Are the murky waters clearing?

The government has signalled that the new WSCCOs will be broadly modelled off Watercare, the Auckland water and wastewater CCO, with a few tweaks. Most importantly, the government believes it can achieve full balance sheet separation for Watercare (and presumably other WSCCOs). The money that has to be spent to get our water in better shape is astronomical, and that means more borrowing. Many councils are near their debt ceilings, so new lending needs to be to a separate entity that has more borrowing flexibility, allowing it to crack on with the investments needed.

The previous government estimated $120-185 billion would need to be spent on water over the next 30 years or so. It also pointed out that we will need to pay more for water regardless, to achieve the desired standards. Not acting in a coordinated way to fix water would mean paying even more. As the proposed WSCCOs borrow more to fix water, they will face higher interest rates, and that means costlier water bills whatever the final investment quantum is.

Government has further suggested that councils start working together now to see how they might collaborate, before legislation is finalised. GHD is working with a number to answer this question. Inevitably, there will be councils that are less attractive to work with for a variety of reasons; for instance, councils with large geographies and small populations. At some point the government will likely need to strongly incentivise (compel) councils to work with their neighbours.

Questions also remain over whether parent councils would still need to bail out a failing CCO, and whether at some future stage stormwater would be included in the mix.

New structures present new opportunities. Not only will the WSCCOs (hopefully) be able to borrow much more to get the investment required, but bigger groupings of council jurisdictions will mean a pipeline of chunky projects that need to be delivered. A CCO with say five or six councils, and a similar number of wastewater treatment plants needing replacement or upgrades over the next 15 years will be a far more attractive target for a long-term relationship by contractors looking for certainty. Knowing this pipeline is lined up will enable contractors to sharpen the pencil.

Multi-council CCOs will also allow for much more standardisation across a sector characterised by bespokeism across everything from pump station design to back-office systems.

The scale of the new CCOs may also make third party funding tools like Public-Private Partnerships (PPPs) more feasible, which reduces the upfront infrastructure construction costs for the CCO. New Zealand has some history with PPPs in water, some of it good and some of it bad, so there is a starting point to learn from. The scale of the challenge and the necessity of the action will require CCOs and their council owners to overcome any ideological opposition to third party funding. Our council clients are working with us to understand the funding tools available to them, particularly for larger investments.

The regulatory framework applied in the electricity sector is the likely starting point for water. This will be a new mindset for many water services, but is a relatively mature framework in New Zealand. No need to re-invent the wheel.

The challenge will be to set regulations that allow for variation in the state of water infrastructure across the country and for appropriate levels of investment to genuinely make a dent in the shortfall. This may require the WSCCOs (of which there may be 15 to 30) to each set a custom price path, with supporting evidence, to hit water quality targets, while also making prudent financial decisions, and balancing debt and affordability for water services customers. The capacity of the regulator and the WSCCOs will be stretched in providing this level of detail, although as the sector matures, it will become easier.

Our constant advice to clients is to be as well-prepared as possible for the coming changes. Know the state of your assets, understand your neighbours’ assets and financial position, and be able to demonstrate a rigorous prioritisation plan, so when legislative and regulatory settings are finalised, you are best placed to progress water services for your community.

If you're grappling with how your region is going to make the transition to a WSCCO, reach out to us for a confidential discussion.

 ¹ https://www.dia.govt.nz/Water-Services-Policy-legislation-and-process