The water sector has made fresh calls for a new independent regulator as the Government launches a major review to tackle New Zealand's water woes.

The Department of Internal Affairs-led review will probe the way the "three waters" - wastewater, stormwater and drinking water - are managed.

It follows revelations last year that three quarters of a million Kiwis and countless tourists are drinking water that may not be safe.

"The local government sector cannot fix the significant challenges ahead of them and neither can central government," Local Government Minister Nanaia Mahuta said.

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"Our cities, towns and communities are facing challenges of ageing infrastructure, climate change, declining populations in rural areas, rapidly increasing population growth in urban centres – that's why the Government is looking to develop workable solutions to these issues."

The work would consider whether current regulations were working and the case for a new dedicated body - something called for by the industry and the Government's inquiry into the Havelock North gastro outbreak.

It would also look at who were the best entities to be providing water services, although in a letter sent to the sector last week, Mahuta said she was mindful the "core principle of public ownership" would underpin considerations that came out of the review.

In a separate Cabinet paper, Mahuta said the review was an opportunity to undertake a "comprehensive programme of reform" to transform three waters services, strengthen the regulatory regime, and start tackling the funding pressures facing the local government sector.

The four main focus areas of the review were oversight and regulation; funding and financing; transparency and accountability; and capacity and capability of decision-makers and suppliers - which included looking at the Havelock North inquiry's recommendations for the aggregation and licensing of drinking water suppliers.

Water New Zealand chief executive John Pfahlert said his sector group supported the idea of the Government setting up a new independent water regulator.

"The conversations that were going on at the [Havelock North] inquiry were around a water quality regulator for drinking water, but we think the conversation should at least consider the possibility of regulating wastewater as well."

The group also wanted some form of mandatory requirement for residual disinfection - through an agent such as chlorine - in water supplies.

"In our view, we need to have another look at whether the way we deliver water services, in terms of having 67 councils across New Zealand doing it, remains the most effective and efficient.

"We think the Government should run its ruler over local government to decide whether those functions should still be carried out at a local government level or whether they should be aggregated up to a smaller number of entities, based on a Wellington Water or Watercare model."

Pfahlert also wanted to see more training offered to ensure operators were in step with international best practice.

"I think there's a general and growing expectation from the public that when you turn the tap on, you get fresh, clean water - and there is an expectation that you shouldn't have to think about whether you're going to get sick."

The 2016 Havelock North gastro outbreak saw more than a third of the town's 15,000 people become sick from contaminated drinking water.

A December report of the inquiry into it was scathing on the suppliers - usually the local authority, monitored by the Health Ministry - for not ensuring safe drinking water.

While water in Auckland and Wellington was safe to drink, elsewhere at least 721,000 Kiwis were drinking water that was "not demonstrably safe".

Hundreds of thousands more people may be exposed, considering the numbers didn't include about 625,000 New Zealanders that drink water from self-suppliers or temporary suppliers, or the deluge of tourists that visit non-compliant townships.

The inquiry recommended a major overhaul of the system including 51 recommendations, including the universal treatment of drinking water, establishing a new independent drinking water regulator, and stronger laws and regulations to enforce standards.

Local Government New Zealand (LGNZ) president Dave Cull said his group favoured a "co-regulatory" approach where regulation was shared between councils and the Government - something he added wasn't supported by recommendations from other groups.

"LGNZ recognises the need for improvements across all of the three waters infrastructure and governance, and the way forward for that is collaboration between local and central government to develop new cost and funding mechanisms," Cull said.

"We know that the funding streams that local government has at its disposal - which are largely property rates - are simply not going to be sufficient or affordable for our communities."

A Beca report found councils could have to spend $500 million to comply with new drinking water standards, but Cull said that figure was conservative.

"So we are going to need to be having some serious conversations with central government about alternative funding mechanisms - or just simply how water infrastructure will be paid for."

In her letter, Mahuta acknowledged that ageing infrastructure had meant "significant cost pressures" and challenges to service delivery.

"We need to deal more effectively with the pressing issues confronting waters infrastructure but with a strategic approach in mind," she wrote.

"The Government is committed to confronting the scope of this challenge as we seek to protect the health of people and the environment, and to support a strong economy.

"That is especially so in the face of challenges like climate change, declining populations in rural areas and increasing funding and financing pressures on small communities."

The Havelock North inquiry had found there had been no marked improvement in the number of suppliers supplying safe drinking water between 2009 and 2016 period, despite a law change in 2007 that was considered international best practice.

Improvement in compliance has also been negligible since the outbreak in Havelock North.

"Twenty-seven supplies failed entirely to take any remedial action after a transgression," the inquiry heads reported in December.

"In the aftermath of the bacteriological outbreak in Havelock North, these failures to respond effectively to transgressions or to monitor adequately are surprising and unacceptable."