What is the Three Waters Restructuring Actually About?

While the restructuring proposal talks about ‘three waters’ – fresh, waste and storm water – it is really about the massive infrastructural requirements to manage them. Another three waters – estuarine and marine water, natural water bodies (streams and lakes) and groundwater/aquifers – are not included because their management is not so dependent on huge capital assets.

The capital value of the infrastructure is thought to be about $40b but projections suggest they may eventually cost as much $185b if we get it up to the quality we want. (Statistics New Zealand thinks it is our sixth biggest industry by value of its capital stock, behind housing, real estate transport, electricity and education and above health, central government, telecommunications and mining.)

It is generally accepted, even by the managers, that the three waters are managed badly. Among the incidents cited are a gastroenteritis outbreak in Havelock North which made more than 5000 people sick, 45 hospitalised and possibly three dead, while Wellington City's ageing pipes regularly burst, spilling sewage over the streets. Not to be left out, Auckland beaches get polluted after heavy rain, while some residents of Karitane and Waikouti (north of Dunedin) were told not to drink their tap water because of its lead levels. Nationally it is thought that the drinking water of a fifth of those on town supply – 800,000 New Zealanders – is not ‘demonstrably safe’. In his recent report to Parliament on the local government sector the Auditor-General tells us that the amount councils spent renewing pipes and other plant was 74 per cent of depreciation for water supply, 64 per cent for wastewater and just 39 per cent for stormwater; these are higher rates than for earlier years. (The special case of Christchurch, which has had to spend up large post-quake, is excluded.)

It is said that, despite being local councils’ largest asset, most of the infrastructure is underground out of sight and out of mind, so its management has low priority. The government's resolution is to set up standalone agencies to manage the three waters infrastructure – to put the pipes 'above the ground'. That seems a sensible way of dealing with the invisibility.

But it is an incomplete explanation for it ignores the fact that the revenues of local councils are very dependent on local authority rates which are clumsy and difficult to raise. Strapped for cash, councils will inevitably underfund the invisible. This dimension was hardly touched designing the new water care entities (WCEs).

When she first announced the restructuring, the Minister for Local Government said it would reduce local body rates. It was a stupid thing to say because somebody is going to have to pay for the rising costs of managing the three waters, especially given the proposed expansion and quality ambition. To simplify, that payer is YOU. At the time I thought she might have had in mind that we would all pay water charges rather than the equivalent of rates to the four entities. Current indications are that the rates option is the favoured one, at least initially, so there wont be much change, although I shant be surprised if the new entities are ineluctably drawn to charging for their water. You will still be paying.

I want to set down a benchmark to assess what is going on. I don’t think it is the one the WCE designers are using but you can compare their proposal against it. The benchmark is corporatisation. Many New Zealanders will react against it because they saw it used as a means of pursuing privatisation of public assets by the Rogernomes in the 1980s. So the strengths of corporatisation get overlooked; it is not too difficult to prevent sale outside the public sector unless you have a bloody minded government.

The aim in the 1980s was that separating out various public trading activities from the mass of government activities would make them more transparent and better define their role and their efficient pursuit of that purpose, which is what the three waters restructuring is about.

The corporations were set up as commercial entities but one need not prioritise the profit objective. Rather, the objectives need to be well defined. (Not sure what the WCE designers have in mind; we need to be clear why the public may not be satisfied with the purely commercial objective of profit – which leads to privatisation.)

One is that the public gets a sense of its worth by collectively owning things. We simply note that objective here and certainly do not discount it in the way the Rogernomes did.

A second political reason is that it gives the power of patronage. You know what that means. While your party appoints people of the highest competence and integrity, the other side appoints party friends and relations and absolute dullards. Business does the same; you don’t think that all those on their boards are there for their ability? The designer’s proposals to appoint more Māori illustrates the political power of patronage.

There is also the political ability to prioritise investment, especially when there are funding constraints. The East Coast WCE may have to choose between new projects in East Cape and in Golden Bay. This would not be simply a technical decision but would involve political judgements. Who do you want to make the decision?

Similarly there is the issue of charging. There are no simple technical solutions to charging especially across many regions. Perhaps the people in Golden Bay will be charged more so the East Capers are charged less.

These are real possibilities. That is why the restructuring has a regulator placed above the WCEs (although details were only released after public consultation was closed). To this economist such a regulator is necessary, although when I see what a hash our parallel regulators have made – say, over airports, electricity and telecommunications – my heart sinks.

The issues in the previous three paragraphs arise because the supply of the three-waters infrastructure is a monopoly in each region – they are ‘natural monopolies’. Any competition – such as domestic rural supply – is marginal. That is why the WCEs will have considerable discretion of where to invest, what to charge, and the quality of the services they provide; that is why there is a need for an independent regulator to make those decisions more transparent and in line with the public benefit.

This is all orthodox economics – if you are not a neoliberal. Making the comparison between the proposed three waters restructuring and corporatisation suggests that the proposals are just badly designed and could be improved (although this one is more thoughtful about regulation). However that does not explain the local body outrage; that is for the next column.