On water reform National and Act are sailing on same course

Dr Eric Crampton
24 October, 2023

No election platform survives contact with post-election coalition negotiations.

But one outcome of the current negotiations seems rather obvious. The Labour government’s Three-Waters reforms will be repealed. In its place will be a model based around the Castalia model commissioned by the set of councils that objected to Labour’s reforms – Communities 4 Local Democracy (C4LD).

The change could come reasonably quickly. The parties likely to be in coalition agree, at least at a high level, on a reform agenda. And an incoming government will have a head start on the necessary policy work and legal drafting.

First, though, the high-level consensus.

The National Party’s “Local water done well” policy promised to repeal Labour’s water legislation, scrap the new water services entities, and return water assets to council ownership and control.

The ACT Party’s Water Infrastructure Plan also promised to return water assets to councils.

And while New Zealand’s First’s online policy manifesto does not mention local water infrastructure, it elsewhere opposes co-governance and supports devolved approaches “to counter the “Wellington-Knows-All” approach.” It seems unlikely that Winston would oppose repealing the prior Labour government’s legislation that mandated co-governance as part of a Wellington-Knows-All approach.

Labour established a new water quality regulator, Taumata Arowai. Both National and ACT would keep it, though ACT would exempt very small water suppliers from the rules. Regulations that can be cost-effective for a town of a thousand people may not make sense for very small rural water schemes serving a handful of neighbours.

So the new amalgamated Water Service Entities will be gone, along with their rather unique and potentially risky governance structures. But the water quality regulator will remain.

There’s also reasonable agreement between National and ACT on what should come next. Or, at least, the two parties’ proposals are generally consistent with each other.

Both National and ACT would have more central government oversight of council-owned water infrastructure management, though they differ on the details.

ACT would set 30-year agreements between central and local government for water infrastructure upgrades, with potential for investment by the likes of ACC, Kiwisaver funds, or iwi investment funds. They would also encourage councils to pursue shared services agreements if doing so actually provided benefits of scale.

National would set an independent water infrastructure regulator within the Commerce Commission. The Regulator would require councils to restore water assets to meet minimum standards and ensure they are investing to accommodate growth. Within a year, councils would be required to deliver their plans for meeting both water quality and infrastructure investment rules while being financially sustainable.

But should that fail, National has taken up the C4LD regulatory backstop proposal allowing central government to step in if councils cannot deliver a viable plan for water services.

Normally, this kind of policy reform work can take years. The set of officials who were strong advocates for Labour’s policy reforms may not be likely to deliver workable replacement legislation in any kind of hurry.

For the better part of this year, the New Zealand Taxpayers’ Union has been coordinating policy work to flesh out the C4LD / Castalia model – including drafting instructions and drafting for a replacement Local Water Infrastructure Bill.

Malcolm Alexander, former Chief Executive of Local Government New Zealand and with a background in electricity reform, chairs the Technical Advisory Group for the Bill. I have assisted on the group, along with David Hawkins, formerly of Watercare and former Mayor of Papakura; Christchurch Councillor Sam McDonald, and NZ Taxpayers Union economist Ray Deacon – who formerly served on the Major Electricity Users Group.

The proposed reforms
would shift drinking water and wastewater assets into Council-Controlled Organisations (CCOs) – for councils where water is not set as a CCO. Stormwater is fundamentally different, with assets plausibly including parks, recreation areas, ditches and roads; it is left out of the proposed structure.

A CCO can be owned by a single council, or by a set of councils. If councils find it more effective to deliver water services through a shared service model, they retain ownership of the shared entity.

But unlike Wellington Water, council water CCOs in the proposed structure would own the water assets and earn revenue through water charges, rather than be stuck like Wellington Water in attempting to manage the underlying councils’ water assets on whatever funding the underlying councils might wish to provide.

It’s a far sounder model. And, at the outset, they could be required to satisfy the Minister that they are appropriately capitalised and that Councils have not loaded them with non-water debt.

Water CCOs would prepare and publish their own asset management plans and be accountable for outcomes.

They would also be subject to commercial regulation by the Commerce Commission ensuring that the Council-owned monopoly water providers were setting appropriate water rates.

Councils like Wellington have slowly stripped their water infrastructure assets by failing to maintain and renew the network, allowing Wellington Council to fund all manner of showy above-ground projects while not increasing rates proportionately.

The proposed CCO structure would mean water would stop cross-subsidising other council activities. Water utilities would be able to charge what is needed to bring their networks up to standard and to keep it at standard.

It would also mean that other councils, or taxpayers more generally, would not be on the hook for some councils’ long-term negligence.

An incoming coalition government that broadly supports the C4LD proposal can then have a running start. Much of the legal drafting for a potential replacement Bill has already been completed, along with drafting instructions for sections requiring technical detail held within government.

That running start will be needed. National has committed to repeal Labour’s Three Waters legislation in its first hundred days, but legislation for a replacement regime will be needed quickly. Councils will need to know the regime within which their water services will operate if Labour’s Water Service Entities are abolished.

Post-election coalition negotiations usually make it hard to predict just what will come of parties’ campaign promises. But, in this area, the waters are reasonably charted.

To read the article on the Newsroom website, click here.

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