New Zealand will lose benefits of reform if it waits until 2030 to impose economic regulation on the country’s new three waters entities, says the principal international adviser on the controversial amalgamation of drinking, waste and stormwater services into four countrywide entities.
The cabinet has yet to decide on a timetable, but current proposals contemplate a six-year hiatus after 2024, when the country’s disparate drinking, waste and stormwater services are scheduled for amalgamation into four entities, before imposing economic regulation in 2030.
Economic regulation would mainly comprise so-called 'price-quality' paths that would set standards to be met and upper limits on charges that could be imposed on water users to meet those standards.
In an interview with BusinessDesk, the chief executive of the Water Industry Commission of Scotland (WICS), Alan Sutherland, said waiting too long to impose economic regulation was one of two "big mistakes" that Scotland had made when it enacted similar reforms in the late 1990s.
He became the economic regulator for Scotland’s water services in 1999, three years after reforms were implemented.
Scotland's first big mistake was failing to collect detailed information about the investment required, said Sutherland, speaking between back-to-back meetings on a week-long visit to NZ last week.
NZ had gathered good information in the reform process so far, “so, big tick to you guys,” he said.
However, NZ was “in grave danger of making the same mistake” as Scotland by not moving quickly enough to impose the investment disciplines a regulator would require of the new water entities.
“We created three bigger, stronger entities with professional managements who knew what they were talking about, who were interacting with government officials who clearly are not as specialised,” said Sutherland. The result: “We ended up with three entities which, after three or four years before I got my mitts on them, had got quite flabby and quite inefficient”.
“You're talking about having that (economic regulation) in 2030. So you're gonna have entities in place for six years before that starts?”
Sutherland disclosed that he had been working closely for some time with Auckland’s Watercare – seen as the most advanced example of the kind of entity that would run water services in the future – to accelerate the path to economic regulation.
“Any form of regulator’s going to tell you that they are more effective if they've got a model that they can hold everyone else to account to,” he said. “So if you can accelerate and get someone who's already in a stronger position than the rest of New Zealand” and show “benefits to the citizens in the Northland councils benefits to Aucklanders … what’s not to like?”
“The really important thing then is that what you're doing is you're putting real discipline on what essentially is quite a good management team … and doubtless there are people from three Northland councils that will contribute and, you've got the basis there to really create a positive message as to what this could mean for local communities, particularly in the more rural parts of New Zealand”.
He predicted that people covered by the new ‘entity A’, which amalgamates Auckland and Northland water services, could expect lower charges than at present within three years and substantial improvements in service within five years.
“Years three and four and five, that's when the big impacts of the professionalisation of management, the systematisation of everything start to really kick, and the real big benefits come in.”
Water 'intensely local'
Sutherland said the Scottish reforms had been strongly opposed before they were implemented, particularly among remote Scottish island communities but that had reversed once the reforms demonstrated their value.
“You're paying less than NZ$800 today for all three waters in Scotland on average, in all the rural communities, all the Shetlands and the Orkneys and the Western Isles, which if they were left to their own, they wouldn't have those improvements.”
On one hand, WICS had succeeded because it had created economies of scale in areas of high-cost expertise and senior management but had recognised that the delivery of water services remained “intensely local”.
He believed this was not well understood or believed by New Zealanders opposed to the reforms.
“You need to have a professional responsive staff in place, like professional hydrologists, professional asset planners, professional people for dealing with procurement, professional people for dealing with finances and bond markets.
“To do that you need real scale. Because if you don't, you can't afford the top specialists because (they) are typically quite well-paid individuals.”
Sharing their costs over a community of 50,000 to 100,000 people was very different from sharing their costs over a million people.
In Scotland, opposition had come from communities that asked “what do you guys know, in head office?”
“And the answer to that is quite simply that they don't know, the people sitting in head office. But what they have done is they've made sure that local operatives are sufficiently empowered to be listening, reporting back and then that feedback has been taken into account in doing the investment funds and the asset management planning.”
Existing local workforces continued to do the actual work of maintaining the water system and as new investment was approved, became a source of new employment.
Head offices also didn’t need to be in the central city if they were serving a very large area.
Sutherland suggested Watercare’s offices on Remuera Road in Auckland's Newmarket were “a bit lavish”, and cited as more appropriate the head office of the Welsh water regulator, which he said, “looks like a 60s reject comprehensive school”.
Watercare as exemplar
But Watercare itself had changed enormously in the last four years as the three waters reforms had started taking shape, he said.
“If you look at where they are today versus where they were two years ago, they're in a fundamentally different place in terms of the quality of information, their awareness of what they've got to do next.
‘’They've gone from ‘well, I got to fill this in because our chair says we got to fill it in’… to understanding that doing this is essential to getting the best possible results corporately and for Aucklanders”.