Garry Law

 A few weeks ago the Government and Auckland City announced that they had agreed arrangements for a new financial basis for Watercare, Auckland’s CCO (Council Controlled Organisation) for water and wastewater. Details were few beyond it being a balance sheet separation, freeing Auckland Council to be able to borrow more.

The Bill has now appeared - Local Government (Water Services Preliminary Arrangements) Bill 52-1 (2024), Government Bill – New Zealand Legislation

It covers more than Watercare, including the potential creation and regulation of Council-Controlled Water Organisations (CCWOs) for the rest of the country, outside Auckland. These might include stormwater if the Councils choose (but not in Auckland, Watercare is just water and wastewater). The process of creation of these – especially if they are joint across several Territorial Authorities - is tortuous.  There is the ability to provide organisational resources to help in the creation of these. 

The former Three Waters programme was a mandated outcome to deliver fewer better resourced water entities. That was a fundamental need. The labelling of this change as Water Done Better is not credible. Meeting this fundamental need will not necessarily be the result. A better outcome from Local Government reforming itself lacks credibility. In the past the Government has always had to lead. The tools here for CCOs covering larger areas have always been available, investigated at times but rarely taken up. Wellington was an exception but a messed-up version with few assets. In an asset intensive undertaking like water that is a recipe for a poor outcome. Poor pricing and investment decisions resulted. One can predict slow progress with new CCWOs, despite that they must have a head start with the planning that was done with Three Waters entities, past asset management plans and long-term Council plans.

 There is no provision for specific Māori input to Watercare or any future CCWOs. It little reflects the Treaty in that respect and must be an unstable element in respect of the future.

Not mandating stormwater is an improvement. It was always a poor fit. I and others have commented on this before: Scroll down to an earlier post. 

Looking more to Watercare and its split from Auckland Council: During the Three Waters debates there was a fair bit of nonsense talked about debt.  Local Government can borrow as much as it can afford to service, considering the amount of revenue it can generate, taking in some risk on the certainty of that. In Auckland the big revenue sources are rates and water metering income. You can borrow against one or the other or both. It’s a zero-sum game. The ability to borrow is set by the total.

 Surely you can borrow against assets? Not really – the assets – especially water and wastewater ones - are very specific to their purpose – a lender that resumed them can only use them to run a water business – a business that few lenders would want to get involved with in detail. Anyway this Bill will prohibit encumbering assets. Council non-water assets are pretty much dedicated as well. Their cash flow apart from rates is small. A receiver will not find relief in some quick turnaround. Success in this industry comes from good long-term management.

There was a lot made of creating the Three Waters entities freeing Councils’ ability to borrow. That could only happen when the separated water entity was placed in a poorer position with respect to borrowing. The zero-sum issue. This was rarely discussed but came to a head in a late piece of the Three Waters legislation where the Crown accepted it would have to guarantee the new water entities’ debt – an admission that negated an awful lot of the pro-Three Waters propaganda to that date. The control change was a lot more than Māori involvement.

 Appended below is a piece that looks at the ownership role that was involved with having CCOs.

 This legislation leaves Watercare owned Auckland Council, but it has its ownership functions resumed by a Crown Monitor. Its controls are (extract from the Bill Part 1 Preliminary provisions - slightly edited for clarity):

“Watercare charter.

Clause 63 provides that the Crown monitor must prepare and make a Watercare charter.

Clause 64 sets out the details of what must be contained in a Watercare charter: minimum service quality standards, financial performance objectives, and a customer compensation scheme.

Clause 65 requires Watercare to submit a draft business plan to the Crown monitor…

Clause 66 requires that each business plan that Watercare submits to the Crown monitor must cover a period of at least 10 consecutive financial years, with more detail provided in respect of the first 3 years than for the rest of the period.

Clause 67 provides that when it receives a business plan from Watercare, the Crown monitor must review the plan and provide comments to Watercare, and may require Watercare to provide additional information.

Clause 68 sets out the details of a price-quality path that must be contained in Part 2 of a Watercare charter.

Crown monitor to monitor and report on performance.

Clause 71 requires the Crown monitor to monitor Watercare’s performance under the charter.

Clause 72 requires the Crown monitor to report annually on Watercare’s performance against specified components of the charter. “

As at present, Auckland Council as owner cannot take a dividend from Watercare, nor can it guarantee any debt of Watercare.

Essentially Watercare must now finance itself, off its own balance sheet – effectively the security of its cashflow and on its reputation to prudently manage its operations and new capital investment.

The normal CCO ownership functions of considering cost and service quality have been transferred to the Crown.

The Bill is silent on what rights Watercare has as a service provider. It is not the Act that other utilities have, to site, access and manage their needed assets and charge for their use. Perhaps this is still to come. It is a needed separation from being a Council function, using things like by-laws.

Does this loss of control matter? Watercare is deeply embedded in the fabric of Auckland:

• ·   It leases a substantial amount of Council parkland for its headworks operation and is of its own initiative converting some of that land from commercial forestry to indigenous forest  
• ·   Its service area must closely relate to the areas Auckland Council requires serving – typically the urban boundaries
• ·   Watercare is inevitably bound up in servicing the remaining combined sewer area. The bargain here is that Watercare has built the new Central Interceptor to take more of the wastewater that otherwise would spill, causing stream and harbour pollution, and so in turn Auckland Council avoided having to separate its combined sewers
• ·   Its service standards must be what Auckland needs and can afford. Something Auckland Council should be better able to determine than a Crown Monitor.

 The first risk of this new separation is that Watercare will focus on satisfying its new regulator - the Crown Monitor – not its owner and these four key relationships will become secondary.

A further risk is of ever-increasing Crown assertion of ownership rights.

 The Bill makes provision for what might happen if Watercare defaulted on its debt. The outcome considered by the Bill is that a receiver might be appointed. This is an unlikely outcome. Despite what the Bill says a receiver could hold Auckland to ransom. Someone in the public sector is a provider of last resort. Crown or Council? There can be little doubt that if such a situation approached the Crown could resume all ownership functions – a full Crown takeover. Worse, a Government could regulate prices more than here, to force a crisis and take full control. With full control, more complete regulation and allowing dividends, a full or partial privatisation would be an option. This may seem to be well beyond current intentions but it is closer to reality than with the current Watercare CCO.

 Will the finance market believe that Watercare and the Council are truly separate? – maybe not – the risk that Watercare might, in near default, fall back on Council may still weigh. Council’s borrowing might still be linked.

Council has entered into a Faustian bargain – it is proposing to yield control of Watercare so as to maintain its ability to borrow as a Council for other purposes.  Has it served the interests of Auckland? – in my view no. It is a short-sighted decision.

Appendix – Council Controlled Organisations

Normal businesses must consider four influences. Competitors, Customers, Regulators and Owners. A monopoly business has no competitors and hence its customers have no sovereignty, have no choice of suppliers and weak influence over service levels. Regulators and Owners become all-important. Regulations can be made in areas of Price, Quality (of products) and Service. In water, delivered water quality and effluent quality are regulated – the former inadequately as revealed by Hastings and now corrected. To date prices and service have not been regulated. It was threatened as part of Three Waters, but that was left as future work. Essentially with a local government owned monopoly CCO, the ownership function merges with control of prices and service levels. The Council is owner and part regulator. The whole control is by the Council and ultimately through the democratic process.

 The trade-off in prices here is that the Council as the owner of capital invested forewent a dividend return on its investment, and the community benefits from lower costs from that absence. Of course an economist will argue that this is under-pricing of services and will lead to inefficient decisions on use both by consumers and on investment by the Council and its CCO.

 In its initial form as a bulk provider Watercare had an insubstantial owner. It was officially precluded from any guarantee over debt by its owner or by its multiple council customers but there was an implied guarantee. It had no difficulty borrowing because of its cashflow from the council customers, but also because of the implied guarantee.

 Later as an integrated supplier Watercare had a single substantial owner – the City Council but also a substantial income of its own, especially after wastewater service was charged through water metering. Auckland City chose (? or perhaps was required - beyond my knowledge) to consolidate Watercare into its books as its debt and assets, rather than as a shareholding. Inevitably lenders looked at it that way anyway, for while an owner guarantee on Watercare’s debt was forbidden there is still an implied guarantee.

The change from this regime to the one proposed in the Bill is substantial and worth of more debate that has occurred to date.

Garry has a long involvement in the water industry, in Auckland and Brisbane, in engineering, management and consulting. He was the first Chief Executive of Watercare in its initial bulk servicing role and later Manager Water in Brisbane City for water and wastewater to end customer service.

Sunday, December 24, 2023

 The best change that the Government could make to its Three Waters proposal is to forget about including stormwater.

Note - published on Facebook July 2022

Stormwater might seem at first glance to be another piped utility like water or sewerage. But the reality is it differs a lot, for the piped component is only a part of it. Concentrate on the piped part and you will get a poor outcome.

Well-managed stormwater looks like this: Firstly the largest impervious areas that are connected to stormwater systems are roads. Managing stormwater fundamentally involves how road drainage is connected. Pollution from roads is controllable to a degree by road sweeping and by regular catchpit cleaning. With more modern roads often peak flow attenuation ponds are built into the road layout. Roads, a few state highways aside, are managed by local government.

The greatest pollution events with stormwater are during land development, when bare soil is exposed and is prone to erosion. Controls by limiting bare soil areas and by using sediment traps come through local government consent processes.

Best practice urban stormwater design involves retaining some natural waterways, which can only be done by detailed land use master planning – done by local government in advance of development. But because entirely natural systems and development are incompatible, because the amount and the timing of runoff inevitably changes. Limits are often placed on impervious area to reduce runoff and peaks – a control available to local government in plans and development approvals. Not everything can or should be piped. Piped systems need a relief in extreme storms – through planned overland secondary flow paths, again detailed in land-use planning – done by local government. To moderate intensification of flows mid-catchment ponds are often used. Not entirely natural but with care, better than pipes. They get planned in land use planning and get set into park areas, managed by local government.

Lower in catchments, depending on the topography some flooding may be inevitable. Local government planning controls can limit areas which may be built on, or where building is allowed then floor levels need to be set above expected flood levels – through plans and consent controls. Flood overflow storage can need preserving by not allowing land filling to take place – again a local government control.

Lastly where intensification is taking place there are off-sets that can be engaged such as on-site stormwater retention, think very local tanks or rain gardens, required as part of development – required by the consenters of the development – local government. These store some of the run-off, reducing peak flows and can have some quality benefits as well.

Land use planning and development controls are key functions in stormwater management - best run by those that understand them – local councils. These functions are subject to local control through the elected councils – control appropriately close to the application.

The message should be clear – local government is fundamental part of stormwater management. Any devolution to a remote pipes centred agency cannot get the same results, as it will not have all the tools. Local Government New Zealand is now saying delay transferring stormwater to the new entities. It’s better to not do it at all.

Would stormwater’s management improve with some input of Mātauranga Mäori? Yes, but it would be more complete input through local government to involve all the tools.

Reform of water supply and sewerage provision has long been needed to achieve better technical focus and economies of scale. Get on with that.

Garry Law

Garry has past engineering and management roles in water including Works Director at the ARC, first CE of Watercare and Manager Water for Australia’s largest council, Brisbane.

(Below) A retained natural stream through an urban area flowing from top right to bottom left, through parkland. The pond in picture central is a retention and settling device to limit the peak flows and to encourage settlement of sediment.

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