Submission on the Water Services Entities Bill

Our submission to the Finance and Expenditure Committee on the Water Services Entities Bill.

22 July 2022

Committee Secretariat
Finance and Expenditure Committee
Parliament Buildings
WELLINGTON

Tēnā koe

SUBMISSION ON THE WATER SERVICES ENTITIES BILL

Thank you for the opportunity to comment on the Water Services Entities Bill (the Bill).

As you know, the Controller and Auditor-General is an independent Officer of Parliament. In that role, I am responsible for giving Parliament and the public assurance that public entities are operating and accounting for their financial and non-financial performance in keeping with Parliament’s intentions and public expectations. I also have a keen interest in the accountability of public entities to Parliament.

The challenges of the “Three Waters” reforms

New Zealand faces a significant infrastructure challenge with the drinking water, wastewater, and stormwater services that are currently delivered by local authorities. The Bill intends to pave the way for improved, effective, and efficient management of the “Three Waters” service delivery and infrastructure by establishing four stand-alone Water Services Entities (WSEs).

I consider well-governed WSEs that have clear accountability arrangements with good performance reporting, strong independent assurance of their performance, and are responsive to their respective communities, are all critical to the success of the reforms. This is the lens through which I have considered the Bill.

Summary of submission

Effective public accountability will be critical to the success of the “Three Waters” reforms.

Currently, water services are delivered and managed by local authorities, and accounted for in local authorities’ long-term plans (LTPs) and annual reports, which are audited by the Auditor-General.

The Bill proposes that water services will be delivered by WSEs. Under the Bill, WSEs are accountable in various ways (and to various extents) through annual reporting to a Regional Representative Group, through oversight by the Minister, and through new engagement practices with consumers and communities.1

WSEs cannot be held to account by ratepayers like local authorities are, nor can they be held accountable by Parliament because they are not Crown entities; this makes direct accountability to their respective communities more important. I am concerned about whether these mechanisms will be sufficient, individually or collectively, to enable comprehensive and effective public scrutiny and accountability. I recommend that the Committee seek further information from officials about the effectiveness of these public accountability arrangements.

For WSEs to be genuinely accountable to local communities, engagement must be coherent, consistent, and integrated with the WSE’s planning and reporting requirements . However, the Bill does not currently clearly link the findings from the consumer engagement stocktake with corresponding reporting requirements, such as the statement of intent. There are also some limitations in the accessibility of the mechanisms proposed for public reporting. 

I suggest that further consideration is given to integrating consumer and community engagement with reporting requirements in key accountability documents, so that there is clarity on how the outcomes of such engagement are addressed by the WSEs.

In moving responsibility for water services from local authorities to WSEs there is a significant reduction in audit scrutiny.

Currently under the Local Government Act 2002, there is independent assurance over the LTP. The audit provides assurance to Parliament and the public that the LTP is giving effect to its statutory purpose and is based on reasonable and supportable information. The Bill proposes no equivalent requirement for a WSE’s planning documents to be audited. There is also no proposed audit scrutiny of the WSE’s engagement with local communities.

I consider this to be a serious diminution in accountability to the public for a critical service. I strongly recommend that the Committee consider the requirements for independent assurance in all aspects of the operations of these new entities, and whether WSEs should be required to produce a 10-year plan similar to LTPs that is also audited.

Setting of performance measures.

Currently the Secretary for Local Government must make rules specifying performance measures in relation to the “Three Waters” services, which local authorities report against in their LTPs and annual reports. The Bill does not include an equivalent rule-making power, which presents another gap in holding WSEs accountable. This may further reduce the effectiveness of the public accountability arrangements because it limits the quality of information available for public scrutiny.

The roles of the Regional Representative Group and the Board may overlap.

Good governance is essential in all organisations, and particularly in those providing critical services. The Bill proposes a unique governance structure consisting of a Regional Representative Group that appears to have both an oversight and a governance role over a WSE, in addition to a WSE Board. To avoid the risk of overlapping accountabilities, the Regional Representative Group’s intended role, and the purpose of the statement of intent versus the statement of strategic and performance expectations, should be clarified. The role of the chief executive and the Board could also be more clearly delineated.

The proposed accountability arrangements risk creating a fragmented approach to the planning and delivery of water services.

The planning and reporting documents of an entity should tell an integrated and coherent story. Currently the Bill provides for nine planning and reporting documents. It is unclear how they align and support each other, given that they cover different timeframes. In my view, there is scope to simplify these arrangements while better aligning reporting and review times for more overall coherency.

Integration with the wider, system-level planning is needed.

Local authorities are required to develop an infrastructure strategy that encompasses, at a minimum, assets for the Three Waters services, flood protection and control works, and the provision of roads and footpaths. With the creation of the WSEs, it is important to maintain integration with local planning and other reforms, such as the Resource Management Act. The Bill currently contains no explicit requirements to connect WSEs’ planning with wider planning processes. Although this might be covered by subsequent legislation, I suggest that clarity is sought on how WSEs are expected to work with the wider system.

Control over the water entities.

We are in ongoing discussions with the Department of Internal Affairs about councils’ influence over water assets and whether any single council or group of councils will control any of the WSEs (balance sheet separation). The Bill alone does not provide enough information for us to form a view about these matters.

Comments on transitional arrangements and other technical matters.

I also have several comments that aim to clarify ambiguities and suggest minor wording changes for the Bill. Please see pages 9 and 10 in the Attachment.

Concluding comments

My comments are intended to help ensure that the “Three Waters” reforms are supported by well-functioning governance and public accountability arrangements.

Overall, I am concerned that, as currently drafted in the Bill, the accountability arrangements and potential governance weaknesses, combined with the diminution in independent assurance noted earlier, could have an adverse effect on public accountability, transparency, and organisational performance.

I recognise that further legislation is to come, and have recorded my concerns here ahead of that.

Thank you for the opportunity to make a submission on the Bill. I ask I have the opportunity to speak to this submission. As my Office does with our other submissions on government proposals, we will publish this on our website in due course.

Nāku noa, nā

John Ryan
Controller and Auditor-General

Attachment

Effective public accountability will be critical to the success of the “Three Waters” reforms

To build and maintain the public’s trust and confidence in the water services entities (WSEs), it is critical that there are effective public accountability arrangements that incorporate independent assurance, particularly to local consumers and communities.

Current accountability arrangements for water services

Water assets and services are currently delivered directly or indirectly and managed by local authorities. They are subject to the accountability arrangements of local authorities and/or council-controlled organisations, which include:

  • a long-term plan that covers 10 years (revised every three years),2 which incorporates a council’s revenue and financing policy, financial and infrastructure strategies, financial projections, performance frameworks, and underlying information to support these (asset and activity management plans);
  • an annual plan; and
  • an annual report (including performance information).

Under these arrangements, councils need to provide their communities with reliable and clear information about the matters proposed to be included in long-term plans and the costs of these so that their community can provide feedback. As the Auditor-General, I am the auditor of long-term plan consultation documents as well as of the long-term plans.

Over the years, councils have been improving how they engage with their communities on investment in infrastructure such as three waters. It is important that communities know and understand how investment will affect the amount of rates they pay and the level of services that they will receive.

As well as these formal documents, councils – specifically elected members – are also held to account more generally by ratepayers at local body elections.

New accountability arrangements for water services

Under the Bill, water services will be removed from the purview of the Local Government Act 2002 and the accountability to ratepayers described above. At the same time, WSEs will not be Crown entities, which means there would be no accountability back to Parliament. Members of Parliament will not be able to hold WSEs to account through normal Parliamentary processes, such as an annual review.

Under the Bill, the WSEs are accountable in various ways (and to various extents) through annual reporting to their Regional Representative Group, through oversight by the Minister, and through new engagement practices with consumers and communities.3

I am concerned, as currently drafted in the Bill, about whether these mechanisms are sufficient, individually or collectively, to enable comprehensive and effective public scrutiny and accountability.

I recommend that the Committee seek further information from officials about the effectiveness of these public accountability arrangements.

Accountability to local communities

One of the objectives of a WSE is to act in the best interests of present and future consumers and communities (clause 11). The Bill provides a set of engagement principles that guide a WSE’s (or WSE chief executive’s) engagement with consumers and communities on the WSE’s asset management plan, funding and pricing plan, infrastructure strategy, and consumer engagement stocktake. The WSE’s chief executive must establish a consumer forum to assist with effective and meaningful consumer and community engagement.

For accountability to local communities to be effective and genuinely respond to community needs, this local engagement must be coherent, consistent, and integrated with the WSE’s planning and reporting requirements.

Currently, the Bill does not clearly link the findings from the consumer engagement stocktake with corresponding reporting requirements, such as the statement of strategic and performance expectations and the statement of intent. For example, I note that the statement of intent (clause 145) must state how the WSE plans to “approach consumer and community engagement” rather than to “respond to” and “address” concerns (clause 204) that arise out of the consumer engagement stocktake. This arrangement risks disconnecting consumer and community engagement with a WSE’s core accountability document on its intent, making it difficult to see how concerns are genuinely addressed.

How reports such as the consumer engagement stocktake, the statement of intent, statement of strategic performance and expectations, and the annual report are presented to consumers and communities is critical to their accessibility and understandability. Although we agree with the principles of engagement that (among other matters) require clear and appropriate communication channels for consumers (clause 205(a)), the stocktake and statement of intent are required to be published only on the internet. This potentially limits the reach of these documents to communities that may not be as digitally confident or connected. Furthermore, nothing is said in the Bill about ensuring that the annual report also presents information about WSE progress and performance in a clear and appropriate way to local consumers and communities (in line with the principles of engagement).

In my view, there is a risk of less opportunity for communities to be effectively engaged and less able to influence planning for water services. I suggest that further consideration is given to integrating consumer and community engagement with reporting requirements in key accountability documents, so that there is clarity on how the outcomes of such engagement are being responded to and addressed by the WSE.

In moving responsibility for water services from local authorities to WSEs there is a significant reduction in audit scrutiny.

In moving the responsibility for water services from local authorities to WSEs, there is a significant reduction in audit scrutiny. Currently, under the Local Government Act 2002, there is independent assurance over the long-term plan.

The audit provides independent assurance to each community, Parliament, and the broader public that the long-term plan gives effect to its statutory purpose and is based on reasonable and supportable information – which will be used for integrated decision-making and subsequent accountability by local authorities. The auditor in particular focuses on;

  • consultation with local communities on the important challenges and decisions that Councils are faced with;
  • the integration of the long-term plan with the infrastructure strategy and financial strategy;
  • whether those strategies are coherent and prudent;
  • the reasonableness of the assumptions; and
  • the quality of underlying information (in asset and activity management plans).

Under the accountability arrangements set out in the Bill (clauses 157, 158, 159), there is no requirement for the equivalent long-term planning documents (the statement of intent, funding and pricing plan, infrastructure strategy, and asset management plan) of the WSE to be audited. Only the annual financial statements and the statement of service delivery performance in the annual report are subject to audit.

This means that there will be significantly less assurance over the information used by decision makers for planning and managing water services, the integration of those decisions with the decisions of councils (which are continuing to make infrastructural and community investment decisions), and for accountability to the public. Further, there is no proposed audit scrutiny of the WSE’s engagement with communities, in contrast to the audit of the long-term plan where there is scrutiny of the community consultation.

I consider this to be a serious diminution in accountability to the public for a critical service. I strongly recommend that the Committee consider the requirements for independent assurance in all aspects of the operations of these new entities.

In my view, the Committee could consider whether the Bill should include a requirement for WSEs to produce a 10-year plan (equivalent to a long-term plan) that would be audited by the Auditor-General. This could include the infrastructure strategy, the funding and pricing plan, and the consumer engagement stocktake.

Setting of performance measures

Under section 261B of the Local Government Act 2002, the Secretary for Local Government must make rules specifying performance measures in relation to certain groups of activities, including the three waters services. The purpose of these rules is to provide standard performance measures so that the public can compare the level of service provided in relation to a group of activities by different local authorities (see section 261A of that Act).

Each council must include its performance targets for these performance measures in its long-term plan and report against them in its annual report, both of which are audited by the Auditor-General. In contrast, the Bill does not provide an equivalent rule-making power for mandatory WSE performance measures. This may further reduce the effectiveness of the public accountability arrangements because it limits the quality of information available for public scrutiny.

It might be that this will be provided for in a subsequent Bill, but it currently appears to be a further gap in the WSEs’ accountability to the public.

The roles of the Regional Representative Group and the Board may overlap.

Good governance is essential in all organisations, and particularly in those providing critical services.

The Bill proposes a two-tiered governance structure for WSEs. This is a unique arrangement. In my view, roles and responsibilities need to be clear for this approach to be successful, with minimal conflicts, tensions, and overlaps between the two governance bodies.

According to the explanatory note for the Bill, the Regional Representative Group “provides joint oversight” over the WSE, while corporate governance over the WSE is undertaken by an independent board that is accountable to the Regional Representative Group. However, in addition to the joint oversight role of the Regional Representative Group, the Bill states that the Group has a role in “participating in the process of setting the entity’s strategic direction and performance expectations” (clause 28).

In my view, this suggests that the Regional Representative Group has a governance role in the WSE in addition to its oversight role, which overlaps with that of the Board. This overlap is likely to play out in practice with the Group required to issue the WSE’s statement of strategic and performance expectations (clause 135), while the Board provides the statement of intent,4 both of which include the expectations, strategic priorities, and outcomes for the WSE, and meeting or performing the objectives, duties, functions, powers, and operating principles of the WSE.

This creates a risk that governance and strategy-setting over the WSE are done by both governance bodies, creating overlapping accountability relationships between the Regional Representative Group and the Board of the WSE, and both these bodies with the management of the WSE.

In my view, the following arrangements need to be clarified:

  • the Regional Representative Group’s intended oversight role and its additional governance and strategy-setting role; and
  • the purpose of the statement of intent and the purpose of the statement of strategic and performance expectations.

Separating the role of the WSE’s chief executive from the role of the Board

Clear roles and responsibilities, which separate governance and management, are critical to high standards of governance and accountability for the WSEs. The separation between the governance role of the WSE Board and the operational role of the chief executive over the WSE is critical in avoiding the risk of the Board “dabbling” in operational matters (leading to potential overlaps and lack of clarity in roles, responsibilities, and lines of accountability).

However, the Bill makes no explicit reference to the role of the chief executive and is unclear whether employees of the WSE are employed by the chief executive. To avoid this risk, we would expect that the chief executive (and not the Board) is the employer of the WSE’s staff.

In my view, the role and responsibilities of the chief executive need to be made clear (in or near clause 119 of the Bill), particularly regarding the employment relationships between the Board, the chief executive, and employees of the WSE. Section 42 of the Local Government Act 2002 provides an example of how this is done in local government.

The accountability arrangements risk creating a fragmentated approach to planning and delivery of services

The planning and reporting documents of an entity should be integrated and tell a coherent story about how an entity intends to manage (and has managed) its finances, assets, and resources to meet its objectives. It should be easy to see the steps and connections between each of the documents and the flow-on effect for decision-making and public accountability.

Currently the Bill provides for nine planning and reporting documents (see Figure 1) that are a mix of what is in the Crown Entities Act 2004 and the Local Government Act 2002. It is at times unclear how these various documents align and support each other. For example, the funding and pricing plan, the asset management plan, and the infrastructure strategy all look out over (at least) a 10-year period and should provide valuable supporting information for the two strategic plans (noted above). However, as the two strategic plans cover only the next three years, important longer-term supporting information in the other plans may be missed. In addition, these longer-term supporting plans also have three-yearly reviews, which means the annually reviewed strategic plans will not always have updated information.

We note that under the Local Government Act 2002, there is a much closer alignment in the review times and the time horizons for all long-term planning documents.

In my view, there is scope to simplify the planning and reporting arrangements, while also aligning reporting and review times and considering how to better integrate them to ensure a coherent accountability system.

Figure 1

Individual / bodies Accountability document Frequency
Minister Government Policy Statement (GPS) Reviewed every three years; covers at least 20 years
Regional Representative Group Statement of strategic and performance expectations Reviewed at least once a year; covers three years
Constitution
Board of Water Services Entities Statement of intent
The statement of intent includes (clause 145 refers):
  • Forecast statement of service delivery performance
  • Forecast financial statement
 Annual, covers at least three years
Annual report

Of all documents presented here, only the following parts of the annual report will be audited by the Auditor-General (clause 161 refers):
  • Statement of service delivery performance
  • Financial statements
 Annual, covers one year
Funding and pricing plan Triennial; covers at least 10 years
Infrastructure strategy Triennial; covers at least 30 years
Asset management plan  Triennial; covers at least 10 years
Consumer engagement stocktake Annual
Response to Te Mana o te Wai statement for water services Response within two years

Ensuring integration with the wider system

Currently, local authorities are required to develop an infrastructure strategy that covers existing or proposed infrastructure assets used for:

  • water supply;
  • sewerage and the treatment and disposal of sewage;
  • stormwater drainage;
  • flood protection and control works; and
  • roads and footpaths.

With the creation of separate water service entities, it will be important that there remains some integration of planning with wider infrastructure. This will be critical to meet the needs of different communities and future challenges, such as climate change. It will also be important how they relate and interact with the reforms to the Resource Management Act.

I note that the Bill contains no explicit requirements for connecting the planning undertaken by WSEs with local authorities’ planning processes.

My understanding is that a second bill will cover the functional elements of the WSEs, so requirements to support integration with the wider system might be addressed in subsequent tranches of legislation. However, I suggest that clarity is sought about how the WSEs will be expected to work with local authorities and the wider system.

Who controls these water entities?

We are in ongoing discussions with the Department of Internal Affairs about councils’ influence over water assets and whether any single council or group of councils will control any of the WSEs (balance sheet separation). The Bill alone does not provide enough information for us to form a view about these matters.

Comments on transitional arrangements and other technical matters

Financial year and timeframe for preparing the annual report

The financial year has been defined, in section 6, as the 12 months ending on 30 June. I suggest considering whether 30 June is the most appropriate financial year-end date for the WSEs, especially, as we understand it, the intention of the reforms are the WSEs assets will not be controlled by any other public entity. Another option could be 31 December.

Under section 156, the annual report (which includes annual financial statements and a statement of service delivery performance), must be prepared “as soon as practicable after the end of each financial year”. Under section 161, the annual financial statements and statement of service delivery performance should be forwarded to the Auditor-General.

I request a timeframe specified for when the annual report should be completed, and when the annual financial statements and a statement of service delivery performance should be forwarded to the Auditor-General. This will enable effective planning of our annual audits of entities.

Establishment date of the WSEs for the purposes of the first annual report

Clause 10 of Schedule 1 of the Bill provides for what happens with the first annual report of a WSE established during the last four months of a financial year. There is uncertainty about whether, for the purpose of this clause, a WSE is established on the day after the date of Royal Assent or on the establishment date referred to in clause 1 of schedule 1 (by July 2024, or earlier by Order in Council).

I suggest that this is clarified in the Bill so that this clause is workable.

Transitional provision for the WSEs’ first statement of intent

The WSE’s first annual report will report against the WSE’s first statement of intent. Clauses 1 and 4 of Schedule 3 of the Bill provide that the Board of a WSE must deliver a draft statement of intent to the Regional Representative Group on, or before, 1 March in the year preceding the start of the period to which the draft statement of intent relates. The final statement of intent is then delivered to the Regional Representative Group before the start of the period to which the statement of intent relates.

I suggest that the Bill include a transitional provision for the WSE’s first statement of intent. This will help clarify when a WSE should prepare its first statement of intent (for example, a scenario where a WSE is established in April). As with the recommendation for the establishment date of the first annual report, I suggest that such a transitional provision make it clear when a WSE is established for the purposes of the first statement of intent.  

The department’s oversight powers during the transitional period

Subpart 4 of Schedule 1 of the Bill provides the chief executive of the department powers to review, confirm, and decline decisions made by local authorities (for example, adoption of and amendments to a long-term plan, or the purchase or disposal of assets) that relate to, or may affect, the provision of water services.5

Given the likely volume of decisions that are covered by long-term plans, there is a risk that the Department of Internal Affairs might be severely constrained in its ability to review and approve decisions in a timely manner.

Minor wording changes are suggested

I would also like to propose the following minor amendments (underlined).

In section 6, the definition of “financial year” erroneously refers to the year 2022. I propose that the reference to 2022 be deleted.

financial year means the 12 months ending on the close of 30 June 2022

Section 156 refers to a report on the affairs of the WSE. I propose that the word “affairs” be clarified by referring to the content of the annual report as described under section 157 of the Bill.

156 Obligation to prepare and publish annual report

(1) A water services entity must,—

(a) as soon as practicable after the end of each financial year, prepare an annual report on the affairs of the water services entity as provided under section 157; and

Section 160 only refers to the signatories’ responsibility for establishing and maintaining a system of internal control in relation to financial reporting. I propose that the signatories should also assert their responsibility for establishing and maintaining internal controls over performance reporting.

160 Statement of responsibility

The statement of responsibility must—

(b) contain a statement of the signatories’ responsibility for establishing and maintaining a system of internal control designed to provide reasonable assurance as to the integrity and reliability of financial and performance reporting; and

1: There are also channels of community advice and representation through Regional Advisory Panels and the Regional Representative Group. Mana whenua may also provide Te Mana o te Wai statements for water services (clause 140) which the WSE must respond to in the statement of intent and report on in the annual report.

2: The purpose of the long-term plan, as set out in section 93(6) of the Local Government Act 2002:

  • describe the activities of the local authority;
  • describe the community outcomes of the local authority’s city, district, or region;
  • provide integrated decision-making and co-ordination of the local authority’s resources;
  • provide a long- term focus for the decisions and activities of the local authority; and
  • provide a basis for accountability of the local authority to the community.

3: There are also channels for community advice and representation through Regional Advisory Panels and the Regional Representative Group. Mana whenua may also provide Te Mana o te Wai statements for water services (clause 140), which the WSE must respond to in the statement of intent and report on in the annual report.

4: I note that the content of the Statement of Intent spans the WSE’s “strategic elements” (which must be approved by the RRG), and the forecast statement of service delivery performance and budget of the WSE.

5: In the Bill, department means the department for the time being responsible for the administration of this Act.