Appendix 4: Papakura's water and wastewater services

Procurement route

The Papakura District Council (the Council) entered into a franchise agreement in 1997 with a private company (the franchisee) to operate the water and wastewater services within the Papakura District for an initial term of 30 years, with provision for renewal for a further 20 years. The franchisee paid the Council a franchise fee of approximately $13 million.⁵⁷

The franchisee is responsible for:

• providing the supply of water to the customers in the district; and
• managing the local wastewater collection systems.

The Council continues to own the water and wastewater assets, and the franchisee has responsibility for maintenance and enhancement of the water and wastewater systems.

The franchisee is required, at its own cost, to maintain the water and wastewater infrastructure to an overall standard better than its initial condition and in good operational order. The intention is that, on the expiry or earlier termination of the agreement, the infrastructure should be in a better condition than at the start of the agreement.

The franchisee bills customers directly, and is entitled to all of the revenue generated from water charges.

Reasons for procurement decision

From the information available, the following appear to have been the benefits that the Council sought in 1997 from the franchise agreement:

• Lower-cost services – It was considered that costs would be controlled through linking water charges to the Auckland Average Price for water and wastewater services, and through competitively priced infrastructure charges, such as connection charges.
• High-quality services – Dedicated staff would be responsible for operating the franchise, with a high level of ownership and commitment to providing a good quality service.
• A better management mechanism – The Council would not be burdened with the responsibility of direct management.
• The opportunity to bring in international expertise.
• A means of improving the condition of the existing asset and addressing future growth requirements.
• A means of transferring the risks related to direct water supply and management of wastewater collection to a third party.

Lessons so far

The following sets out the lessons we identified in a report published in April 1998⁵⁸ and from a follow-up audit in September 2000 (reported on in June 2001),⁵⁹ together with the views of the Council’s representatives.

Changes to legislation

The Council believed that the ultimate responsibility for, and therefore the risks of, running the water supply and wastewater systems were transferred to the franchisee. However, new provisions of the Local Government Act 2002 specify that local authorities have entrenched responsibilities for water supply.

The Council also considers that it may find it difficult to comply with new requirements for consultation in the Local Government Act, since much of this information is held by the franchisee. The franchise agreement inadequately documents the franchisee’s obligations to release such information to the Council.

Change of political ideology

A Council composed of members strongly committed to taking this procurement route entered into the franchise agreement. Since then, a great deal of time has had to be spent working through concerns held by newer Council members.

Alignment with the Council’s strategic objectives and plans

A number of issues have arisen around decisions that the franchisee has made, or may make in the future, that appear to conflict with the Council’s strategic objectives and plans – for example, issues about water conservation, development planning, and providing support to local businesses. These types of issues could have been addressed in a business plan documenting what the Council wished to achieve for the delivery of water services, before considering how they should be delivered. The plan should have included identification of entrenched principles, including the need to protect the long-term interests of ratepayers and users of the service.

The business case for the franchise could have been used to set objectives for managing and operating the services concerned, and been included as part of the selection criteria in conducting a tender for franchising the service to ensure that the preferred tenderer could meet the strategic objectives for service delivery.

Need for community consultation

Water is seen as an essential commodity, and the control and supply of water and wastewater can arouse strong emotions. The Auditor-General identified a need for the Council to carry out sufficient consultation to assure itself that it had identified the needs, issues, and any concerns the community might have, to be used in the decision-making process.

Need for internal expertise

The Council relied on limited internal expertise and local solicitors when setting up the franchise agreement, and an external expert did not review the draft agreement. The Council now considers that it should have sought external expertise at an early stage, and has contracted a firm of professional consultants to assist in the day-to-day management of the agreement on its behalf.

Performance management

The Auditor-General highlighted that it is important for the Council to establish the necessary systems and allocate suitable resources to manage and monitor the franchise from its start. This monitoring should include a programme of auditing the performance of the franchisee to provide the level of assurance it requires.

The performance monitoring systems should specify the role of Councillors and include specific mechanisms for identifying and managing poor performance.

The franchise agreement focused on performance indicators related to price and quality. The Auditor-General identified 2 other indicators – customer service, and asset management and development – that needed to have been better defined.

The 30-year term can be extended by an additional 20 years, but an extension is not linked to a performance agreement.

Council representatives expressed the view that the costs of providing for internal contract management, including performance management, should have been identified as part of the initial decision-making process for choosing this procurement option.

Asset management

The Auditor-General identified a number of lessons related to asset management.

There should be agreement between the parties about how the condition of the infrastructure is to be measured over the duration of the franchise. As a baseline, an Infrastructure Condition Assessment should be undertaken, so that both parties have a shared understanding about the state of the infrastructure at the start.

There should also be a requirement on the part of the franchisee to produce and make available an Asset Management Plan for protecting the water and wastewater asset throughout the life of the agreement, and to enable the Council to manage and monitor the agreement effectively.

The Asset Management Plan should establish clear benchmarks for existing asset condition and service levels, and standards for the maintenance and enhancement of the infrastructure. The Asset Management Plan should also provide a sound basis to establish clear procedures for:

• dealing with poor performance or non-performance by the franchisee;
• assessing the required condition of assets before they are returned to the Council’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.

The requirement for a suitable Asset Management Plan to be produced should be included in the franchise agreement. In this case, although the franchisee was required to produce an Asset Management Plan, the Council has been in dispute with the franchisee over the right of access to its contents for management and governance purposes.

57: Since the Council entered into the franchise agreement, the Local Government Act 2002 has imposed restrictions on local authorities’ ability to make arrangements with other persons (except other local government organisations) for providing or operating water services. The Act prohibits any arrangement that has a term of more than 15 years, or that involves any transfer of pricing, management of services, policy development, or ownership of infrastructure.

58: Papakura District Council: Water and Wastewater Franchise, April 1998.

59: Local Government: Results of the 1999-2000 Audits, parliamentary paper B.29[01a], June 2001.