Local Government Minister Nanaia Mahuta

The realisation that the country faces a looming crisis over its three waters’ infrastructure goes back as far as 2014.

Then a Local Government New Zealand Issues Paper signalled there would be major problems financing the replacement of an already ageing network of pipes, reservoirs and treatment plants.

It is that fundamental issue – how to finance the infrastructure — which lies behind Three Waters but which has been obscured by the Government putting its political emphasis on water quality, privatisation and co-governance issues.

Speaking on Friday, Infrastructure Minister Grant Robertson said the whole point of the Three Waters exercise was to aggregate the existing Three Waters assets so they could have sufficient working capital to undertake the billions of borrowing that will be required to upgrade the infrastructure.

It is a point that has been lost in the emotional and, at times, irrational debate that has greeted the reform proposals.

They were a long time coming.

In 2014 the Local Government Issues Paper, prepared by the Castalia consultancy firm, surveyed the state of three waters infrastructure in New Zealand.

The consultants were up against a major challenge from the beginning; there was little comprehensive data available on the state of New Zealand’s water infrastructure.

So they surveyed Councils and found that significant numbers had not spent their full depreciation allowances to fund the maintenance of their water systems.

In a 2019 report, the Auditor General found that in 2018/19, all councils’ renewal capital expenditure was 79% of depreciation. 

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“We remain concerned that councils might not be adequately reinvesting in critical assets,” the Auditor General, John Ryan, warned.

“If councils continue to underinvest in their assets, there is a risk of reduced service levels.”

National’s Finance Minister 2015, Bill English, was aware of the problem.

He launched a 30-year Infrastructure Plan which included a commitment that Infrastructure providers would collaborate more effectively within and across regions, “taking a long-term view and ensuring adequate investment in high-growth communities.”

As a start, the plan proposed the coming together of three Waikato local bodies, Hamilton City, Waipa and  Waikato District Council as a pilot to explore the benefits of working together on three waters issues.

In 2017, Infrastructure NZ led a 32-person delegation split 50/50 between the private and public sectors to Scotland to look at infrastructure and in June of that year, a report, Building National Infrastructure Capability: Lessons from Scotland, offered what now appears to be the blueprint for Three Waters.

“Scotland’s previous five water service operators struggled to provide clean drinking water, and the environment suffered from poor wastewater treatment,” the report said.

“Weak asset management meant future customers were facing rapid price increases to replace and maintain services.

“This is the situation facing a number of council areas across New Zealand today.”

The report said that the Scottish solution of a single water provider for the whole country would be unlikely to offer the best value for money.

“A more obvious alternative is to consolidate services at the subnational, for example regional, level.

“Councils could transfer their water assets into a jointly owned specialist water provider and deliver significant improvements in levels of service.

“Value would be achieved from a greater focus on water service delivery, improved strategic direction, economies of scale and skills development.

The report noted that Scottish Water assets sat on the balance sheet of the Scottish Government, meaning that capital spending was subject to rigid budgetary processes.

“Regionalising water services in New Zealand could involve removing the assets and the debt

from council balance sheets.

“This would in some cases allow for greater council investment at the same time as the water company could borrow independently to fund priority capital works.”

The only real addition that has subsequently been made to Infrastructure New Zealand’s recommendations based on the Scottish water model is the addition of the Maori seats on the governing Regional Representation Groups.

By 2018 momentum was building on reinforcing national safe drinking water standards after the 2016 campylobacteriosis outbreak in Havelock North, which had seen 5,500 of the town’s 14,000 residents become ill; 45 were subsequently hospitalised, and there were three deaths.

Launching a “conversation” with local Government about how to manage the cleanup, Local Government Minister Nanaia Mahuta was adamant that because rates would not be sufficient to foot the bill, Councils would need to look to aggregation both to cut costs and to develop vehicles which could raise additional funding.

Cleaning up drinking water was the cheap part of the equation.

She said it was estimated to cost $500 million to improve drinking water to what would be a new post-Havelock North standard.

But it was estimated that the bill for only part of the wastewater cleanup could be $2 billion.

Mahuta and Department of Internal Affairs officials unveiled the plan at the Infrastructure NZ conference in 2018; at that stage, they proposed what they called a “Super 15” model, which would have five instead of the eventual four water bodies.

However, Mahuta’s 2018 cost estimate proved to be hopelessly optimistic.

A 2021 report by the Water Industry Commission for Scotland (WICS) estimated New Zealand would need to invest $120 billion to $185 billion in our three waters infrastructure over the next 30 years to catch up on the historic underinvestment and plan for the future.

It is the size of that bill that the Government uses as its justification for having four large water bodies which would have the capability to borrow significant sums of money.

“The whole point of this is to aggregate up the assets that are there, and we believe that once we do that, they’ll certainly have the working capital they need to get on with the job of improving water infrastructure,” Robertson said on Friday.

“That’s the very point of the exercise, and one of the reasons we work so hard to make sure the balance sheet separation continues is because that’s what enables the entities to borrow and be able to achieve a much greater level of debt financing than any individual council could. “

Internal Affairs officials said last week in a media briefing that because the bodies would be larger, they would be able to borrow six or seven times their income against the three times income that individual Council entities could.

The reason for that is that the more direct political control there is over an entity, the lower its credit rating.

That was confirmed in a statement by the credit rating agency Standard and Poors late last year after they reviewed the various scenarios for Three Waters reform.

“In our view, under the scenarios presented, the impact on a local council’s credit rating is likely to be increasingly negative where there is a greater level of local council influence and control over water service entities,” they said.

“Regarding the water entities, we consider their business risk profiles and credit ratings would benefit from a larger asset and customer base in the scenarios presented.”

Former Labour Minister and veteran local body politician, Dover Samuels, has been a member of Kahui Wai Māori, the Government’s Maori advisory body of=n freshwater reform.

Samuels told POLITIK that local Government had done nothing to maintain three waters assets over the years.

That was because local Government always wanted the Government to do the job and to provide the finance.

“Of course, now it’s come to a crisis situation where everybody is pointing the finger at everybody else,” he said.

“This issue is not a new one.

“I have no confidence in local authorities managing our waterways.

“You have a look at that. Have a look at the condition of our waterways and our rivers with respect to now, and of course, three waters falls into the same category.

“They’ve never given it any priority. Neither have they budgeted for it. Now they want the bloody taxpayer to foot the bill.”

Samuels also believed that co-governance would work and said that initially when Kahui Wai Maori began its work on the freshwater reforms, the other advisory bodies focused on the economic aspects first, but he said after Maori made the case for the mana o te wai (the power of the water) the other groups had accepted their point.

The Maori focus would continue to be on the quality of the water.

The Government faces a noisy and sometimes angry opposition to its reform proposals. However, there are signs that the local government protest group, Communities for Local Democracy, is beginning to fracture, with Waimakiriri and Queenstown Councils breaking with them over the past week.

National and ACT remain resolutely opposed but so far have not produced an answer to the finance question.

But then, the Government, with its pushing of the finance issue into the background, has hardly demanded a response from them.