David Clarke: Three Waters reform - a pivotal question of control

OPINION

The proposed model for reform of Three Waters - water, wastewater and stormwater - has caused much angst and rhetoric from both the informed and uninformed. And quite understandably, given the tens of billions of dollars at stake.

Few would disagree that reform is needed. Water infrastructure has been underfunded for decades and the need for significant investment has never been more apparent.

But this is where the problem lies.

Councils are currently limited by the amount of money they can borrow to fund this necessary infrastructure. With investment issues the key driver of these reforms, councils are hobbled from the starting line because of their current high levels of debt.

In the current Three Waters proposal, it is planned that council water assets are transferred into four new Water Service Entities (WSE). What this will do is help separate the WSE’s assets from councils’ balance sheets - but with the councils still retaining ownership.

Illustration / Rod Emmerson

Once separated, the WSE should have much more ability to borrow necessary funds for infrastructure investment as the capital markets should see them as no longer part of the councils’ debt limits. How much they can truly borrow and under what conditions and prices will be determined when they actually go to the increasingly volatile markets (and all this has taken so long that sadly we have missed the low-interest rate window and the ability to get on and invest, upgrade and build).

However, there is one more critical step that must be resolved, as the litmus test of separation turns not on ownership of assets but control.

While councils will still own the WSE, they cannot control these entities to effect separation. And this is pivotal.

The common view of capital markets (e.g. banks) is that, effectively, councils could appoint no more than 50 per cent of the board of directors of the WSE if they were considered not to “control” them. The Government’s response to this has been to provide for councils to appoint 50 per cent of a WSE’s board of directors. The other 50 per cent, all or in part, has to be given to other appointments that are not related parties to the councils.

The Crown has decided that this other 50 per cent will be made up solely of mana whenua in a co-governance arrangement.

The structure is rather complex and multi-layered. The overall group - 50 per cent mana whenua and 50 per cent council - will then appoint a panel that then appoints the boards, that then appoints and monitors the management that operates the WSE.

Of course, one of the risks of 50/50 joint ventures is the possibility of an impasse. Either of these parties, mana whenua or the councils, could “block vote”, effectively a veto. This is a not uncommon practice on commercial boards. However, with good competent directors, this would be unlikely.

There are other risks too.

It is unclear where the buck will finally rest should the WSE be unable to raise the required capital for the required investments - it is unlikely to be the debt-laden councils.

Effective public scrutiny of the WSE has also been raised as a concern, with the Auditor-General noting WSE are accountable to neither ratepayers nor to Parliament (WSE are not Crown entities).

Also significant is the question of how stormwater will be managed by the four WSE. When rainfall exceeds the capacities of the pipes, stormwater flows overland and often through private properties. Who will be responsible for managing the overland flow path? This is land use best managed by local councils.

Flooding and flood management are best managed by regional councils with their statutory responsibilities and powers.

Will the new reforms deliver lower water prices compared to no reform, as the Government has stated?

David Clarke.

This should be the case but the cost of the reforms appears significant such as the reported price of $750 million for a new IT system. Statistically, IT projects of that size are considered very high risk and don’t have a good history of being on time and on budget.

It is also important that the WSE price the true long-run cost of its services, and pay no dividend. That is, use all the funds for reinvestment.

It is perhaps not a surprise then that numerous people, and many councils, are feeling frustrated with this proposed Three Waters model. Suddenly they will lose control of significant, ratepayer-built assets.

However, urgent reform is required, and the sooner the better.

If we are going to run with this proposed Three Waters model, the Government needs to address key concerns, explain the costs/benefits, assess the co-governance model and get on with implementation.

- David Clarke is a former engineer, merchant banker and a past chairman of Watercare.