How to fix three waters

Matt Burgess
Insights Newsletter
28 October, 2021

Constitutional progress usually start with a bad government. Back in the 13th century, King John lost wars and paid for them by taking his subjects’ property. John was above the law and he took full advantage.

Then came the correction: Magna Carta. John signed it under duress and immediately tried to renege. But a principle was established and it stuck.

Eight centuries later and half a world away, the Crown is at it again. Labour will use its majority to take water assets worth $54 billion off councils and give them to four new entities. Councils will not be compensated.

The central plank of the reform is cost savings. The government says economies of scale will cut water bills by as much as 90%. Economic consultants Castalia reviewed the evidence and found the government’s claims fanciful.

The problem with water is not cost. It is scalability.

Urban councils have made it persistently hard to build a house mainly because of the way water infrastructure is funded. Water competes with other council spending for funding, and it is expensive. Councils have managed their financial exposure by restricting land use.

The result of this unholy nexus of planning and poor incentives is the worst-performing housing market in the OECD.

The solution is not to take water off councils. It is to put water on a commercial footing within councils, at least in urban areas.

Two changes are needed. First, water users should pay the full cost of water services including, crucially, a return on capital. This is how electricity lines and other essential public infrastructure is priced.

Second, water should be ringfenced within councils so that it can borrow in its own right, off councils’ balance sheets and without troubling ratepayers.

With these changes, pipes go wherever people are willing to pay for water. The pipes would just turn up, which is how it works in most other countries. Growth pays for growth.

Households will pay more for their water. But each council will receive a healthy dividend from their water business each year, a return on capital. That money could offset rates. Households need not pay more overall.

The government’s plan is based on a dubious theory and questionable evidence. It could lead to constitutional questions about the limits on what a government can do with its Parliamentary majority.

After all, it took King John to get Magna Carta. What will be this government’s legacy?

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