The first shoe has dropped from the Government's Three Waters Review (the Review) with the announcement of a water regulator. The regulator will set national drinking water standards, and monitor and enforce those standards.

Given ministerial statements at the recent Infrastructure New Zealand conference, these standards will be demanding, and have made local authorities, who outside Auckland (Watercare) build and fund water infrastructure, sit up and notice. When combined with the just announced draft National Policy Statement for Freshwater Management, which will drive improved discharges from waste-water facilities, local councils are facing a constricting regulatory brace. The days of avoiding rates inflation via a near-enough-is-good-enough approach to water quality are coming to an end.

One can hardly argue with the objectives of the Review. Who can (overtly) quibble with safer aqua going in and cleaner water coming out. However, councils will be concerned about the consequential cost of these improvements and will worry the natural consequence of higher standards will be the eventual federalisation of water assets. If that occurs and those duties lost to councils, they might validly wonder if that could represent an existential threat.

While a rethink of sector organisation is not the prime objective of the initial phase of the Three Waters Review, it is surely a focus for the next phases. The reforms particularly point to the challenge faced by smaller councils to fund waste water upgrades. Local Government Minister Mahuta has promised that throughout the rest of 2019 and into 2020, her officials will be discussing “…options to improve three waters service delivery and funding arrangements” with key stakeholders. At this point the Ministers stated high-level options are:

  • Regulatory reforms only, with voluntary, sector-led reforms to service delivery arrangements
  • A three waters fund to support voluntary service delivery improvements
  • An aggregated system of dedicated, publicly-owned, drinking water and wastewater providers

How different councils will negotiate these treacherous waters will be absorbing. Some will try to get ahead of the wave, others will try to swim it alone, and some might wait for the mighty ship of state to steam by and throw them a life line.

Ahead of the wave

Some councils will pre-empt the Review by implementing their own solution. Hamilton City Council have with the award of a contract to Auckland's Watercare. The most obvious solutions involve either contracting out to a reputable service provider, or aggregation with other councils - aiming for scale and synergies. The opportunities to contract a third-party service provider range from the safe – contracting Watercare or Wellington Water, to the politically ambitious, contracting a commercial service provider (although, not without a historical precedent). The challenges for other local councils considering contracting a Watercare or Wellington Water are two-fold. First, does Watercare or Wellington Water have the appetite to grow, particularly into more challenging areas like Northland. Secondly, the willingness of Council's to cede control.

Safety in numbers – the safe option

The opportunity for councils to aggregate with their neighbours follows the course plotted by the Wellington Water Councils (Hutt, Porirua, Upper Hutt and Wellington city councils and Greater Wellington Regional Council). This approach sees the councils continue to own their own infrastructure, but aggregates operations into a single entity. This shares skills and expertise, but doesn’t remove the costs from the rating pool. Evolution, not revolution.

However, even dipping ones toe into the waters of amalgamation can have its complexities. The inability of Waipa and Hamilton to reach terms shows that the devil can be in the detail of forming partnerships (and who wants to deal with the devil?).

Swimming alone

Others, like Waipa Council, have decided to swim alone. They may have undertaken a generational upgrade of their water infrastructure and are set to stand independently for the foreseeable future. Those choosing to go it alone, may find that they don't necessarily have operational scale in the water space, but if they don’t retain a role in water infrastructure, then they would be diminishing their aggregated scale across all of their operations (roading, park's maintenance etc) to the point they risked their economic viability to provide all their functions.

A life preserve?

Despite the best intentions and protestations to the contrary, some councils, particularly ones with small rating bases and heavy tourist obligations or more comparatively impoverished constituents, may have to send up the distress flares for Government assistance. While this is not our current model it is not without equity or precedent.

Councils collectively receive only 7% of the total tax take (compared to 93% that accrues to the central government). Given this imbalance, at some point, the discussion may shift towards central government coming to the party. This does not though have to be at the end of the sword of forced aggregation. Government could just fund. There is a historical precedent for this, with a large amount of existing water infrastructure actually built by central government through the Ministry of Works and then owned and operated by local council.

In any event, it may not take long to see if the next shoe will drop – with the Three Waters Review scheduled to have detailed advice on service delivery and economic regulation in front of Cabinet towards the end of 2019. Given the narrative disseminating out of Government, one wonders if any of the above measures taken by local council will quench the thirst of Government to see fundamental reorganisation in this sector. Councils might equally ask whether Government is prepared to put its money where its good intentions are.