Eric Crampton: There's a better way to reset the Three Waters reforms

I don’t know the right number of local water service entities. Neither do you. And neither does the Government.

Sometimes, the right number isn’t the number that drops out of a careful tallying of sums by people far removed from the consequences of a decision. The right number instead is the number that emerges from a process led by those affected by it. Get the process right, and it will produce the right number, by definition.

If anyone ever tried to ask how many law firms or barber shops the country should have, no sensible person would ever try to answer it. The right number simply finds itself as people who want services shop around for them, and people wanting to provide services either take up jobs with existing providers or strike out on their own.

Are water service providers really that different?

The Government this week announced that water service reform will force councils into amalgamating their water service providers into 10 entities rather than the four it had previously favoured.

The larger number would mean that each entity would be a bit closer to the community it serves, but decisions for the West Coast would still largely be made in Canterbury. Is that right for either? And can anyone know whether 10 is the real magic number?

What was needed wasn’t consultation with Scotland about amalgamations, armies of local consultants picking numbers, or hasty rejigging of those numbers in response to political pressure.

There was, and remains, a big problem to solve.

Some councils, like Wellington, have let their pipes fall into ruin while pursuing vanity convention centres and costly strengthening of buildings that should have been demolished.

In other places, consents are coming up for renewal on wastewater plants that are not likely to make the grade.

Councils’ inability or unwillingness to expand water networks or pipe capacity in places where people want to live threatens the Government’s urban growth agenda.

But councils at their debt-to-revenue limits now cannot fund the necessary works.

Amalgamating council water service providers into larger water service entities provided a solution, but only in a very roundabout way. If amalgamated water entities were sufficiently divorced from the councils they serviced, those entities’ debts might not count towards council debt limits. They could raise debt to fund infrastructure, finance it through water service charges over time, and start fixing the problems.

And suppose those entities came under rate-of-return regulation, like electricity lines companies, and faced commercial incentives. In that case central government might have to do less cajoling to get councils to extend the infrastructure needed for growth. In the same way that power lines just seem to show up where they are needed, without substantial council-level bottlenecks, water pipes might as well.

Coming at the problem from that direction requires setting some number of amalgamated entities. And amalgamation of some entities might even make sense. But, again, there is a better way of solving the problem – one that doesn’t require picking numbers of water service providers or forcing councils to give up their water assets.

Central government could set legislation authorising councils and council-owned entities like water service providers to issue debt that has no recourse to the council main balance sheets. This kind of project-based financing was common in New Zealand decades ago and continues to be the dominant form of municipal debt in the United States.

Rather than pay off the debt for a new pipe out of general council revenues, targeted rates on the serviced properties would cover the cost over the life of the pipe. While councils can currently set special ratings areas to finance projects, the mechanism doesn’t work for projects backed by councils’ main balance sheets. There is a need for legislation allowing such bonds, while prohibiting councils from using general revenues to pay them back.

The recently-created water services regulator, Taumata Arowai, will make it harder for councils to let drinking water quality slide. And if councils had better tools for funding and financing necessary upgrades to wastewater pipes and treatment plants, regional councils might be less reluctant to hold councils to adequate standards.

Tightened standards enforcement, combined with the sheer magnitude of the job of getting pipes up to spec, would force harder thinking about finding savings in delivery. If councils could save money by combining efforts or by contracting for shared services, they’d have strong incentive to do so.

Getting the standards and enforcement right while enabling water entities to fund and finance the necessary works would let the number of water service entities find its own proper level – without expropriating council assets, and without anyone having to guess at the right number of merged entities.

It’s a much simpler solution than the Government’s proposed reforms.....The full article is published HERE

Dr Eric Crampton is Chief Economist at the New Zealand Initiative.