Scottish Water CEO, Alan Sutherland

The Government’s key consultant on Three Waters reforms says he doesn’t know how much money will be needed to fix the country’s ageing water, sewerage and stormwater infrastructure.

Auditor General John Ryan has estimated that $38 billion will be needed over the next ten years.

But that is based on what Councils say they want to spend under their Long term Plans.

Alan Sutherland, the CEO of the Water Commission of Scotland (WICS) and the key advisor to the New Zealand Government on Three Waters, thinks the bill is likely to be much bigger.

“You don’t know,” he told POLITIK yesterday during a fleeting visit to New Zealand.

“I don’t think we know in Scotland after 20 years because the problem is 85% of what you’ve got is buried under the ground.

“So you cannot possibly know, even with modern technology, being able to send remote cameras down, pipes and sewers and all the rest of it.

“You can’t know exactly what’s going on.”

There are other factors.

The country’s largest water entity, Auckland’s Watercare, estimates its total revenue this year will be almost $1 billion and that it will spend just over $700 million on capital expenditure. It estimates its total net debt will be $2.6 billion.

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But even at the Auditor General’s estimate all of New Zealand would need to spend $3.8 billion a year on fixing its three waters systems over the next ten years.

In other words, it would need at least five Watercare-sized entities to foot the bill.

But Sutherland said it wasn’t only that we don’t know what is going on underground that is the problem with arriving at a firm projection for what the bill might be.

“I’ve looked at the Watercare stuff, and it’s very clear that there’s not enough proactive repair and maintenance of assets going on,” he said.

And he said housing growth would also impact future cost estimates.

However, the introduction of the Spatial Planning Bill may allow some more clarity in the future about growth areas in big cities like Auckland, which in turn should allow more accurate cost forecasting from entities like Watercare.

Nevertheless, the cost argument is the core of the case for Three Waters.

But there has been little debate on cost, in part because the Prime Minister, in particular, has chosen to try and sell the reforms as being necessary to provide cleaner and safer water supplies.

The biggest critic of both the Three Waters proposal and the Government’s reliance on Scottish Water and Sutherland is a Wellington-based consultancy, Castalia, whose executive director, Alexander Sundakov, is a former CEO of the NZ Institute of Economic Research.

Castalia was hired by the Three Waters opposition group of 24 councils, Communities4Democracy to prepare a countercase to The Government’s proposal.

It questioned its economic projections.

“The government’s estimate of New Zealand’s water investment need is underpinned by the assumption that it must match per capita investment levels in Scotland,” the Castalia report said.

“This single assumption drives the claims of how much money must be spent.”

This is the foundation of the Council’s case against Three Waters.

Instead, Castalia argues that Councils’ own estimates should form the basis of any assessment of how much investment will be required.

It says New Zealand has a more urbanised population than Scotland; therefore, it benefits from not having to run pipes over long distances.

But Sutherland is sceptical about exaggerating the differences.

“There are engineering things you can do, but that’s not the big area of saving,” he said.

WICS has suggested that the reforms could lead to greater operating efficiency and investment efficiency.

“Operating costs in New Zealand may well be higher than could otherwise have been achieved because asset replacement and maintenance expenditure has consistently fallen short of allowed for depreciation,” their report said.

But those efficiency gains rely on aggregation; entities need to serve populations of at least 800,000 to achieve the gains.

“The savings are savings are really in three things,” said Sutherland.

“The first thing is how are you going to have the right people trained with the right skills utilised fully in their specialty so they keep current.

“You need to have a degree of scale in order to have the right financial people, the right engineering talent, right asset planning talent, the right scientific talent, the right sort of testing talent, all of those sorts of things,” he said.

“It’s just st using people better.”

And then there are the huge number of engineering projects that water entities commission every year.

“ Every single one of those needs to be being monitored and needs to be being procured,” he said.

“You need to make sure you get the right people onsite at the right times.

“That’s quite an exercise, and you need skills to do that.

“And if you don’t do that, you end up having cost overruns with the supply chain; you don’t get what you want.

“Just have a look at councils and their output, how much they deliver versus what they say they’re going to deliver.”

Sutherland said the third way the entities could make savings was how they managed their debt.

This is a contentious issue in New Zealand, and alongside the potential to make savings on the cost of maintaining, growing and running our water systems, is one of the core reasons for the reforms.

The hope is that the entities will be attractive enough to investors to enable them to borrow at the lowest possible rates.

“You are reliant on debt investors, and they do not want risk, and that investor-state investors do not want risk,” he said.

“They want to be absolutely secure, that the return of their capital at the end of it is guaranteed.

“And that’s why they take a lower percentage.”

The alternative proposal launched by the Auckland and Christchurch Mayors this week suggests that to get around this problem, the Government establish what, in effect, would be an infrastructure bank.

In July, the ratings agency, S&P, reviewed the Three Waters proposals based on an assumption they would be structurally separated from local councils and the Crown, have financial and operational autonomy, borrow in their own rights, and have independent governance arrangements.

They examined how this would impact on Auckland and concluded that because the Auckland Council would be legislatively prohibited from intervening either politically or financially in the Auckland water entity, its own credit rating would jump up to AA++.

But that conclusion is based on an assumption that if the water entity got into financial trouble, the Government would support it.

The Mayors’ proposal asks that the Infrastructure Fund be guaranteed by the Crown.

“If the debts are all on the government books, how are you going to make sure that the boards of these new entities and the regulators of these new entities are really seeking out the best value for money, “ said Sutherland.

“If they don’t have to worry about their interest bill and explaining to their citizens why their bills are going up because of them then borrowing more or having borrowed unwisely or having done a bad project; how are you going to make them accountable?

“I can’t see how you do it

“It’s like a free lunch, isn’t it?”

One of the arguments against the political independence of the entities is that the ratepayers and consumers they will serve will have no say in how they are run.

Sutherland said that had not been the experience in Scotland. Like the proposals for New Zealand, the local Councils will appoint representatives to the Regional Water Organisations.

“The entities have got to make their case,” he said.

“Ultimately, when boards come with a pricing proposition and a set of projects that they’re planning on doing, they’ve got to be accountable to the people who are paying the bills.

“They’ve got to be accountable to the others who represent those people. “

They’ve got to be able to justify why they’re making the decisions that they’re making.

“In the Scottish context, don’t have any illusions; councils are very noisy about making sure that things happen in their areas, that development constraints in their areas are being solved, and they’re trying to get to the front of the queue all the time.

“And the beauty is in Scotland because those councils are not having to sort of put their hand in their pocket and tell their individual ratepayers that they’ve got to pay more to get X.

“They’re much more vociferous about what they need than they were before. I’ll tell you that.”