Three waters working group stymied by government bottom lines

Three waters feedback going to the minister on Monday seems unlikely to sway the government, whose latest model appears to fall short of its own demands.

Changes revealed in draft legislation in December largely match a scenario that government-sponsored analysis found would limit water entities' borrowing, failing a bottom-line borrowing requirement set by the minister.

It would also leave assets at risk of political pressure, and dilute the benefits of doing the reforms.

The government is expected to push its three waters reforms - which would put drinking, storm and waste water management in the hands of four organisations - through Parliament this year.

Local Government Minister Nanaia Mahuta is set to receive advice from the governance and accountability working group on how to address councils' concerns on Monday, after they were granted a seven-day extension.

The group's terms of reference include bottom-line requirements from the government that the water service entities give effect to Treaty of Waitangi, ensure "good governance" and board selection processes, ensure the entities remain in public ownership, and retain balance sheet separation.

The latter is a financial term for the separation of ownership and control over assets being borrowed against, and would enable the water service entities to borrow much larger sums for repairing and improving water infrastructure.

After councils gave largely negative feedback in October, with particular concerns over a loss of accountability and too many layers of bureaucracy, the government revealed changes to its preferred model in an "exposure draft" bill in December, giving councils more influence over water entities.

The new model would do away with an independent selection panel for entity board members' appointment and removal, handing that responsibility to a subgroup of the Regional Representative Group (RRG), which is made up of council and mana whenua representatives.

The maximum number of RRG members would also expand to be equal to the number of councils served by the entities plus an equal number of mana whenua; and the draft bill specifies the entities would be required to give effect to the RRG's statements of intent.

Those measures - popular with some councils - largely align with the "high governor influence" model, one of six analysed for the government by global ratings agency Standard and Poor's (S&P), which was included in a presentation to the working group on 17 December.

While the model would improve economic efficiency, S&P found it would fail to achieve balance sheet separation and "represents an increased level of council influence over the entity board compared with the base case". This would leave borrowing constrained by "liabilities on local balance sheets".

Briefings to Mahuta obtained under the Official Information Act noted the "level of influence over entities and the likelihood of [emergency financial] support of entities by local authorities was assessed by S&P as being sufficiently high that removal of revenues, expenses and debt associated with three waters assets would not be fully achieved".

S&P also found the model would not be better than the status quo for infrastructure delivery - with assets subject to similar levels of political pressure - or decision making.

It leaves the working group with the choice of supporting the apparently unworkable new draft proposal; going back to the government's previous unpopular suggestion; or coming up with a new solution. However, the group noted in its early meetings the government did not specifically ask for recommendations of other models in its terms of reference, saying a recommendation for deviation from it would have to meet a high threshold.

National Party local government spokesperson Simon Watts said that made it difficult for the group, and the government should simply start over.

"It leaves them in pretty much a very difficult position but actually the best thing that working group could advise the minister is that the government needs to rethink three waters reforms, they need to go back to the drawing board, and they need to undertake a true and authentic consultation process with the key stakeholders."

He said a one-size-fits-all approach simply would not work for water reform.

"That working group delayed reporting back to the minister by a week and that, we understand, is because of the complexities and the significant pushback that they've received through that consultation process. We're aware of a number of solutions that have been fed into that committee but we have little confidence that the government is going to give that genuine thought."

"The heart of local government's being ripped out by these reforms and again they need to go back to the drawing board," he said.

He said National would repeal the government's model, and instead partner with local government to build solutions tailor-made for each area.

"If it's worth doing it's worth doing right and there is absolutely no excuse to be rushing this through when this is one of the most significant scale levels of reform on infrastructure that impacts every Kiwi and every household and will do not only now but way into the future."

Mahuta's office referred RNZ to Internal Affairs (DIA), which only provided a short written statement.

"The exposure draft has been provided to the Working Group for their consideration and feedback. While they are continuing their deliberations the Department of Internal Affairs will not provide commentary on the matters they are considering," a spokesperson said.

"There will be further engagement with Standard & Poor's following delivery of the Working Group's report and prior to the Bill being introduced ... this will be incorporated into additional advice to Cabinet, drawing on a range of sources including the Working Group's recommendations before Cabinet considers and finalises reform plans and legislation."

The department said the latest one-week extension to the working group was not expected to affect the timing of the legislation, but refused to answer questions on whether other aspects of the draft bill would resolve the concerns raised over its revised model.

It may be a moot point. Mahuta - whose office would only refer RNZ to the DIA statement - has already refused to commit to enacting any changes recommended by the working group, only to listen to them.

She also faces what is likely to be a lengthy clash with councils and the public.

Cabinet documents, from before the legislation was delayed, estimated the bill would take up to nine months. OIA documents show the delays to reform legislation announced in December mean the bill is expected to be introduced in "mid-2022".

That would mean the bill would be still undergoing Parliamentary scrutiny during the October local body elections - something Mahuta had hoped to avoid.

"Previous conversations with you and other ministers have indicated a strong desire for the first Bill to be enacted around mid-2022, in advance of the local government elections. To meet this timeframe, we estimate the Bill will need to ... be referred to select committee in December 2021, at the latest," a briefing to the Minister stated.

Details from the exposure draft bill:

• Increasing the maximum number of council representatives on the regional representative group (RRG) to be equal to the total number of councils, with iwi/mana whenua representatives increased to match that.
• Clarification that the entities are body corporates led by a board of 6-10 members. The chief executive is appointed by the board.
• The "Independent selection panel" for appointing the entities' board members is replaced with a subgroup of the RRG who are elected by the RRG. Board members can be removed by the RRG for failure to carry out duties.
• The procedure for RRG appointments and removals, and entity board appointments and removals, would be governed by a constitution. Regional representatives would be banned in this constitution from gaining rights or assets in the entities. The RRG can propose changes to the constitution but it must be signed off by the minister.
• The entities are body corporates and are subject to LGOIMA as though they were a local authority. Local authorities legally cannot get a payout from the entities.
• The Minister can appoint a monitor (for seeking information), a Crown review team (if there are difficulties accessing information), a Crown Observer (if a problem with the entity is reasonably believed to exist), or a Crown Manager (to fix problems with the entity).

Privatisation protections

Under the draft legislation, proposals to sell or privatise assets must get:

• Consultation with mana whenua and the minister
• A 75 percent majority vote in favour from both the RRG with at least 75 percent of representatives present
• A public poll of electors which must achieve 75 percent support

The entity itself is prohibited from advertising or doing anything in support of or opposition to a divestment proposal - including spending. They would be limited to unbiased information releases.

Others must also include their full name and address in any advertising in support or opposition to such a proposal, or face a penalty of up to $20,000.

Watts said National would never privatise the water assets, but he was worried the proposed four-entity model would make doing so easier.

Putting protections in the legislation were unlikely to stop future governments from being able to override them, he said.

"Putting stuff into the legislation is in theory nice but the reality is any future government could repeal that, so ... it's a bit of a theoretical argument," he said.

Part of the working group's scope is to look further at safeguards against Crown intervention.

Entities' reporting requirements and responsibilities

The new water service entities must take account of:

• RRG's statement of strategy and performance expectations, published at least once every three years. The response is included in the entity's annual report, and the entity must give effect to it.
• Government statements of water policy. The minister must consult water entities in preparing this statement, which the entities must give effect to. They may be amended at any time.
• Mana o te wai statements from mana whenua on the RRG. The entity must respond after consultation "as soon as practicable" but within two years. The response must include a plan for giving effect to the statement.

The entities must publicly publish:

• Financial statements published annually after each financial year.
• An annual report with audit, actual financials for the year and demonstrating how the entity is giving effect to the RRG statement. The report shows performance compared to the previous year's forecast statement and any payments to board members including the chair, deputy chair, and chief executive. It must be published publicly within 20 days of an audit by the Office of the Auditor-General, and as soon as possible after being provided to the RRG.
• A statement of intent, setting out strategy. Published every year, relating to the following three years. A draft must be published on or before 3 March in the preceding year, with the final statement published before the period to which the statement relates.
• A funding plan (budget) at least every three years, with planning for the next 10 years.
• An asset management plan at least every three years, for the coming 10 years.
• An infrastructure plan at least every 3 years, with planning for the next 30 years.

The RRG may extend deadlines for these by up to 1 month.

The entity chief executive must:

• Set up at least one consumer forum, to engage with communities.
• Publicly publish a consumer engagement stocktake annually.

Establishment

Four organisations are already being set up as 'establishment entities'. These would themselves become the water services entities from July 2024. There is also a national transition unit within DIA to coordinate.

Until then, the minister has the additional role of overseeing the establishment of the entities, including powers to appoint and remove members of entity boards.

The establishment entities provide quarterly reports to DIA's chief executive for approval, which includes a plan for the entity. This includes timings for and assessment of transfer of assets, staff, and functions from local authorities.

The draft legislation also includes clauses that force councils to cooperate on the reforms, including complying with any reasonable request for employees and information including collation, formatting and disclosure of current pricing or indicative water charges. Failure to comply can be enforced through District Courts.

Employees of local authorities who are primarily involved with water services and are not senior managers will be offered terms at the new entities as good as or better than before, in the same area or "within reasonable commuting distance". Employment will be recognised as though it were continuous.

Under the legislation, council decisions relating to water service provision during the establishment period are automatically rendered void and of no effect unless the DIA chief executive confirms them.

Other concerns: Stormwater, rural supplies

DIA presentations to the working group highlight stormwater as particularly problematic because the systems are complicated, with various parts spread across large areas.

It would not be practical to give responsibility for some aspects of the system - like wetlands, streams and rivers - over to the new entities as it would make their existing land use near impossible, and would not meet iwi/Māori and civil defence needs.

As a solution, the bill states assets and lands not predominated by stormwater use would remain in current ownership. Those parts critical to the function of stormwater systems would be managed through an agreement between owner and entity.

Rural supplies across New Zealand would also be affected by new health safeguards. This includes outdated supplies from the 1970s that supply residents and stock alike.

Farmers have seven years to comply, and regulation is proportional to the scale of sites being supplied. Single-use housing supplies are exempt.