What will happen to water reforms now?
What will happen to water reforms now?
Monday 6 November, 2023
Is it too soon to write about this? Well no, it is not. Legislation hastily passed before the election is in place and, in part, has commenced. The special votes have been counted and although the coalition talks have yet to conclude at the time of writing, we know there will be a National led government. National has promised to scrap the newly formed water services entities and repeal the Three Waters / Affordable Water legislation (except that relating to water quality regulation) within its first 100 days in office.
Councils gearing up for their 2024/2027 long-term plans were already struggling with the planning of future arrangements for water supply, wastewater, and stormwater that would remove the associated infrastructure to one of 10 water service entities under the Water Services Entities Act 2022 and the Water Services Legislation Act 2023. Now there is confusion as the existing legislation cannot be repealed without replacement. Reverting to the revoked provisions of the Local Government Act 2002 and other legislation is impractical and inconsistent with the pre-election policy announcements from either the National or Act parties.
What will happen next is uncertain, and no firm indications can be given ahead of the tricky negotiations that precede the formation of a National-led coalition government. What seems most likely is that new legislation will embody some elements of what is provided for in the current legislation, but with a reduction in or omission of the co-governance elements, and with water services being transferred to council-controlled organisations rather than water services entities. This would allow for water infrastructure to remain at least nominally under the ownership of local authorities albeit at one step removed, but would not necessarily resolve the debt funding difficulties inherent in meeting the cost of new and replacement infrastructure.
Apart from a demonstrated need in many parts of the country to upgrade water services infrastructure, one of the drivers of water services reform was the perceived need to find methods to fund the asset development that did not put councils in breach of their debt ceiling limits. Moving the assets off the books was intended to facilitate long-term borrowing by water services entities. Debt funding of infrastructure investments so they can be paid down over the life of the asset is also National policy. However, while moving assets off Council books may avoid the impact of the quantified limits on rates set under the Local Government Act and the debt cap on lending set by the Local Government Funding Agency, it will not necessarily avoid the effect on credit quality for related organisations. Where councils own and have a high degree of control over their CCOs, the debt level of either organisation may have an impact on the credit rating of the other.
In its pre-election Local Water Done Well policy the National party said that it would require councils to deliver a plan for how they will transition their water services to a new model that meets water quality and infrastructure investment rules within a year of the repeal of the Water Services Entities Act. It has said it will not mandate any specific model for water services onto councils, but if they cannot demonstrate that they have a financially sustainable model for the delivery of water services that meets statutory requirements, there will be a regulatory backstop providing for the Government to step-in.
There are different models for what that back-stop would look like, but there will almost certainly be a new water services regulator within the Commerce Commission to ensure minimum standards are met and that investment is provided to accommodate growth. National party policy has been influenced by the Communities 4 Local Democracy (C4LD) group of councils that opposed the Three
Waters / Affordable Water model and the recent legislative reforms. C4LD proposed a model, since refined by the Tax Payers’ Union into a draft Local Water Infrastructure Bill. This means there is at least one legislative possibility ready to go if it finds favour with the yet to be formed coalition. The proposal would see ownership of water and wastewater assets transferred to council-controlled organisations (CCOs) owned by a single or a set of councils. Those CCOs would earn revenue through water charges, be required to prepare and publish asset management plans, and be subject to commercial regulation by the Commerce Commission.
Stormwater infrastructure, although a key component of recent extreme weather events, seems set to be left out of the mix except in relation to regulation of water quality. The inclusion of stormwater assets was seen by many local authorities as creating a difficulty in the reform programme because of the mixed-use nature of the assets. For example, reserve land is often categorised as Local Purpose (drainage) but its predominant use may be for recreation, and a culvert under a vehicle entrance is both a stormwater drainage and part of a road. It remains to be seen how stormwater will be encompassed within any amended models for water services.
Whatever the outcome, we can be sure change will come for most councils. While some councils may want to retain existing infrastructure models that work well and are adequately funded and maintained, it seems likely that many will seek to align with other councils or existing CCOs (such as Watercare Services Ltd) to rationalise service provision and maximise efficiencies of scale. Those who do not do so will have to find the means to meet increased water quality standards, including future servicing, or face Government intervention and the imposition of whatever model is adopted by the incoming coalition.
Tompkins Wake will continue to provide information on this topic as new policy and legislation emerges.