WaterCare Services Financial Operations Clarified
Auckland City Council
13th July 1999
Councils in the Auckland region who now own Water care Services Limited, which owns and operates most of the region’s bulk water and wastewater systems, want the company to operate on the basis of a zero return on investment.
The Chairman of the Shareholders Representative Group, Auckland ‘s Deputy Mayor, Doctor Bruce Hucker says under present legislation, the company cannot distribute profits, and it is far better for customers to receive the benefits of lower waste water charges resulting from the removal of profit driven policies.
"There has been criticism of this zero return approach, especially as the former owners (Auckland Regional Services Trust) were looking for something over 8% as a return from the company.
That rate of return was obviously required in the event that Watercare Services may have been offered for sale.
Its new owners have no intention of selling this publicly owned asset, so there is no need for a commercial rate of return.
For most companies, requiring a commercial rate of return helps ensure that they operate efficiently, and make appropriate capital expenditure decsions.
This can be achieved by putting pressure on management to reduce costs and invest only in projects which make an adequate return.
However, the special circumstances applying to Water care mean that this is not the case.
Requiring a return on equity will not put pressure on Watercare to reduce operating costs, because it is largely a monopoly business, and can simply increase prices to achieve the return required.
In addition, requiring a return on equity will not put pressure on Watercare to make good capital expenditure decisions. In fact, it could have the opposite effect, because Watercare cannot pay dividends to its shareholders. Any profits it makes are retained in the business, and the resulting build-up of cash may lead to unwise investment decisions." he said.
"I also note that the international credit rating company Standard and Poors may review Watercare Services’ credit rating as a result of this new approach. I think they have been somewhat hasty in expressing that view, as they are probably not aware of the restrictions on profit distribution in the legislation. Once they have fully investigated the position, they may review their stance."
Doctor Hucker said there had also been some criticism that the local authorities had something of a conflict of interest in owning Watercare. Most of the Councils own and operate the local water and waste water businesses in their regions.
There is not a conflict of interest, but in fact a dual role which provides a check and a balance. This produces a better integration of the social, environmental and financial objectives of the company.
" I believe that the residents and ratepayers of the region, are much better off under the new ownership arrangement than they were previously.
The new owners have achieved a reduction of 5% in the wastewater levy for this year, and that saving will be passed on to individual consumers.
That reduction would not have been possible under the profit driven policies of the previous owners." said Doctor Hucker.