Background

NOTE: A full list of linked references is available at the bottom of the page.

Following the serious campylobacter outbreak in 2016 and the Government’s Inquiry into Havelock North Drinking Water, central and local government have been considering the issues and opportunities facing the system for regulating and managing the three waters (drinking water, wastewater, and stormwater).

The focus has been on how to ensure safe drinking water, improve the environmental performance and transparency of wastewater and stormwater network and deal with funding and affordability challenges, particularly for communities with small rating bases or high-growth areas that have reached their prudential borrowing limits.

The Government’s stated direction of travel has been for publicly owned multi-regional models with a preference for local authority asset ownership. The Department of Internal Affairs (DIA) acting in partnership with the Three Waters Steering Committee (which includes elected members and staff from local government) commissioned specialist economic, financial, regulatory and technical expertise to support the Three Waters Reform Programme and inform policy advice to ministers.

The initial stage (Tranche 1 - MOU, Funding Agreement, Delivery Plan and RFI process) was an opt in, non-binding approach. It did not require councils to commit to future phases of the reform programme, to transfer their assets and/or liabilities, or establish new water entities. It identified a 2020 indicative reform programme and the anticipated next steps (Reference 1).

In a parallel workstream the Otago/Southland Councils had commissioned Morrison Low to research the possibility of a regional entity and compare such an entity to Clutha going it alone. It was predicated on the basis that Otago/Southland might propose to government an option before any decisions were made. In June 2021 Morrison Low produced a report on the impact of three potential future scenarios for three waters service delivery in the Clutha District (Reference 2). The conclusion was that there was expected to be some efficiencies and benefits from a combined regional entity compared to Clutha delivering alone. This work was useful but was superseded by Government decisions in June and July 2021.

Council completed the RFI process over Christmas and New Year 2020/21 and the Government has used this information, evidence, and modelling to make preliminary decisions on the next stages of reform and has concluded that the case for change has been made (Reference 3)

In June 2021 a suite of information was released by Government that covered estimated potential investment requirements for New Zealand, scope for efficiency gains from transformation of the three waters service and the potential economic (efficiency) impacts of various aggregation scenarios (Reference 4).

In summary the modelling indicated a likely range for future investment requirements at a national level in the order of $120 billion to $185 billion, an average household cost for most councils on a standalone basis to be between $1,910 and $8,690+ by 2051. It also estimated these average household costs could be reduced to between $800 and $1,640 per household and efficiencies in the range of 45% over 15-30 years if the reform process went ahead. An additional 5,800 to 9,300 jobs and an increase in GDP of between $14b to $23b in Net Present Value, (NPV) terms over 30 years were also forecast.

As a result of this modelling, the Government has decided to:

• establish four statutory, publicly owned water services entities that own and operate three waters infrastructure on behalf of local authorities.
• establish independent, competency-based boards to govern.
• provide for iwi/Maori treaty obligations.
• set a clear national policy direction for the three waters sector, including integration with any new spatial / resource management planning processes.
• establish an economic regulation regime in addition to environmental regulation through Taumata Arowai and the Water Services Bill.
• develop an industry transformation strategy.

The proposed safeguards against privatisation can be found on pages 26 to 27 of the DIA’s Case for Change (Reference 3).

Both DIA (Reference 5) and LGNZ (Reference 6) have produced two-page national overviews.

We have been placed in Water Services Entity D, although the precise boundaries are still up for discussion.

On 15 July 2021, in partnership with LGNZ under a Heads of Agreement (Reference 7), the Government announced a package of $2.5 billion to support councils to transition to the new water entities and to invest in community well-being. This funding is made up of a ‘better off’ element ($500 million will be available from 1 July 2022 with the investment funded $1 billion from the Crown and $1 billion from the new Water Services Entities) and ‘no council worse off’ element (available from July 2024 and funded by the Water Services Entities). The “better off” funding can be used to support the delivery of local wellbeing outcomes associated with climate change and resilience, housing and local placemaking, and there is an expectation that councils will engage with iwi/Māori in determining how to use their funding allocation.

Council’s funding allocation is $13,091,148. The detail of the funding (including expectations around the use of reserves) and the full list of allocations have been published (Reference 8). Conditions associated with the package of funding have yet to be worked through.

In addition to the funding announcements, the Government has committed to further discussions with local government and iwi/Māori over the next eight weeks ending on 1 October 2021 on:

• the boundaries of the Water Service Entities
• how local authorities can continue to have influence on service outcomes and other issues of importance to their communities (eg chlorine-free water)
• ensuring there is appropriate integration between the needs, planning and priorities of local authorities and those of the Water Service Entities
• how to strengthen the accountability of the Water Service Entities to the communities that they serve, for example through a water ombudsman.

As a result, the original timetable for implementing the reform and for councils to consult on a decision to opt-in (or not), no longer applies.

Next steps are expected to be announced after 1 October 2021, which would include the timeframes and responsibilities for any community or public consultation, if that was still going to be an option. Updated guidance for councils has also been provided (Reference 9).

It is also important to note that the Government has not ruled out legislating for an “all-in” approach to reform to realise the national interest benefits of the reform.

In the interim the DIA continues to engage with council staff on transition matters on a no regrets basis should the reform proceed. These discussions do not pre-empt any decisions about whether to progress the reforms or whether any individual council will transition. On the no regrets assumption that the reform goes ahead, it is anticipated that councils will continue to deliver water services until at least early 2024 and council involvement in transition will be required throughout.

In August 2021 Morrison Low produced a second report (Reference 10) that provided commentary to provide councils support to interpret Water Industry Commission for Scotland (WICS) calculations and how those relate to the existing Clutha information, as well as a comparison of the approaches adopted by WICS and Morrison Low in the analysis of potential future costs with and without water reform. The conclusions were that overall, while the projected household charges from the WICS analysis may be the subject of some contention, they are likely to be directionally accurate. That is, household charges will increase in the new regulatory environment, and CDC ratepayers are likely to have lower household charges under the proposed entity delivery model than through continued council service delivery. This is consistent with Morrison Low’s earlier analysis undertaken for the Otago and Southland councils. See Reference 2.

Independent reviews of the DIA/WICS modelling by Farrierswier (Reference 11) and Beca (Reference 12), whilst generally supportive of the model scope and direction also raised a range of issues with the model application, which whilst technical in nature, could have large impacts on the currently published model results – particularly in South Island provincial and rural areas.

In addition, and again in parallel, Councils in the Ngai Tahu takiwa (including Clutha) have been engaging with Ngai Tahu over the entity proposals. A general set of non-negotiables were agreed by the Mayors and Ngai Tahu for application to an entity if such was to be created. Those non-negotiables are:

Public ownership

Assets must remain in the hands of the communities for our generation and the future generations. Non-Council supplies default to the new entities.

Community Care

All communities need to be able to be looked after within Entity D, including those whose councils may be aligned with Entity C and the Chathams.

Retain local and bespoke service delivery

Our communities have differing needs. Where a district seeks to maintain a higher level of service, they can require it of Entity D, fund and deliver it locally.

Governance

Mechanisms must allow for representation across the region and accountability to communities.

Ability to Grow

Communities across Entity D must have access to the infrastructure they need to grow, regardless of whether they are small or large. The base of local knowledge and skills is retained and grown.

NgāiTahu is able to exercise rangatiratanga in the Takiwā

Must give effect to Treaty principles and legislation and enable Ngāi Tahu to meaningfully participate in decision making.

Transition for success

Right capability and understanding needed of local needs to guide Entity D through the design, establishment, and transition stages.

In respect of the Takiwa boundaries ongoing discussion is happening with regard to the Chatham Islands and there is no doubt that agreement will need to be reached by the Government and Ngai Tahu over these boundary matters, with Southern Councils in the discussion.