Hutt City Council
27 August 2021
File:
(21/1334)
Report no:
HCC2021/4/207
Three Waters Reform
Update
Purpose
of Report
1. This report
updates Council on:
- the Government’s 30 June 2021 and 15 July 2021 Three Waters
Reform announcements, which change the reform process previously outlined in 2020,
- the specific data and modelling Council has received to date,
- the implications of the revised Three Waters Reform proposal for
Council and alternative service delivery options,
- next steps (including uncertainties).
|
Recommendations
It is recommended that
Council:
(1) notes that in July 2020 the Government announced an initial funding package of
$761M to provide a post COVID-19 stimulus to maintain and improve water
networks infrastructure, and to support a three-year programme of reform of
local government water services delivery arrangements;
(2) notes
that in August 2020 Council agreed to enter into a Three Waters Reform
Memorandum of Understanding and Funding Agreement with the Government
which resulted in Council receiving funding of $10.6M;
(3) notes the Government’s 30 June and 15 July 2021 Three Waters
Reform announcements, which includes a $38.7M ‘better off’
funding for Lower Hutt, refer Section B of the report ;
(4) notes the
need to ensure and uphold active engagement, involvement and partnership with
Mana Whenua throughout the three waters reform programme, refer Section C of
the report;
(5) notes officer’s advice on the information provided to Council in
June and July 2021 as a result of a Request for Information process and Water
Industry Commission Scotland (WICS) modelling processes, refer Section D of
the report;
(6) notes officer’s high level overview and analysis of the options
available to Council for three waters service delivery, refer Section E of
the report;
(7) notes that a decision to support the Government’s preferred three
waters service delivery option is not lawful (would be ultra vires) at
present due to section 130 of the Local Government Act
2002 (LGA), which prohibits Council from divesting its ownership or interest
in a water service except to another local government organisation, and
what we currently know (and don’t know) about the Government’s
preferred option;
(8) notes that Council cannot make a formal decision on a regional option
for three waters service delivery without doing a Long Term Plan amendment
and ensuring it meets section 130 of the LGA;
(9) notes
that the Government intends to make further
decisions about the three waters service delivery model after 30 September
2021;
(10) notes that it is Council’s position that it is necessary to gain
an understanding of the community’s views through consultation and
engagement once Council has further information from the Government on the
next steps in the reform process;
(11) requests the Chief Executive to seek further information and guidance from
the Government on the following key areas:
(a) the
proposed boundaries and rationale for these;
(b) plans
for consultation with mana whenua and communities;
(c) ensuring
that communities have a voice in the system and influence over local
decisions;
(d) prioritisation
of investment, particularly ensuring integration with spatial and local
planning, including growth planning;
(e) effective
representation on the new water service entities’ oversight boards; and
(f) the
criteria and conditions that will be associated with the Government funding
packages for ‘better off’ and ‘no worse off’;
(g) integration
with other local government reform processes;
(h) the
scope of the stormwater role that entities will play, including in relation
to growth and development planning, asset management and maintenance; and
(i) how
Councils will be involved in holding future entities accountable for performance
and customer service levels;
(12) considers any
further areas of the Government’s proposals that Council needs more
information or guidance on;
(13) considers
any feedback to be provided on the Government’s proposal or
process;
(14) notes that the Chief Executive will report back further once further
information and guidance from Government has been received on what the next
steps look like and how these should be managed; and
(15) in
noting the above, agrees it has given consideration
sections 76, 77, 78, and 79 of the Local Government Act 2002 and in its
judgment considers it has complied with the decision making process that
those sections require (including, but not limited to, having sufficient
information and analysis that is proportionate to the decisions being made).
For the reason that Council
needs to be in a position to seek guidance and provide feedback to
Government’s water reform programme in line with the expectations of
the “eight week” process.
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Executive Summary
2. Over the past four
years central and local government have been considering the issues and
opportunities facing the system for regulating and managing the three waters
(drinking water, wastewater, and stormwater) – Three Water Reform.
The background is provided in Appendix 1.
3. Taumata Arowai
became a new Crown entity in March 2021 and will become the dedicated water
services regulator later this year. There is an expectation that monitoring,
compliance and enforcement of mandatory standards will increase substantially
on the status quo requirements and costs, as will the coverage and requirements
of the standards themselves. Further information on the role and work of the
regulator as it affects local government is provided in Appendix 1.
4. The Government has
concluded that the case for change[1] to the three
waters service delivery system has been made and that there is the need for
system-wide reform to achieve lasting benefits for the local government sector,
communities and the environment (refer Appendix 2 for further information).
During June and July 2021 the Government released information and made
announcements on:
o the direction and form of Three Waters Reform, including proposed
new Water Service Entities (four and their indicative boundaries), their
governance arrangements and public ownership
o individual Council data based on the information supplied under the
Request for Information (RFI) process
o a package of investment ($2.5B) for councils to invest in the future
for local government, urban development, and the wellbeing of communities,
ensuring no council is worse off as a result of the reforms, and funding
support for transition
o an eight-week process for councils to understand the implications
of the reform announcements, ask questions and propose solutions and for
Government to work with councils and mana whenua on key aspects of the reform
(including governance, integrated planning and community voice).
5. Hutt City
Council has been placed in Entity C and our ‘better off’ funding
allocation is $38.7M.
6. While the
Government and Local Government New Zealand (LGNZ) considers that the national
case for change has been made, each council will ultimately need to make a
decision based on its local context if the process to join one of the proposed
entities remains voluntary.
7. As a part of the
three waters reform the Government has agreed to recognise and provide for
Iwi/Māori rights and interests with a specific focus on service-delivery.
This approach has been informed through numerous engagements with iwi /
Māori which will continue through the reform programme lifetime. Council
have been engaging with Mana Whenua on the three waters reform and will
continue to do so until it is finalised.
8. This report
provides Council with the initial analysis of the information provided and
assesses the Government’s proposal and currently available service
delivery options. The intent here is to assist Council to understand the
information that has been provided to date and enable Council to prepare for
future decisions and community consultation and engagement.
9. In summary,
o WICs analysis undertaken estimates that in order to meet future
investment pressures the average household cost per annum of three waters would
increase in Lower Hutt from $880 to $2,380 in 2051. Through adopting reform,
this would be reduced to $1,260. The analysis shows that the projected
average cost per household is not unreasonable, particularly given the higher
level of capital investment forecast and noting that there are a range of
uncertainties and risks (refer Appendix 5 report by PWC).
o Given the peer reviews of the modelling and underlying assumptions
by Beca and Farrierswier (which always carry a degree of uncertainty) no
further analysis of this work has been done or is proposed and officers have focussed
on the reasonably practicable options and their implications for Council and
the community.
o Four feasible options available to Council for three waters service
delivery have been considered. This has been done at a high level and provides
a comparison with the Government’s proposed reforms model. These options
are:
- Option A – Government reforms proposal
- Option B – Wellington Water model at higher level of service
(effectively the status quo or do minimum option)
- Option C – asset transfer to an enhanced Wellington Water type
model
- Option D – Council delivery of water services.
- Under all options except the Government proposal, Council bears the
risk of meeting the new water standards, environmental requirements and
achieving compliance.
10. Other Government
reforms (Resource Management Act, Future of Local Government) pose
opportunities and challenges for each option.
11. If the
Government’s proposal was to proceed, effective management of the
transition risks by Council, Government and partners will be critical.
12. The law currently
prohibits Council’s deciding to opt-in to the current proposal (given
section 130 of the Local Government Act 2002 and what we know about this option
at present). Current decision-making requirements, including the need to
take account of community views and strategic nature of the assets involved,
would also preclude Council deciding to opt-in at this time without
consultation.
13. Similar requirements
apply if the council wishes to consider alternative arrangements that involve
asset transfers, divestment, or change in ownership to deliver water services
in the future.
14. There are a number of
issues, concerns and uncertainties for the Government and councils to work
through before a Council decision can be produced, including whether
legislative change will enable or require the Water Services Entity to be
adopted. Therefore, there is no expectation that councils will make a
decision to opt-in (or out) or commence community engagement or consultation
over the eight-week period.
15. Officers request
Council to consider the issues that arise from the Government’s proposal
and any potential solutions so these can be raised with Government and LGNZ
before the end of September 2021.
16. Government decisions on
entity boundaries, governance and transition and implementation arrangements
are expected to occur after the eight week-process ends (30 September
2021).
17. On the assumption that
the reform goes ahead, it is anticipated that councils will continue to deliver
water services until 30 June 2024 and council involvement in transition will be
required throughout.
Section A - Background and context
18. Council
has received the following reports and briefings on Three Waters Reform:
- 25 August 2020, Council report entitled “Three Waters Reform
– Memorandum of understanding”(HCC/2020/5/173),
- 24 February 2021 Council briefing on Three Waters Reform,
- 13 July 2021, Policy, Finance and Strategy report entitled
“Three Waters Reform update, including financial analysis of potential
impacts”(PFS 2021/3/152),
- 18 August 2021, Council briefing on Three Waters Reform.
19. Following the serious
campylobacter outbreak in 2016 and the Government’s Inquiry into Havelock
North Drinking Water, central and local government have been considering the
issues and opportunities facing the system for regulating and managing the
three waters (drinking water, wastewater, and stormwater).
20. The focus has been on
how to ensure safe drinking water, improve the environmental performance and
transparency of wastewater and stormwater network and deal with funding and
affordability challenges, particularly for communities with small rating bases
or high-growth areas that have reached their prudential borrowing limits.
21. The Government’s
stated direction of travel has been for publicly-owned multi-regional models
with a preference for local authority ownership. Te Tari
Taiwhenua ,the Department of Internal Affairs (DIA), in partnership with
the Three Waters Steering Committee (which includes elected members and staff
from local government ) commissioned specialist economic, financial, regulatory
and technical expertise to support the Three Waters Reform Programme and inform
policy advice to ministers.
22. The initial stage
(Tranche 1 - MOU, Funding Agreement, Delivery Plan and RFI process) was an opt
in, non-binding approach. It did not require councils to commit to future
phases of the reform programme, to transfer their assets and/or liabilities, or
establish new water entities. Council received $10.6M funding through this
initial Three Waters Reform funding process. The 2020 indicative reform
programme and then anticipated next steps can be found in Appendix 1.
23. Council completed the
RFI process in January 2021 and the Government has used this information,
evidence, and modelling to make preliminary decisions on the next stages of
reform and has concluded that the case for change has been made (Appendix 2).
Section B - Government’s June
2021 and July 2021 announcements and information releases
24. In June 2021 a suite of
information was released by Government that covered estimated potential
investment requirements for New Zealand, scope for efficiency gains from
transformation of the three waters service and the potential economic
(efficiency) impacts of various aggregation scenarios.[2]
25. In summary the
modelling indicated a likely range for future investment requirements at a
national level in the order of $120B to $185B. 
26. The modelling also
estimated that an average household cost for most councils on a standalone
basis to be between $1,910 and $8,690 by 2051, and that these costs could be
reduced to between $800 and $1,640 per household and efficiencies in the
range of 45% over 15 to 30 years if the reform process went ahead. An
additional 5,800 to 9,300 jobs and an increase in GDP of between $14B to $23B
in net present value terms over 30 years, were also estimated.
27. The efficiencies noted
are underpinned by evidence across a range of countries based on joined up
networks, greater borrowing capability and improved access to markets,
procurement efficiencies, smarter asset management and strategic planning for
investment, a more predictable pipeline of investment and strengthened
benchmarked performance, governance and workforce capabilities.
28. As a result of this
modelling, the Government has decided to:
o establish four statutory, publicly-owned
water services entities that own and operate three waters infrastructure on
behalf of local authorities
o establish independent, competency-based boards to govern
o set a clear national policy direction for the three waters sector,
including integration with any new spatial / resource management planning
processes
o establish an economic regulation regime
o develop an industry transformation strategy.
The proposed
safeguards against privatisation can be found on page 26 of the DIA’s summary of the case for change.
29. Both
DIA and LGNZ have produced two page national overviews,
available on the DIA website[3] and LGNZ websites[4] respectively. Appendix 2 contains more detail on the national
context and Appendix 3 provides the DIA and LGNZ overviews.
30. Hutt
City Council has been placed in Water Services Entity C. The diagram that
follows shows the boundaries, although it is important to note the precise
boundaries are still up for discussion. Refer Appendix 2 for further
information on the boundaries of the other entities.
31. On 15
July 2021, in partnership with LGNZ under a Heads of Agreement[5], the Government announced a package of
$2.5B to support councils to transition to the new water entities and to
invest in community wellbeing. This funding is made up of a ‘better
off’ element ($500M will be available from 1 July 2022 with the
investment funded $1B from the Crown and $1B from the new Water Services
Entities) and ‘no council worse off’ element (available from
July 2024 and funded by the Water Services Entities). The ‘better
off’ funding can be used to support the delivery of local wellbeing outcomes
associated with climate change and resilience, housing and local placemaking,
and there is an expectation that councils will engage with iwi/Māori in
determining how to use their funding allocation.
32. Hutt City
Council’s funding allocation is $38.7M. A small portion of this may
be re-allocated to GWRC in recognition of its responsibilities for bulk water
supply. The detail of the funding and the full list of allocations is available
in Appendix 4. Conditions associated with the package of funding have yet
to be worked through.
33. In addition to the
funding announcements, the Government has committed to further discussions with
local government and iwi/Māori over the next eight weeks on:
o the
boundaries of the Water Service Entities,
o how
local authorities can continue to have influence on service outcomes and other
issues of importance to their communities,
o ensuring
there is appropriate integration between the needs, planning and priorities of
local authorities and those of the Water Service Entities,
o how
to strengthen the accountability of the Water Service Entities to the
communities that they serve, for example through a water ombudsman.
34. As a result, the
original timetable for implementing the reform (outlined in Appendix 1) and for
councils to consult on a decision to opt-in (or not), no longer applies.
Further advice on the difficulties and risks of making a decision to opt-in or
not is included at section G of this report.
35. Next
steps are expected to be announced after 30 September 2021, which would include
the timeframes and responsibilities for any community or public consultation.
36. It is
also important to note that the Government has not ruled out legislating for an
“all-in” approach to reform to realise the national interest
benefits of the reform.
37. In the
interim DIA continues to engage with council staff on transition matters on a
no regrets basis should the reform proceed. These discussions do not pre-empt
any Government decisions.
38. On the
assumption that the reform goes ahead, it is anticipated that councils will
continue to deliver water services until 30 June 2024 and council and
Wellington Water’s involvement in transition will be required
throughout.
Section C – Mana Whenua
39. As
part of the three waters reform proposals, Cabinet has agreed to recognise and
provide for Iwi/Māori rights and interests with a specific focus on
service-delivery. It is proposed that Iwi/Māori will have a greater role
in the new Three Waters system, including pathways for enhanced participation
by whānau and hapū as these services relate to their Treaty rights
and interests.
40. The
Department of Internal Affairs led engagement with iwi/ Māori through many
workshops across the country, webinars, technical reference groups and one on
one discussions.
41. DIA
expect to continue its engagement on three waters service delivery reforms with
iwi/Māori throughout the reform programme lifetime (anticipated to take
until 1 July 2024). The Water Services Entities, when live, will also be
required to form relationships with mana whenua and resource this relationship.
42. Council,
as a part of our regular meetings with Mana Whenua, included discussions on the
three waters reform proposal. Mana Whenua were invited to the 18 August 2021
Council briefing on the three waters reform and will also be included in any
further engagements and activities related to the reforms as it progresses
through its programme.
43. Mana
Whenua involvement in reform programme, whether working alongside DIA and or
Council, will ensure that a strong foundation is built which will enable active
engagement when and if the government proceeds with its three water reforms.
44. The
table that follows sets out the current opportunities for iwi/Māori in the
three waters reform.
|
Design
feature
|
Description
|
Opportunity
for Iwi/Māori
|
|
Statutory
recognition of the Treaty of Waitangi
|
Rights and interests of Iwi/Māori will be
recognised and provided for in service-delivery arrangements for the new
Three Waters system
|
Uphold existing Treaty Settlement arrangements,
including through transition and the standing-up of new entities
|
|
Statutory recognition of Te Mana o Te Wai
|
Te Mana o Te Wai will be recognised and provided for in
service-delivery arrangements for the new Three Waters system
|
Each entity
will be required to give effect to Te Mana o Te Wai both in legislation and
as articulated by mana whenua over a defined waterbody
|
|
Creation of Mana Whenua Groups for each Entity
|
A Mana Whenua Group for each of the four entities will
be established to guide strategic performance expectations alongside local
government
|
Each Mana Whenua Group will have equal voting rights to
local government and the new entities will have statutory obligations to fund
and ensure Mana Whenua participation
|
|
Te Mana o Te Wai statements
|
Legislation will broadly describe Te Mana o Te Wai,
however the emphasis is that mana whenua define what Te Mana o Te Wai means
to their specific location. Operationally, a statement can take the
form of an Iwi Management Plan, Cultural Impact Statement or the like
|
Provides an instrument for mana whenua to prioritise
their capacity and capability to participate in the new system and recognises
the role of whānau and hapū in providing kaitiakitanga
activities
|
Section D - Council local context and
information
45. While
the Government and LGNZ considers that the national case for change has been
made, each council will ultimately need to make a decision based on its local
context.
46. Councils
do not have a national interest test for their decision making. Councils
are required to act in the interests of their communities and the
community’s wellbeing (now and into the future), provide opportunities
for Māori to contribute to their decision-making processes, ensure prudent
stewardship and the efficient and effective use of its resources in the
interests of the district or region (including planning effectively for the
future management of its assets) and take a sustainable development approach[6].
47. Council
currently delivers three waters services through a Council Controlled
Organisation Wellington Water Ltd (WWL), alongside other shareholding councils
Wellington City Council, Porirua City Council, Upper Hutt City Councils, South
Wairarapa District Council and Greater Wellington Regional Council. WWL fully
manages under contract the water, wastewater and stormwater assets for these
councils. WWL is a non-asset owning entity as the assets are owned by the
shareholder Councils. The book values of the Hutt City Council three water
assets are $0.5B.
Network
condition and renewal of three waters assets in Lower Hutt:
48. Using
the age profile of the assets we know that there is a current backlog of
approximately 27% in renewals for the water network, representing around 190
kilometre of pipe, along with a backlog of 14% in renewals for wastewater
representing 90 kilometres of pipe. The estimated cost of this backlog of
deferred renewals is $230M. A large portion of this backlog has occurred in the
period 2012 to 2016. This poses a growing risk to service reliability for the
city. On this basis the overall condition of these networks is considered to be
low.
49. Much
of the city’s three waters network is at, or close to, capacity, while
approximately 60 per cent of our pipes are due for renewal in the
next 30 years. The capital investment needed for this infrastructure is
substantial, particularly when these assets need renewing or require
significant maintenance.
50. WWL is working to improve the understanding of the
condition of high and very high critical assets and prioritising the renewal of
these assets where there is evidence that they are failing. Through the Long
Term Plan (LTP) 2021-2031 external audit process, a modified audit opinion was
issued due to the risks and uncertainties over the three waters capital
investment forecasts, with a need to improve asset condition information.
51. Our maintenance
costs have been increasing, particularly in maintaining the water network
to cope with the increased number of leaking pipes. This trend has been
particularly noticeable since the Kaikoura Earthquake of November 2016. The
increase in maintenance costs is directly attributable to the current backlog
of renewal work and will continue until such time as the renewal programme has
caught up. WWL has advised Council that the maintenance budgets are unlikely to
be adequate for current and future years and that stimulus funding will need to
be utilised again this financial year to offset an expected overspend.
Whaitua
52. The
Whaitua-Te-Whanganui-a-Tara Committee (Whaitua) is an advisory body established
by Greater Wellington Regional Council (GRWC) and tasked to develop
recommendations, with community and stakeholder engagement, that would improve
the quality of freshwater bodies in the Wellington/Hutt catchment. At the heart
of this programme is GRWC’s need to meet the requirements of the National
Policy Statement for Freshwater Management .
53. The Committee has been active since late 2018 and is now
finalising its recommendations to GWRC. At a recent Council briefing we were
advised that the recommendations of the Whaitua would include aspirational
outcomes, reflecting the high community desire for clean waterways, which will
likely go beyond what can be achieved with the current LTP funding provision.
GWRC officers stated that they would take into account affordability and
do-ability issues when considering the Whaitua recommendations in drafting the
Regional Policy Statement for Freshwater Management.
Climate
change impacts
54. Wastewater
is a significant contributor to Council’s carbon emissions, with the
treatment and disposal to Landfill of the sludge. While we have included some
budget provision in the LTP to investigate options for a new sludge treatment
facility to reduce carbon emissions, further funding provision (likely to be
not insubstantial) will be required to address our longer term responsibilities
including NZ Emissions Trading requirements.
55. Expected
sea-level rise will have impacts on three water infrastructure. This
projected rise in sea level will likely compromise the ability of the
stormwater network to drain effectively and further exacerbate the impacts of
flooding. Additionally, the projected sea-level rise means that some of the
city’s key three water infrastructure, particularly the Seaview
Wastewater Treatment Plant, is likely to face inundation, which is a threat to
the functioning of the wastewater system.
56. The
increased likelihood of heavy rainfall events with global warming will have an
effect on our stormwater and wastewater networks with a higher number of
wet-weather overflows and flooding. Future freshwater standard requirements
will place increasing costs on Council to meet its consent requirements to
reduce wastewater overflows.
Resilience
57. A major
earthquake is likely to cause disruptions to water supply and wastewater
networks, both in terms of structural damage to pipes or pumping stations and
our ability to ensure continuation of supply. Council’s planning focuses
on both wider change and treatment capacity, to ensure people have access to
clean drinking water and sanitation. Earthquakes may also cause significant
damage to the stormwater network, leading to significant problems, particularly
if heavy rainfall follows a seismic event.
Stormwater
network assets
58. The reform
process was unclear in the earlier stages as to whether the stormwater network
assets would be included or not. Most recent feedback from the Government is
that stormwater network will be included. With the stormwater network managed
by WWL for Council and the other City or District Council shareholders, this
move is supported.
59. There are
some technical issues which arise with this, particularly around
ownership/management of assets that have multi-functionality such as roads and
water sensitive design assets (e.g. rain gardens). This is being considered by
one of the expert technical groups established to consider details of the
proposed reform changes.
Three
Waters Reform - DIA local dashboard
60. The
DIA local dashboard for HCC was reported to the Policy, Finance and Strategy
Committee 13 July 2021 (PFS2021/3/152). Underpinning
the DIA local dashboard is modelling undertaken by the Water Industry
Commission for Scotland (WICS) to assess the potential benefits from
amalgamating three waters infrastructure and delivery for the 67 councils
across New Zealand into a limited number of independent water service entities.
61. The
key aspects of the local dashboard are detailed below. PWC has assisted
with detailed analysis and appendix 5 provides further information.
Average cost per
household:
o DIA
local dashboard, (based on several assumptions) assumes a current (FY21) annual
cost per household of $880; our estimate, based on the Long Term Plan
2021-2031(LTP) is $1,100 per household.
o Projected
out to 2031 (again based on assumptions) is $2,212 (DIA uninflated) and our Council
LTP is $1,767 (uninflated).
o Projected
out to 2051 is $2,380 (DIA uninflated) and our council (using DIA’s
assumed compounded annual growth in 2032-2051) is $1,861 (uninflated).
o While the DIA analysis includes
capital expenditure and debt estimates that pre-date Council’s finalised
LTP 2021-2031, our analysis shows that DIA’s estimated average cost
per household is not unreasonable; particularly given the level of capital
investment forecast (DIA forecast $932M between FY22-FY31 compared with
Council’s 2021 LTP forecast of $489M).
o DIA estimates that average household costs in Entity C in 2051 is
$1,260 with reforms or $3,730 without reforms.
Debt
62. Council’s
debt projection from the LTP is shown in the graph that follows:
63. Based
on Council’s LTP investment levels, Council does not have issues with
delivering necessary investment in three waters infrastructure on a debt basis
as there is adequate headroom within borrowing limits. It is however
important to note that in the early stages of the LTP development Council chose
the “modified mid-option” investment level due to affordability
considerations. This option excluded some investment choices, for example a
proposed $200M placeholder for future growth in the city (refer Long Term
Plan/Annual Plan Subcommittee LTP2020/5/206 and LTP2020/6/223). Further
information about the network condition risks is detailed above; this has
significant flow on risks to debt capacity for HCC in the future.
64. In
support of the reform process, DIA has developed a high-level financial
impact tool (released 17 August 2021) to provide councils with an
indication of how the proposed transfer of water-related debt, assets and
revenues may affect the financial position, credit ratings and/or financial
covenants of each Council.
65. The
financial impact tool primarily uses the data in Council’s final LTP,
with an opening balance three waters debt figure from Council’s RFI.
These calculations are at 30 June 2024, the proposed transfer date.
66. The
output of the financial impact tool (following updating the opening balances to
reflect actuals) is Council will transfer $71M of revenue and $104M of debt to
the new water entity, having the impact of increasing Council’s debt to
revenue ratio from 186% to 206%. This is summarised in the table that follows:
|
Metric
|
Without Transfer
|
Transfer
|
With Transfer
|
|
Revenue
|
$216M
|
$71M
|
$145M
|
|
Debt
|
$402M
|
$104M
|
$298M
|
|
Debt to
Revenue
|
186%
|
|
206%
|
Note:
Revenue transferred above includes general rates allocated to three waters.
However, the allocation of general rates in the LTP needs to be considered in
light of the balanced budget deficits in the LTP until 2028/29, which are
largely driven from affordability considerations. Council will need to consider
this position in further discussion with DIA.
67. The
Government has committed to ensuring that councils are ‘better off’
and ‘no worse’ from the three waters reform. The HCC allocation for
‘better off’ funding is $38.7M. The
financial impact tool indicates that any council with a reduction in debt
headroom will receive a payment equal to the loss in debt headroom to ensure
debt to revenue ratios are not affected. The tool indicates that HCC will receive
$29M, which ensures its net debt to revenue ratio remains at 186% (this would
be part of the ‘no worse’ allocation).
68. Council’s
debt projection in 2021-2031 have been reproduced below to show forecasted net
debt post transfer. This assumes HCC receives a ‘no worse’ payment
from Government.
69. To assess
whether the proposed ‘better off’ and ‘no worse’
funding to Council is sufficient, Council needs further information on the
conditions that will be associated with that funding. It is reasonable to
expect that the funding would provide Council with an opportunity to address a
range of issues and opportunities to improve community wellbeing.
70. It
should be noted that the financial impact tool is indicative only to support
the reform process and may not be a true reflection of final amounts paid to Council.
Should the reforms proceed as proposed, a due diligence process will be
undertaken to assess the actual assets, debt and revenue at the point of
transfer on 1 July 2024.
71. Council
does not allocate its debt to each of the Council activities and takes a
portfolio approach to managing borrowings. The quantification of Council’s
three waters related debt is yet to be finalised and, as such, officers will
provide further advice on the reasonableness of the estimated debt transfer
generated from the financial impact tool. Further advice is also being sought
on the appropriate method to calculate debt associated with three waters.
Capital expenditure
72. Significant
investment in three waters infrastructure is forecast to be required over the
next 30 years, underpinned by assumptions that regulatory standards will
increase and that there will be more monitoring
and enforcement in the future.
73. DIA is
forecasting $932M (uninflated) on capital projects on three waters
infrastructure over the 10 year period 2021-2031. Over a 30 year period to
2051, this investment is forecast to grow to $3.02B (uninflated), of which
$1.7B relates to renewals (capital maintenance of existing assets). Note all
figures are provided on a real basis (inflation stripped out).
74. Council’s LTP 2021-2031 is budgeted to spend $489M (uninflated) on capital
projects on three waters infrastructure. Over the life of Council’s 30
year Infrastructure Strategy, that investment grows to $1.6B
(uninflated). These amounts are materially less than those forecast by
DIA which is a key cause for Council’s forecast cost per household being
lower.
75. There
are a few specific items to draw Council’s attention to:
o While prepared at the national
level, the WICS model underpinning the DIA local dashboard has been peer
reviewed by Farrierswier
and Beca to ensure
that both the modelling and underlying assumptions are reasonable in the New
Zealand context. It therefore provides a reasonable indication of the
“direction and order of magnitude”[7] of the gains that can be delivered though the new system and the
level of future investment Council is likely to need to make over the next 30
years.
o A key factor in realising the benefits achieved through the
amalgamated entity (reform) are achieved through increased leverage as Entity C
(which Council is proposed to be part of) has debt to revenue of 645% by FY51.
The use of significantly higher leverage combined with forecast cost
efficiencies are key contributors to the lower forecast cost per household
under the reform.
o At this stage it is not possible
to fully test the projections as the standards for New Zealand out to 2051 are
not known, although it is reasonable to assume that there will be greater
community and mana whenua expectations around environmental performance and
quality, tougher standards to meet for water quality (drinking and receiving
environment) and that monitoring, compliance and enforcement will be greater
than it is now. This affects both operational and capital expenditure (costs
will go up), including the number of staff (or contractors) that council will
need to ensure Council outcomes for water and community and legal requirements
are met.
o There is always a level of uncertainty and therefore risk around
assumptions and forecasts, whether prepared by Council for our LTPs or by
others, including government agencies, to facilitate policy decisions, such as
the current Three Waters Reform process. Officers consider that it would likely
not be a good use of Council’s limited resources to spend time and
money on a detailed review of the assumptions and modelling, particularly given
the relative similarity of council projections to the DIA local dashboard. We
note that the WICS analysis has received both a financial model and technical
peer review.
o Under the proposed reform process HCC will be one of the owners of
the new water service entries, but will have no direct control (necessary to
achieve balance sheet separation). HCC may still be seen as responsible in
ratepayers eyes. Prioritisation of investment for the local community may be
challenging in the future when HCC’s “voice” can only
influence, including alignment with growth planning.
o There will be
additional financial considerations for Council as further information is
provided by DIA. Officers are mindful of ensuring value for ratepayers and are
already taking steps to mitigate the impact of these reforms on the
Council’s borrowing portfolio. It is unclear how financial derivatives
(interest rate swaps) and loan break fees will be treated and accounted for
upon the transfer of debt. A liability may exist for HCC when it “closes
out” financial derivatives following the transfer of debt to the new
water service entities, however, this is being managed currently to mitigate
liability.
Section E – Options available to
Council for three waters service delivery
76. This
section provides a high level overview and analysis of feasible options
available to Council to compare with the Government’s proposed reform
model.
77. This
options analysis has been informed by advice from LGNZ, Taituarā and DIA guidance[8] and our risk framework and policy. It provides an overview of
the potential impact of reform and other practicable options (both today and in
the future) in terms of service, finance and funding, economic development and
growth, workforce, delivery and capability and social, cultural and
environmental wellbeing.
78. Four
feasible options are considered:
i. Option A – Government reforms proposal,
ii. Option B – Wellington Water model at higher level of service
(effectively the status quo or do minimum option),
iii. Option C – asset transfer to an enhanced Wellington Water type
model,
iv. Option D – Council delivery of water services.
79. It is
important to note that there is further information to be developed and
Government decisions to be made ahead of Council proceeding with any decisions
and a community consultation process. Refer to Section G for further
information on Council decision making and consultation.
Option A - Government
Proposal
80. This
option is outlined in the report above. Under this option, HCC is in water
services entity C, a publicly owned water services entity (WSE) that owns and
operates three waters infrastructure on behalf of councils, mana whenua and
communities.
81. The
ownership and governance model is a bespoke model, with councils listed in
legislation as owners, without shareholdings or financial interests, but an
advocacy role on behalf of their communities. Iwi/Māori rights and
interests are also recognised. Representatives of local government and mana
whenua will sit on the Regional Representative Group, who issue a Statement of
Strategic and Performance Expectations and receive a Statement of Intent from
the WSE. WSEs must also consult on their strategic direction, investment plans
and prices/charges.
82. The
proposed reforms model represents a very significant change process to address
fundamental issues of future standards and affordability.
Implementation of this model will require ongoing decisions by Government and
legislative change followed by 5-10 years for the proposed WSE to develop a
maturity model and realise the anticipated benefits of the reforms.
|
Key benefits
of Option A
|
Key risks and
issues with Option A
|
|
o Potentially very significant efficiency gains through scale,
procurement, governance, capability, economic regulation
o Increased financial capacity/ borrowing
o Increased affordability of water services
o Ability to respond to water regulation
o Reduction in Council’s current risk profile including
compliance risk and the risk of not meeting standards
|
Aspects of the model remain
unclear at this time and could lead to risks or sub-optimal outcomes:
o Governance and oversight, including the role of Iwi/Māori
across such a large geographical area and multiple interests and owners
o Protections from future privatisation
o Prioritisation of investment including: local needs, alignment
with growth and wider community outcomes
o Financial impacts on Council including debt transfer and the
details of the package for local government
o Impacts on local government from wider sector reforms
o Transition including impacts on communities through the change
process, workforce and capability
o Benefits realisation, including stated efficiency gains.
|
Option B –
Wellington Water model at a higher level of service
83.
Option B is effectively the status quo option whereby WWL continues as a CCO to
deliver three waters services for the six shareholding Councils.
84. This
model would need to respond to the proposed changes in the regulatory
environment, including increased investment to ensure compliance with drinking
water and environmental standards. It would also need to respond to the
oversight and expectations of a potential future economic regulator.
85. This
option requires making assumptions about
o the future regulatory requirements. This would apply the
assumptions underpinning the WICS modelling and the Government’s proposal
and draft/emerging standards and compliance regimes eg those coming from
Taumata Arowai as well as early assessment from WWL.
o the ability of non-WWL drinking water supplies to meet standards and
requirements and the risks to Council and WWL in relation to these
o Increased Council investment to meet both regulatory requirements
and network requirements.
86. Any
changes to levels of service or material changes to the cost of service would
require consultation and an LTP amendment (or consultation on those changes as
part of the next LTP 2024-34 and potentially later ones). These would
need to be agreed and aligned across the WWL shareholder Councils.
|
Key benefits
of Option B
|
Key risks and
issues with Option B
|
|
o Lowest risk option in short term
o Less disruption from transition to communities through the change
process, workforce and capability
o Responds to increased regulatory requirements
o Known option with established workforce, oversight and governance
o Greater Council control and more certainty over local
infrastructure integration (planning and delivery) with land use plans and
council objectives
|
o Does not address the fundamental drivers for change of
affordability, efficiency gains and costs to community = longer term risk
o Ongoing challenges of alignment between Council investment /
affordability and required levels of investment
o Potential for future change to be imposed by government
o Unforeseen future impacts on Councils and WWL from new water
regulation and economic regulation
o Loss of capability and capacity from WWL to WSE if these are
established elsewhere in NZ
|
Option C –
Asset transfer to enhanced Wellington Water model
87. This
option would build upon Option B by including aspects of the Government’s
reform model whereby three waters assets would be transferred to an enhanced
Wellington Water type CCO entity.
88. This
type of model was identified as a potential option through the Wellington City
Council Mayoral task force report[9]
and through the Hawkes Bay Councils three waters review business case process[10].
89. Depending
on how this option was developed, it may allow for some form of balance sheet
separation from Council to enable greater borrowing and investment. This
would however most likely require some form of legislative change to enable
this.
90. Significant
further analysis and buy-in from the shareholder councils would be required to
develop and then implement this model. This would include working through
similar aspects of the Government’s model that have been identified as
unknowns or potential risks above.
|
Key benefits
of Option C
|
Key risks and
issues with Option C
|
|
o Potentially lower risk option (relative to Government reform) in
the short term
o Builds on known WWL model with established workforce, oversight
and governance
o Potentially less disruption from transition to communities through
the change process, workforce and capability
o Greater Council control and more certainty over local
infrastructure integration (planning and delivery) with land use plans and Council
objectives
Potential to
realise similar types of benefits to Option A:
o Efficiency gains through scale, procurement, governance,
capability, economic regulation
o Financial capacity / borrowing
o Increased affordability of water services
o Ability to respond to water regulation
|
Significant
further work would be required to develop this model which raises a range of
risks and challenges. This would need to include consideration of:
o How to address the fundamental drivers for change of
affordability, efficiency gains and costs to community
o Buy-in, capability and capacity to manage and govern this process
as a major change programme
o Governance and oversight model, including the role of
Iwi/Māori
o Asset and debt transfer and borrowing model
o Costs to households and systems for charges
o Potential or future process for further councils to join this
model (eg wider Wellington region, Horowhenua, Tararua)
o Legislative changes and government buy-in required to enable the
model
o Process requirements and timeframe including consultation
o Potentially lower benefits than Option A due to smaller scale
|
Option D –
Council to deliver three water services
91. Council
could also opt to deliver three waters services itself / through a contracted
model / through a mixed model of in-house and contracted services. This
might include contracts with a WSE or other Councils.
92. This
model would require the shareholder Councils to agree to wind up WWL (WWL would
also need to be wound up under Option A) or for the Council to withdraw from
this model.
93. This
model would present a range of challenges and risks to Council given the
interconnected nature of the Wellington three waters system and that Council
has effectively transferred capacity and capability for water functions to
Wellington Water Limited.
|
Key benefits
of Option D
|
Key risks and
issues with Option D
|
|
o Potential for more Council control of aspects of three waters
– investment, delivery, alignment with wider planning and outcomes
|
o Does not address the fundamental drivers for change of
affordability, efficiency gains and costs to community
o Council liable for regulatory requirements and oversight from
Taumata Arowai
o Unknown implications of economic regulator on Council
Complexities of establishment:
o Winding up or opting out of WWL
o Developing drinking water supply agreements from GWRC (or WSE)
owned assets
o Commercial arrangements with other Councils – such as for
transfer and treatment of wastewater and stormwater
o Rebuilding of internal three waters capability and capacity
o Council’s capability and capacity to manage and govern this
process as a major change programme in relation to other priorities
|
Key priorities in the Council’s LTP 2021-2031
94. The
Government's reform proposals have also been considered in relation to high
level alignment with the Council's key priorities identified by the LTP
relative to the Council's current position. This is briefly summarised
below:
Investing in infrastructure | Whanake i ngā poupou o te
hapori
Increasing
housing supply | Hei āhuru mōwai mō te katoa
o As noted above, Council has considerable
investment required in three waters infrastructure which presents a range of
funding and affordability challenges. Enabling
future growth and housing supply to facilitate housing affordability is
contingent upon enabling investment in three waters
infrastructure. Through the LTP process, whilst some funding to enable
growth has been included this was restricted due to affordability
considerations (for example a $200M placeholder for future growth was
excluded).
o The three waters reforms are intended to address
this affordability challenge and enable investment required for growth.
o It is however noted that prioritisation of
investment for the local community may be challenging in the future when
HCC’s “voice” can only influence, including alignment with
growth planning, unless legislative provision is made that better ensures this.
Caring
for and protecting our environment | Tiaki taiao
Supporting
an innovative, agile economy and attractive city | Taunaki ōhanga auaha,
tāone whakapoapoa
Connected communities |
Tūhono hapori
o Locally aspirations for improved water quality
are being reflected through the outcomes of the Whaitua process and the recent
LTP investment decisions.
o The Government's reform programme in part
responds to the need to improve the quality of freshwater which will be
enforced through a strengthened regulatory regime and supported by an increase
to the capability and capacity of the water sector to make the necessary
investment to meet community expectations and regulatory requirements.
o Ensuring a ‘local voice’ in the
governance and direction of the WSE and ensuring that investment aligns with
broader community outcomes may present some challenges given the scale of the
WSE and the proposed governance arrangements
Being
financially sustainable | Whakauka ahumoni
o The long term benefits of the reform proposals are clearly
focused on financial sustainability and addressing affordability constraints.
o The significant scale and size of the proposed system-wide
changes for the local government sector enables efficiency opportunities in the
medium to long term, however there are a range of risks and uncertainties in
establishing the new entities and transitioning to this new structure.
Section F – Transition
95. If the
Government’s proposal were to proceed, effective management of the
transition by Council, Government and partners will be critical. There are a
range of risks that will need to be considered in this regard, and includes:
o Loss
of customer experience,
o Poor
transition management could cause delays and confusion over responsibility
exposing Council to liabilities and affecting continuity of service delivery,
o Different
local approaches may reduce the economies of scale,
o Staff/contractor
retention ,
o Stranded
overheads,
o Transition
resourcing in tight and challenging labour market
o Deferred
decision making - development projects may stall
o Liability
for environmental damage – lack of clarity for monitoring environmental
impacts may expose Council to liabilities.
96. Transition
away from the status quo to any other option, carries inherent risks, with
potential mitigations to reduce both impact and likelihood and therefore
residual risk and sticking with the status quo may not be sustainable in the
short, medium or long term.
Section
G – Council decision making and consultation
97. Part 6
of the LGA, sections 76 to 90, provide the requirements for decision making and
consultation, including the principles of consultation and information that
needs to be provided including the reasons for the proposal and the reasonably
practicable options.
98. In
particular, section 76 requires that in making a significant decision, which a
decision on the future management and or ownership of three waters assets will
be, Councils must comply with the decision-making provisions. This is a
‘higher bar’ than the “promote compliance with” that
applies for ordinary decisions.
99. Section
77 states that Councils must seek to identify all reasonably practicable
options and then assess the advantages and disadvantages of each option.
100. Section 78
requires that in the course of making a decision a Council must consider
community views but section 78(3) explicitly says that consideration of
community views does not require consultation, which is reinforced by case law.
101. Section 79 gives
Council discretion to decide how the above Part 6 requirements are met
including the extent of analysis done etc. Therefore, while a decision could be
challenged, a judicial review is unlikely to be successful unless the decision
made by Council was manifestly unreasonable, the process was flawed or the
decision was beyond its powers (as given in law, ie the Council did not act
within the law).
102. However, despite
section 79 of the LGA, a decision to transfer the ownership or control of a
strategic asset from the Council (or to it) must explicitly be provided for in
the Council’s LTP (and have been consulted on specifically in its
consultation document).
103. An LTP amendment
and consultation process on the ownership and governance arrangements and asset
transfers proposed would be necessary.
104. There are also
provisions in the LGA that relate to unlawful decisions to sell or dispose of
assets, which can be investigated by the Auditor-General.[11]
105. A decision to
opt-out would also be affected by the consultation and decision-making
requirements set out in this report, including the need to follow a robust
process that could survive a judicial review, as well as make a final decision
that was not manifestly unreasonable in the circumstances.
106. Given the
Government’s
o 8 week period of engagement with mana whenua and Councils
o commitment to explore issues such as council and community influence
of service outcomes, integration with other reform proposals, spatial and local
planning
o request for Councils to give feedback on the proposal, identify
issues and solutions
o and uncertainty around next steps, including whether the reform may
become mandatory or legislative change will remove legal barriers to opting in
it would be premature to make a decision
to opt out of the reform process and may expose the Council to litigation
risk.
107. A Government Bill
to progress the reforms could address the issues raised above, for example removing
the section 130 requirements has explicitly been raised.
108. At this stage no
decision is required on future delivery arrangements. Based on the
analysis in this report, Council should wait until it has further information
before consulting on and/or making a decision on the Government’s
proposal.
109. It is recommended
that the Council therefore notes the options canvassed in this report, the
high-level analysis of them and the information and decisions that are yet to
be made.
110. If reform is not
made mandatory, to ensure sufficient information is available to meet the moral
and legal requirements of Council decision-making officers will further develop
the analysis of options (based on further information from the Government,
advice on next steps, and regional discussions) prior to Council decision
making and consultation on future water services delivery. Whether this is
ultimately required will be dependent on where the Government gets to with the
reform process and the decisions it makes after 30 September 2021.
Section H – Information that the
Council requires or potential solutions to outstanding issues that Council
would like to convey to Government and LGNZ
111. There are still
several issues that need to be resolved, including:
o the final boundaries
o protections from privatisation
o plans for consultation with mana whenua and communities
o how the community voice be heard within the new entities, and what
influence local authorities will have (and what the community can realistically
expect Council to influence particularly if it is not on the Regional
Representation Group).
o representation from and on behalf of mana whenua
o integration with other local government reform processes
o integration with spatial and local planning processes and growth
o prioritisation of investment, and alignment with Council priorities
o workforce and capability planning for the new entities
o what will a Government Bill cover and whether the reform will be
mandatory
o conditions associated with the Government’s package of funding
for local government
o transition arrangements, including workforce challenges (without
transition challenges on top) and due diligence for asset transfers etc.
o the scope of the stormwater role that the entities will play, both
in relation to growth and development planning, development control,
asset management and maintenance particularly of green and water sensitive
assets
o After reform, how the entity intends to engage with local
communities, and the role of Council (for example with advocacy, facilitation
of communication, response to failures)
o How Councils will be involved in holding future entities accountable
for performance and customer service levels.
112. Council is
invited to discuss whether there are specific information needs, issues or
solutions that the Council would like officers to convey to the Government or
LGNZ.
Section I – Conclusion
113. While there is
uncertainty about the future steps in the Government’s reform proposal,
and current legislative impediments to it, the current eight-week period gives
Council the opportunity to understand the information it has received (and will
continue to receive) from the RFI and modelling processes.
114. It also provides
an opportunity for Council to understand its potential options, including the
financial, workforce and sustainability impacts for Council and the wider
economic, social and cultural implications of each option, using the guidance
that has been issued. It also provides an opportunity to engage in discussions
with other Councils in its entity grouping, share information and ask questions
and propose solutions to issues it sees to Government and LGNZ.
115. All of this
information will be useful to inform future decision making by both council and
Government and consultation and engagement with mana whenua and communities.
Engagement
and consultation
116. Council is not
required to consult at this time as detailed in section G of this report.
Further advice regarding any future consultation requirements will be provided
after September 2021.
117. Whilst there has
not been any formal consultation process with the community as yet as we are
awaiting further information from Government, there has been some initial
informal feedback from the community that has been received along the following
lines:
o People
understand the challenges we have with three waters infrastructure, and the
need to invest. They broadly recognise the commitments we have made
through the LTP, and also that the reform process is in response to similar
challenges across New Zealand.
o People
are seeking further information/clarification on some aspects of the reform.
People generally recognise there are big changes being considered, but often
not across enough detail to understand and have a strong view.
o There
is a need for community consultation. People are saying that these assets
are the community’s assets, and they therefore want to be involved in the
decision process. There has been some comments raised that people are
concerned Council will make a decision without this community input.
Climate
Change Impact and Considerations
118. The matters
addressed in this report have been considered in accordance with the process
set out in Council’s Climate Change
Considerations Guide.
119. Climate
considerations (both mitigation and adaptation), resilience and environmental
impacts are drivers of the reform process. While there are no specific
impacts arising from this report the decisions that occur post September 2021
will have an impact on climate and environmental issues. Some of these
impacts have been considered in this report based on currently available
information – please refer to Section D of the report.
Risks,
legal and financial considerations
120. Significant
risks, legal responsibility and financial implications have been identified in
analysing the reform proposals and considering the options in this report.
However, there is no decision required, other than to note those issues and to
request further information from Government if Council wishes to, to reduce the
risks and implications to Council and its communities.
Appendices
|
No.
|
Title
|
Page
|
|
1⇩
|
Appendix 1 - 2020 Background including Taumata Arowai
information and Indicative Reform Programme
|
36
|
|
2⇩
|
Appendix 2 - The Government’s conclusion that
the case for change has been made
|
39
|
|
3⇩
|
Appendix 3 - DIA and LGNZ two-page summaries
|
46
|
|
4⇩
|
Appendix 4 - Funding to invest in the future of local
government and community wellbeing
|
50
|
|
5⇩
|
Appendix 5 - Three Waters Reform financial analysis
prepared by PriceWaterhouseCoopers
|
53
|
Author: Bruce
Hodgins, Strategic Advisor
Author: Daniel Koenders, Manager Financial
Strategy & Planning
Author: Jenny Livschitz, Group Chief Financial
Officer
Author: Bradley Cato, Chief Legal Officer
Author: Kara Puketapu-Dentice, Director
Economy and Development
Approved By: Jo Miller, Chief Executive
