the Opposition has committed to reversing them should there be a change of government in 2023.

This week’s Cabinet reshuffle indicates that Local Government Minister Nanaia Mahuta, who has driven the Three Waters reform programme to date, still has the PM’s confidence. Speculation Ms Mahuta might lose the portfolio as a result of the on-going Three Waters controversy proved to be ill-informed. With the elevation of Kieran McAnulty as Associate Minister, however, expect to see him out and about, particularly in regional New Zealand, talking up the reform.

There is still much water to pass under the bridge. In the meantime, one thing is for sure – the looming repair work is not going away, and those leaky pipes will not fix themselves.