Summary and recommendations

Papakura District Council: Water and wastewater franchise.

Summary

Impetus for Change

Changes to local government legislation, public expectations and other public sector reforms have seen the introduction of an increasing number of private and public sector partnerships throughout New Zealand. The positive results and benefits for ratepayers have encouraged local authorities to develop new alternatives for traditional means of service delivery.

The Papakura District Council (referred to as “the Council” throughout the rest of this report) has been an enthusiastic supporter of the reforms, and is the first local authority to put a water and wastewater total facilities operation and maintenance contract in place with a private company. We recognise that the Council has taken an innovative approach towards the delivery of services to its community.

The Costs Involved

The control and supply of water and wastewater are important issues that arouse strong emotional feelings in many people. Communities believe that – over time – they have invested significant resources in development of the existing system, and they are reluctant to see it sold. In addition, people feel that water is an essential commodity and that “paying” for it is not acceptable.

The reality is that there are significant costs associated with the supply of water and disposal of wastewater. Many local authorities are faced with the prospect of having to invest significant capital to upgrade their existing networks. The challenge that they face is to provide the best system to meet the public’s expectations in a financially prudent manner.

The Franchise Agreement

The Council’s franchise agreement (referred to as “the Papakura agreement” throughout the rest of this report) is essentially a facilities maintenance and operations contract under which the franchisee is responsible for all aspects of the water and wastewater services for consumers within the Papakura District.

The Papakura agreement:

  • Resulted in payment to the Council of a $13 million franchise fee.
  • Fixes the retail price of water until July 1999, after which charges are restricted to being at or below the Auckland Average prices for water and wastewater services. This means that the price to the consumer could move from the lowest in the region1 to the Auckland Average Price2.
  • Provides for wastewater charges to be based on 80% of metered water consumption, rather than based on land value.
  • Retains the water and wastewater assets in public ownership.
  • Passes responsibility for maintenance and development of the water and wastewater systems to the franchisee.

Information Is Essential

Our audit has highlighted the need for accurate information and planning for the life of the assets in the form of an Asset Management Plan. The long-term success of a franchise agreement will rely upon the local authority having confidence that required service standards are being maintained and that the water and wastewater networks are protected. Without sufficient baseline information, the management, monitoring and renewal of a franchise agreement carries significant risk.

The Papakura agreement stipulates that the franchisee, United Water International Pty Limited, will produce an Asset Management Plan before July 1998. The Council will need to ensure that this plan is suitable for monitoring and management of the agreement and protection of the assets. We will be reviewing this aspect of the agreement in a future audit.

Our Conclusions

The adoption of an agreement of this type by a local authority is a pioneering step in New Zealand, and it would be unreasonable to expect the agreement to be perfect. How well the Papakura agreement will work in practice will not be known for some time. Although the terms of the agreement met the majority of our expectations, we have identified some matters of concern and issues for our follow-up audit.

Acknowledgment

We would like to thank the Council for its assistance in our carrying out of the audit. We trust that this report will be of benefit both to the Council and to other local authorities that are currently investigating similar options. By assisting with our audit of the Papakura agreement, the Council has provided a valuable insight into the practicalities of setting up such an arrangement.

Readers’ attention is drawn to our earlier publication Contracting for Maintenance Services in Local Government.3

Recommendations

We make the following recommendations under the topic headings shown.

Steps Before Tendering (Chapter 2)

We recommend that, when a local authority is preparing to tender its services, it should:

  • Develop and document clearly what it wants to achieve for the delivery of each of the services before considering how they will be delivered.
  • Carry out sufficient consultation to assure itself that it has identified the needs, issues and any concerns the community might have. This process should be clearly recorded and documented and used in the decision-making process.
  • Develop and publish objectives for the management and operation of the services concerned. The objectives should be designed to include protection of the long-term interests of ratepayers.
  • Invest sufficient time in conducting the tender process to ensure the quality of the ensuing agreement and to protect the long-term interests of ratepayers and users of the service.
  • Complete an Asset Management Plan for the assets involved, or put in place a process to ensure that an Asset Management Plan is produced before tendering for a management and operational agreement. The Asset Management Plan should have regard to the guidelines set out in the New Zealand Infrastructure Asset Management Manual.
  • Demonstrate, for each service, that (so as to meet the requirements of sections 247D and 122C(c) and any other appropriate sections of the Local Government Act) it has considered the advantages and disadvantages of the proposed approach compared to the alternatives and how the preferred approach represents value for money.
  • Consider and document the full range of options for different franchise durations, and the benefits which each alternative will provide.

Conducting the Tender (Chapter 3)

We recommend that, when a local authority is conducting a tender for franchising a service, it should:

  • Prepare a marketing plan setting out how it intends to maximise exposure of the tender to potential tenderers.
  • Adopt a range of selection criteria (including both price and non-price attributes) which are designed to ensure that any preferred tenderer will:
    • meet the strategic objectives for service delivery;
    • be committed to providing a quality service; and
    • employ innovative and alternative ways to provide the service.

Drawing Up the Franchise Agreement (Chapter 4)

We recommend that, when a local authority is drawing up a franchise agreement, it should:

  • Ensure that an agreement is designed to meet the objectives for delivery of service.
  • Have regard to the expectations set out in the Appendix on pages 65-69. In particular, it should give consideration to issues of:
    • identifying the long-term interests of the ratepayer and structuring the agreement to protect them;
    • price control; and
    • the authority’s role and responsibilities to monitor customer satisfaction, service quality, asset maintenance, and non-performance by the franchisee.
  • Set clear standards to ensure that the franchisee knows what it is expected to do and to provide an objective basis for managing the agreement to the level of assurance required.
  • Ensure that the agreement requires the franchisee to set up a customer charter which covers a specified range of issues. The charter should have regard to the customer agreement guidelines issued by the Association of Local Government Engineers of New Zealand (ALGENZ).

Managing and Monitoring the Franchise (Chapter 5)

We recommend that, when a local authority is determining how to manage and monitor a franchise, it should:

  • Establish the necessary systems and allocate suitable resources to manage and monitor the franchise from its commencement.
  • Implement a programme of auditing the performance of the franchisee to provide the level of assurance it requires. The programme should incorporate risk-based audits, systematic inspections of work quality, and periodic reviews of the franchisee’s quality control systems. Where possible, the auditing function should be integrated with the monitoring of asset condition, and the results of audits documented to provide a record of contractor performance and a source of data for future retendering.
  • Develop an Asset Management Plan which establishes clear benchmarks of existing asset condition and service levels. This will provide a sound basis to develop clear procedures for:
    • dealing with poor performance or non-performance by the franchisee;
    • assessing the required condition of the assets to before they are returned to the authority’s control at the end of the franchise;
    • dealing with a range of extreme events; and
    • communicating with the franchisee as a basis for ongoing administration of the franchise.

1: The terms “region” and “regional” in this report refer to the combined areas of Auckland City, North Shore City, Manukau City, Waitakere City, Rodney District, and Papakura District.

2: For the purposes of calculating the “Auckland Average Price” the agreement excludes from the region Rodney District and Papakura District.

3: The Audit Office, June 1997: ISBN 0 477 02849 7.

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