Here are four realities about Three Waters that have been ignored by Minister Mahuta and the mainstream media.
Reality check one
The Water Industry Commission for Scotland (WICS) report assumes the four new water entities will significantly reduce operating costs, and deliver lower-cost capital spending. They assume there is "an efficiency gap" (by that they really mean inefficiency) that will be closed within 10 years and will result in a 53% saving in annual operating costs from year 10. This, they say, is based on evidence of water reform in the United Kingdom (UK).
They qualify this by saying;
"The scope for cost reduction will, however, require a commitment to a full package of reform: investment; financial freedoms, clarity in objective setting, empowered regulation and incentivised management." (Page 32, Powerpoint presentation, Entity A: the use and analysis of the RFI information and other benchmarks.)
Reality check: New Zealand is not the UK and UK water services do not have an indigenous 50:50 "partnership" co-management model that is the foundation stone of our Three Waters reform. Rather than having incentivised management which is required to achieve efficiencies, management of the four entities is more likely to be disincentivised by having to meet the unknown costs of the cultural and spiritual considerations embedded within the governance and management structures.
We know from other co-governance arrangements that iwi act in the best interests of iwi (like the debacle involving the DoC funded visitor information centre at Punakaiki, see HERE >>>).
Reality would suggest the entities will be burdened with additional costs that have not been factored into the WICS model. How much those additional costs will be is impossible to quantify as no other country has passed control of essential water infrastructure to a monopoly controlled by a vested interest group representing 16.7% of the population.
Reality check two
When comparing the status quo with an amalgamation model, WICS assumes new capital spending on water infrastructure would be fully recovered from rate increases, once councils reach a debt to revenue ratio of 2.5 times. However, the new water entities are assumed to have a debt capacity of 6.25x revenue. This significantly tilts the figures in favour of the WICS model because it can borrow substantially more before raising water charges to property owners! That "advantage" will disappear once the 6.25x debt level is reached, but until then the true cost to ratepayers is under-stated.
For example, the Whangarei District Council collects $40 million a year from water services. According to the WICS model, it could borrow $100 million against that income stream to fund new infrastructure, but they assume the new entities could borrow $250 million. That's a difference of $150 million that according to their model did not need to be collected from ratepayers! No wonder the WICS figures look good.
Reality check three
The WICS modelling also assumes council spending on water assets will be in addition to other spending, without any reduction in spending on other capital projects. My experience as an elected member of the Whangarei District Council is otherwise. I cannot speak for other councils but when setting rates, we had regard to affordability - the ability of property owners to pay. This was a particular concern because Whangarei had, and still has, a high proportion of ratepayers on low or fixed incomes (retired folk and beneficiaries).
That influenced our capital spending because we worked back from what we felt ratepayers could reasonably afford, to arrive at a surplus available for capital spending (which was boosted with prudent debt funding). It was that residual figure that determined how far we could go down the capital projects priority list. From memory, there were around 150 items on that list and our money would run out somewhere around 25 or 30.
Essential infrastructure was always top of the list. Of lower priority were the nice things to have (the wants rather than the needs): new library, new council office buildings(!), new sports fields, reserves, playgrounds, staff cars (!), etc.
I recall one year we had to find an extra $10m to improve water treatment to meet World Health Organisation standards. We "found" the money by deferring other capital projects. We did NOT increase rates by $10m which is what the WICS model assumes.
Capital budgets are flexible and councils are sensitive to issues like affordability. That is completely ignored in the WICS model.
Reality check four
Under the government proposal, the new water agencies will be charging you for water services and your local council will continue to collect rates and charge fees to fund their other services.
Minister Mahuta has said nothing about how the Three Waters reform will affect councils and the rates they will charge. Will your council be able to reduce their rates to fully offset the bills households will receive from the new water entities?
Here's the reality. Councils will be giving up a significant income stream to the new water entities. In Whangarei for example the district council collects a quarter of its total revenue from water services.
$5 million of that revenue is a contribution to council overheads: The salaries and wages of administration staff and councillors, office space, power, vehicles, cultural training courses, etc.
Will overheads fall by $5m after the water assets have been transferred?
Will councillors take a pay cut? No.
Will council CEOs take pay cuts? No.
Will councils downsize their office space? Maybe, if they can. The Whangarei District Council can't because it is building a new council office building designed with surplus space to allow for growth in staff numbers!
The reality is some of the council overhead that is currently being recovered from water charges, will have to be recovered from an increase in general rates or fees for other council services: Building inspections, dog registration fees, resource consent fees and the like. Minister Mahuta says nothing of this.
Each council should quantify the net effect Three Waters will have on rates and let ratepayers know how much their rates bill will reduce should Three Waters go ahead. Ratepayers need to know the full story.
Frank Newman is a political commentator and investment analyst, and a former local body councillor.