Part 5: How the Government's proposed three waters reforms affected the long-term plans

Matters arising from our audits of the 2021-31 long-term plans.

5.1
In this Part, we discuss:

The three waters reform programme

5.2
In mid-2017, after the Government's Inquiry into Havelock North Drinking Water (the Havelock North Inquiry), the Government established the three waters review to look at how to improve the regulation and service delivery arrangements of the three waters services.28

5.3
The findings of the review were consistent with many of the Havelock North Inquiry's findings and raised system-wide questions about the effectiveness of the regulatory regime for the three waters and the capability and sustainability of water service providers.

5.4
In response to the review, the Government created Taumata Arowai, the new water services regulator. On 15 November 2021, Taumata Arowai became the drinking water regulator. In 2024, it will assume regulatory responsibility for wastewater and stormwater networks, becoming the country's three waters regulator.

5.5
In 2020, the Government announced that it was starting the three waters reform programme. The reform programme focused on how the three waters services were delivered. It had six objectives. These were:

  • significantly improving safety and quality of drinking water services and the environmental performance of wastewater and stormwater systems;
  • ensuring that all New Zealanders have equitable access to affordable three waters services;
  • improving resource co-ordination and unlocking strategic opportunities to consider national infrastructure needs at a larger scale;
  • increasing resilience of three waters service provision to both short- and long-term risks and events, particularly climate change and natural hazards;
  • moving three waters services to a financially sustainable footing and addressing the affordability and capability challenges faced by small suppliers and councils; and
  • improving transparency and accountability in cost and delivery of three waters services, including the ability to benchmark performance of service providers.

Figure 17
Key government announcements and how they affected long-term plans and our audit reports

Figure 17 - Key government announcements and how they affected long-term plans and our audit reports

5.6
The Government stated that its key design features in the three waters reform programme were:

  • water service delivery entities that are:
    • of significant scale (most likely multi-regional) to enable benefits from aggregation to be achieved over the medium to long term;
    • asset-owning entities with balance sheet separation, to support improved access to capital, alternative funding instruments, and improved balance sheet strength; and
    • structured as statutory entities with appropriate and relevant commercial disciplines and competency-based boards;
  • delivery of drinking water and wastewater services as a priority, with the ability to extend to stormwater service provision only where effective and efficient to do so;
  • publicly owned entities, with a preference for collective council ownership; and
  • mechanisms for enabling iwi/Māori and communities to provide input to the new entities.

5.7
All affected councils signed a memorandum of understanding with the Government to work together on an approach that will meet the objectives outlined above.29 The memorandum of understanding set out that the signing councils will have the right to choose whether they wish to continue to participate in the reform programme beyond the term of the memorandum, which was 30 June 2021.

5.8
All affected councils other than Auckland Council also received funding from the Government after signing the memorandum of understanding. They could use the funding to support economic recovery and maintain, increase, and/or accelerate investment into core three water infrastructure renewals and investments.

The Government announced its preferred three waters service delivery model

5.9
The Government spent several months completing work to inform its preferred model for delivering three waters services. To inform this work, the Government requested information from affected councils. It requested this information while the councils were preparing their long-term plans. This work included the Water Industry Commission of Scotland's analysis of the economic benefits of reform.

5.10
On 30 June 2021, the Government announced that its preferred model for delivering three waters services was to establish four publicly owned entities to take responsibility from councils. In making this announcement, the Government stated that the new entities would be collectively owned by councils, on behalf of communities.

5.11
However, the new entities would also own the assets and be operationally and financially separate from councils. Figure 18 sets out which parts of New Zealand the four entities were proposed to operate in.

5.12
After this announcement, the Government released information to councils to enable them to assess the Government's proposal. The Government also engaged with councils and other stakeholders.

5.13
Many councils also took the opportunity to engage with their communities to understand their views on the proposal. Councils were asked to provide feedback to the Government on the proposal.

The Government confirmed its preferred three waters service delivery model

5.14
On 27 October 2021, the Government confirmed its preferred model for delivering three waters services, as outlined in paragraphs 5.9 to 5.13.

5.15
In making this announcement, the Government confirmed that all affected councils would be required to participate in the reforms. Opting out of the reforms was no longer an option.

5.16
The new water services entities were expected to become operational from 1 July 2024.

How did the three waters reform programme affect councils' long-term plans?

5.17
When the Government announced it was reforming how three waters services are delivered, councils were developing their underlying information and assumptions to inform their 2021-31 long-term plans.

5.18
Without knowing what the Government would decide in its reform proposal, councils had to consider what the announcement meant, if anything, to the development of their long-term plans.

5.19
The local government sector, through Taituarā, produced guidance that all affected councils followed. Taituarā recommended that councils should continue to forecast the three waters services in their underlying information as if they would continue to own three waters assets for the period that the long-term plans covered.

Figure 18
The locations of the proposed four water services entities

Entity A was proposed to operate from the top of New Zealand to Auckland. Entity B was proposed to cover the middle of the North Island, including from the Taranaki region in the west to the Rangitīkei district in the south, excluding the Hawke's Bay and Gisborne regions. Entity C was proposed to cover the remainder of the North Island, the Nelson, Marlborough (excluding those parts included in Entity D), and Tasman (excluding those parts included in Entity D) districts in the South Island, and the Chatham Islands. Entity D was proposed to cover the remainder of the South Island.

Figure 18 - The locations of the proposed four water services entities

Source: Adapted from a graphic provided by the Department of Internal Affairs.

5.20
In making this recommendation, the sector considered that the community should be able to understand and comment on the important issues related to three waters services until the reforms were certain.

5.21
Because of the considerable uncertainty in taking this approach, councils disclosed the uncertainty over the three waters reforms and the basis on which they had prepared their underlying information in the long-term plan.

What was our audit response?

5.22
We supported the local government sector's guidance on how councils should treat the three waters services in their long-term plans. In our view, there was no other reasonable and supportable assumption to use for three waters services. In forming this view, we also took into account that, at that stage, the Government had not made the reform programme mandatory.

5.23
Three waters infrastructure is significant to most councils. Therefore, we determined that the three waters reform programme caused uncertainty for councils that had significant three waters assets. This was of fundamental interest to the readers of the long-term plans.

5.24
In the audit reports of 67 affected councils, we emphasised the councils' own disclosure of the three waters reform programme.

Mackenzie District Council

5.25
When the Government made its announcement on 27 October 2021, Mackenzie District Council had not yet adopted its 2021-31 long-term plan. The Council continued to follow Taituarā's guidance and assumed that it would continue to own three waters services for the period that the long-term plans covered.

5.26
Mackenzie District Council said that it had two reasons for following Taituarā's guidance:

  • Because the Government had not made any information available about how the three water services would be transferred from councils to the new water services entities, the Council could not reasonably model the transfer.
  • The Council believed that it was appropriate to prepare its long-term plan in the same way other affected councils had, to allow long-term plans to be compared.

5.27
We did not consider that this was a reasonable assumption for Mackenzie District Council to apply. In assessing the reasonableness of a proposed assumption, we also consider what the most likely outcome is when considering alternative options.

5.28
The Government had decided that the three waters reform programme was mandatory for all councils. Therefore, the most likely outcome for Mackenzie District Council was that it would no longer operate the three waters services from 1 July 2024. In our view, the Council had not prepared a credible plan.

5.29
Consequently, we issued an adverse audit opinion on Mackenzie District Council's 2021-31 long-term plan.

Potential implications of the three waters reform programme

5.30
When we wrote this report, Parliament had completed its first reading of the Water Services Entities Bill. This is the first part of a suite of legislation that the Government is progressing to establish the new system for three waters service delivery. The Government has established a National Transition Unit to carry out the Government's decisions on the three waters reforms.

5.31
From the work we have done on the long-term plans, we can see that the Government, councils, and the new water entities should consider certain matters as the three waters reform programme progresses.

5.32
Many of the concerns we have raised in this report and our previous reports on the long-term plans, as well as in our wider work on local government, were about the operations of three waters activities.

5.33
We remain concerned that councils are not delivering on their capital expenditure programmes. Based on the 2021-31 long-term plans, about $28 billion or 36% of the forecast capital expenditure relates to three water activities. As mentioned in Part 4, there are risks of capital expenditure not being completed as planned, such as providing new services to those needing them or even maintaining existing services to the community.

5.34
We also consider that councils need to improve their information about the condition and performance of their assets. As mentioned in Part 4, the main asset class where councils need better information is in three waters infrastructure.

5.35
If the three waters reform programme happens as the Government currently proposes, councils will continue to operate the three waters services for the next two years. It will be important for councils to consider our findings before the activities are handed over to the new water services entities. Ultimately, these assets will still be required to operate efficiently and deliver services to the community.

5.36
It will also be important for the new water services entities to consider our findings as a matter of priority. These larger organisations will have many competing priorities to consider and address as they begin to manage multi-region networks. Making informed decisions about what to prioritise needs appropriately complete and reliable information, based on carefully assessed risks.

28: You can find more information on the Government's Inquiry into Havelock North Drinking Water on the Department of Internal Affairs website, dia.govt.nz.

29: An affected council is one that owns or operates three water infrastructure. This includes all territorial local authorities and the Greater Wellington Regional Council, which is responsible for collecting, treating, and distributing safe and healthy drinking water to Wellington, Hutt, Upper Hutt, and Porirua City Councils.