Matters to do with pipes and drains generally struggle to attract any sort of attention at all. What a difference one simple phrase can make. The numerous signs and billboards around the country are a constant reminder that “Three Waters” is (or was) the reform package that just keeps on drawing heat. It is perhaps unsurprising then that the phrase has now been officially retired, with the reworked package announced on 13 April being branded simply “Affordable Water Reform”.

After a summer of catastrophic weather and its alarming ramifications, and Chris Hipkins taking over as the new Prime Minister and leader of the Labour party, changes to the Three Waters reforms have been expected for some weeks. There is now broad consensus that reform of some kind is required. While almost everyone seems to acknowledge that deferred infrastructure spending can no longer be swept under the rug, agreement about the way forward is a different matter.

The Water Services Entities Act 2022 (providing for the establishment of four new entities) passed into law in December 2022. However, since taking the reins, new PM Chris Hipkins signalled the reform package was being reviewed, and deliberately avoided referring to ‘co-governance’, or the label of ‘Three Waters’ at all. Aside from the new name, the most significant changes in the recent announcements are a move to 10 rather than four water services entities, and the implementation date being pushed from 2024 back to 2026.

Meanwhile, the National Party released an alternative policy announcement back in February, and was also quick to come out firing against the new plan, labelling it a “dumb policy” and nothing but a “new coat of paint”.

It appears that on water reform at least, the battle lines for the upcoming election campaigns have now been drawn.  This article outlines the current state of play in terms of the reform programme, and the key features of National and Labour’s alternative visions for the water sector.

How did we get here?

We outlined the key features of the reforms last June. Essentially, the responsibility for managing the nation's water infrastructure (the three ‘waters’ of water supply, wastewater and stormwater) was to pass from individual councils to four new ‘Water Services Entities’. These four entities (and thus, indirectly, the assets themselves) would be owned jointly by the local councils in the relevant areas. The boards of these entities would in turn be appointed by and report to ‘regional representative groups’ with mixed council and iwi membership – this being the so-called “co-governance” aspect of the reforms.

Key legislative developments since then have been:

• Water Services Entities Act 2022 (WSE Act) passed into law, December 2022.
  • The Act establishes the 4 new Entities; sets out their ownership, governance and accountability arrangements, and provides for how the ‘transition’ of the water services from council control to the Entities is to occur by 1 July 2024.
• Water Services Legislation Bill and the Water Services Economic Efficiency and Consumer Protection Bill were also introduced and passed their First Readings, December 2022.
  • The WSL ‘omnibus’ Bill does not propose a new Act, but instead would amend the WSE Act and other local government legislation to further detail the functions and powers of the new entities, and respond to some of the criticisms of the earlier WSE Act.
  • The Consumer Protection Bill aims to provide a detailed longer-term framework for ensuring Water Services Entities provide affordable and well managed services. It will also establish a Water Services Commissioner within the Commerce Commission as a public watchdog to promote consumer interests, given the new entities will be natural monopolies and will likely fund upgrades (in part) through water levies.
  • The two Bills are with Select Committees, which are due to report back by 25 May 2023.

It is expected that the two Bills currently before Parliament will continue largely unaffected by the reworked Affordable Water package. Instead, a new piece of legislation (presumably amending the WSE Act) is to be introduced and passed before this year's election to make the changes to the timeframe and number of entities.

Work on implementing the original reforms was well underway, with transitional CEOs appointed for three of the four entities. These CEOs were to sit within the ‘National Transition Unit’ (the Government’s vehicle for overseeing the transition period) until the NTU has appointed their Entities’ establishment boards. The establishment boards were charged with giving effect to the transition from the current system to the new one by the July 2024 deadline. It is not yet clear how much of this work will be transferrable to the Affordable Water reforms, but it is likely that much of the progress made to date will have to be rehashed once the 10 new CEOs have been appointed.

The Government has pivoted: ‘Three Waters’ is out, and ‘Affordable Water’ is in – but what’s the difference?

Consistent with his wider refocussing on ‘bread and butter issues’, PM Hipkins has distanced himself from the lofty term ‘Three Waters’ and avoided reference to co-governance; focussing instead on ‘fixing the pipes’, and the need to fund the necessary investment. One of his first moves was to relieve Hon. Nanaia Mahuta of her Local Government portfolio, and to install Hon. Kieran McAnulty as the new Local Government Minister and a ‘fresh face’ for water reform.

Hipkins and McAnulty jointly announced the reworked proposals on Thursday 14 April 2023: further detail can be found in the Government's media release, Media Q&As, and Fact Sheet.

The key features of Affordable Water are:

1. 10 (not four) new regionally owned and led public water services entities, based on existing regional areas (with 16 regions translating to 10 entities because some of them are grouped together).
2. As before, the new entities will be owned by local councils, and run by a professional board.
3. Regional representative groups will provide strategic oversight and direction (to the professional board), and (as before) will comprise a 50:50 split of local council and iwi representatives.  While this overall structure has not changed, Hon McAnulty has emphasised that the smaller entities (each corresponding to fewer districts) will mean that every mayor is now guaranteed a seat at the table.
4. Expected savings to households (by reducing projected rates increases) of between NZ$$2,770-$5,400 per year by 2054 (this compares with the NZ$1900 to NZ$9000 projected last year under Three Waters).
5. A delayed start date – the new entities will begin to be set up in 2025, and operational by 1 July 2026 (delayed from the previous date of 1 July 2024).

Aside from the increase in the number of entities (which is, to be fair, a significant change), and the delayed start date, the overarching structure of the reforms is largely unchanged.

It is particularly notable that, despite pressure from opposition parties, there has been no walk-back of the 50:50 iwi and council membership of the regional representative groups. Instead, PM Hipkins has argued that it never was a ‘full co-governance’ model in the first place (although that option was apparently considered), because while the representative groups have an oversight role and appoint board members, the new entities themselves will be governed by a skills-based board.

Another key talking point is likely to be the reduced projected savings to ratepayers, compared with the original projections under the original reform proposals with four ‘mega entities’. Despite this, the focus has remained on the financial benefits of Affordable Waters. ‘Balance sheet separation,’ borrowing capacity, and lower (future) rates are still the core tenets (as they were with Three Waters).

Finally, the funding allocation to assist councils in the wake of the transfer of their assets to the new entities will also be significantly reduced relative to the Three Waters proposal. The Government will still be stumping up a total of NZ$1 billion, comprising the first NZ$500 million of the ‘better-off’ funding package which will be allocated to councils as per current funding agreements, and the NZ$500 million ‘no worse off’ package to support those councils most heavily impacted financially by the reforms. However, the second NZ$1.5 billion, which was to be borrowed and provided by the new entities themselves will not be going ahead. The Government has decided that it would be better to invest this money into the water infrastructure itself, and avoid saddling the ten entities with significant debt from the outset.

When questioned during the press conference, Hon McAnulty was upfront in saying that the reworking of the reforms involved a trade off between fewer entities with greater borrowing power and more entities with closer links to communities. He argued that a completely devolved model (as proposed by National) would not achieve balance sheet separation or adequate ability to borrow, whereas the four entity model had now been ruled out because it didn’t have the broad support of the local government sector: “Honestly, there’s a balance to strike here… I think we’ve nailed it”.

The National Party counter-proposal

National confirmed its intention in February to repeal Three Waters (as it then was) ‘within 100 days’, should it win the election in October. It has since confirmed its opposition to the reworked ‘Affordable Water’ plan as well.

While National has accepted that ‘the status quo is unacceptable” and that “New Zealand undoubtedly has a water infrastructure deficit”, its own policy document argues that Labour and its advisors have significantly overestimated the scale of the problem and level of investment required. Its ‘Local Water Done Well’ counter-proposal opts for a council-led approach to the issue, but with new standards and safeguards intended to avoid history repeating.

Key components of the Local Water Done Well

• Immediate repeal of WSE Act 2022 and scrapping of the “four co-governed mega-entities” (and now, seemingly, the less-mega 10 entities as well).
• Establishment of a new, independent Water Infrastructure Regulator within the Commerce Commission to work alongside Taumata Arowai (the existing Water Quality Regulator). 
• Councils would be required, within a year of WSE Act repeal, to prepare a plan for ‘transitioning their water services to a new model’, which must meet a new set of rules for water quality and investment in infrastructure. The proposal emphasises the need for this new model to be ‘financially sustainable’, but also states a new National government would not mandate any particular model and instead leave this up to councils.
• However, the proposal nonetheless includes “step-in powers” for central government as a “back stop of last resort” if any council or group of councils are “unable to deliver a viable plan that can deliver on outcomes for water quality, infrastructure investment and financial sustainability”.
• The NZ$1 billion already allocated to the Three Waters Reforms by the Labour government would be retained as a fund for Councils who come to the government with a demonstrable need for that funding. Councils would be required to demonstrate that all other options (such as long term borrowing) have been exhausted.

So how do the proposals compare?

In many ways, the two parties’ positions have never been more similar. It is entirely possible that National’s ‘Local Water Done Well’ could result in similar groupings of councils than what is proposed by Affordable Water. But for the history and rhetoric, most observers would struggle to see (or care about) the difference between the two.

The key differences and points of contention then, are as follows:

• Groupings of councils: this is prescribed by Affordable Water, but left entirely up to Councils themselves under ‘Local Water’. ‘Local Water’ could potentially result in more regional CCOs akin to Wellington Water.
• Ownership of water assets: this would shift to the new entities under Affordable Water. The Government regards this move as essential in order to achieve ‘balance sheet separation’ and enable long term borrowing necessary to fund much needed infrastructure improvements. National, in contrast, regards it as a ‘confiscation’, but has not yet explained how it’s proposal would address the funding challenge.
• ‘Co-governance’ aspects: regional representative groups (but not entity boards) would still have 50:50 council and iwi membership under Affordable Water. Commentators will likely differ on whether this can fairly described as ‘co-governance’ (or exactly what that term means); it is perhaps a form of it, on the weaker end of the spectrum. National continues to label this arrangement as ‘divisive’ and ‘undemocratic’.

Despite Labour’s new proposal moving closer towards National’s (in particular increasing the number of entities), there is seemingly no chance of support from the other side of the House. We can expect the debate in the coming months to centre around, among other things, whether National’s alternative will deliver the same increased access to favourable long term borrowing capacity that has been touted as a key benefit of the Government’s package.

This is currently the key unanswered question for National’s ‘Local Water’ plan, which does not include balance sheet separation of water assets from Councils. At least for now, it is unclear how National proposes to meet the enormous price tag attached to the required investment without improved access to lending, all while somehow committing to no increases in rates.

Conclusion

Several years on from the Three Waters reform programme’s original announcement in July 2020, there is still much water to go under the proverbial bridge – and significant uncertainty hanging over the water sector. It is shaping up to be a key election issue, and one of the first areas of clear policy difference. Politically, support for the reforms is likely to vary across the country, with different views across rural and urban settings, and also depending on the extent to which each region considers it might stand to benefit. Regardless of the implications for the effectiveness of the reforms (if passed), the Government’s new 10-entity approach is a politically shrewd move which is likely to put at least some of the opposition to bed.

It is regrettable that the debate has become so politically charged.  Amidst the swirl of political maneuvering and heated opinions regarding ‘ownership’ of public infrastructure, there is a need to bear in mind that the provision of safe, affordable, and equitable water services is essential for the health and security of all New Zealanders, irrespective of district, regional, and rural/urban divides.