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Bold Action Needed To Stop Water Infrastructure’s Downward Spiral

Work is already underway on a proposal to trim the country’s 67 water service providers – owned and managed by councils currently – into a small set of providers. The government says the new analysis confirms the need for major change, both to meet health and environmental needs – and prevent skyrocketing water bills for Kiwi households.

Local Government Minister Nanaia Mahuta says it is clear the affordability challenges facing our water infrastructure are too great for councils alone. The reports identify investment of between $120bn and $185bn is needed over the next 30 years to ensure New Zealand’s drinking water, wastewater and stormwater infrastructure meets acceptable public health and environmental standards.

“Together, the reports confirm the need for major reform to upgrade and maintain our water infrastructure, protect our environment, and avoid unaffordable increases to household bills.’

“Without reform average household bills in 2051 are forecast to range from $1900 to $13,900. Under reform proposals with five providers those figures range from $800 to $1800. With three providers the range is $800 to $1600.

“Our plan means the required upgrade of infrastructure for our most precious natural resource will be much more affordable for New Zealanders than continuing on the current path.”

But National’s Local Government spokesperson, Christopher Luxon says the Government’s proposed solution is already fraught with serious risks.

“What we’ve heard from mayors is that they lack information; they’re not convinced amalgamation will be positive; they believe amalgamation relies on dubious scale benefits; and they have a ‘high degree of uncertainty about outcomes’.

“Any change will be impossible if councils and communities aren’t taken on the journey. It’s vital that these reforms remain voluntary for councils, and that councils and mayors are engaged with and kept informed by the Minister,” says Luxon.

The reports include analysis of the economic benefits of reform by the Water Industry Commission of Scotland (WICS), independent reviews of WICS’ methodology by Farrierswier and Beca, and an analysis of the effects of the proposed reform on the economy and affected industries by Deloitte.

“The case for reform is boosted by an economic impact report produced by Deloitte,” says Mahuta.

“The reports highlight how the national water infrastructure reforms, will provide more jobs for people (5900 – 9300 extra jobs countrywide between 2022 and 2051), opportunities for businesses and a net increase in GDP by $14bn to $23bn over 30 years.”

Civil Contractors New Zealand Chief Executive, Peter Silcock says bold action is needed to implement the detailed solutions mapped out by the reports. This would ensure better health, wellbeing and environmental outcomes than continuing under the status quo, which it was clear would lead to a downward spiral.

“It is vital we take bold and visionary action as soon as is practical. If we do not, many parts of the country will see a further decline in drinking water quality, worsening pollution of our waterways and marine environment and increased risk from extreme weather events.

“More maintenance, better network assessment, more new water infrastructure and improvements to existing infrastructure are essential activities to shift New Zealand from a downward spiral as aging water assets reached end-of-life.

“Now that detailed proposals exploring not just the issues but also mapping out solutions were emerging, a clear vision providing foresight for future generations is required,” says Silcock.

“As the body representing those who do the work on the ground to construct and maintain our water infrastructure, we want to see the change required to ensure we have healthy drinking water and cleaner waterways. Our members see the need every day.”

Silcock says the recent reports presented detailed information that clearly demonstrated not just of the scale of the problem, but also the possible solutions.

Key findings

WICS Phase 2

The WICS Phase 2 report builds on the findings of the earlier report to provide a more up-to-date analysis. The key findings of the report are in three parts:

  1. The modelling indicates a likely range for future investment requirements at a national level in the order of $120 billion to $185 billion. This investment is estimated as necessary for New Zealand to meet current levels of compliance that water utilities in the United Kingdom achieve with EU standards over the next 30 years. These standards are assessed by WICS (and confirmed by Beca) to be broadly comparable with equivalent New Zealand standards.
  2. WICS assesses the scope for efficiency by looking at the performance of regulated water utilities in the United Kingdom and making adjustments to take account of factors specific to the New Zealand context. It demonstrates that New Zealand’s Three Waters sector is in a broadly similar position to Scotland in 2002, in terms of relative operating efficiency and levels of service. In just under two decades, Scottish Water has lowered its unit costs by 45% and closed the levels of service gap on the best-performing water companies in the United Kingdom. WICS considers that New Zealand can achieve similar outcomes to Scottish Water over a longer period (30 years).
  3. WICS has analysed around 30 possible aggregation scenarios, reflecting the large number of possible number and boundary configurations. The WICS analysis shows that scenarios ranging from one to four entities provide the greatest opportunities for scale efficiencies and related benefits in terms of improved levels of service and more affordable household bills (when compared against the likely outcomes ‘without reform’).

Farrierswier independent review of WICS findings

  • Farrierswier find that the overall approach WICS takes to its analysis should give reasonable estimates in terms of direction and order of magnitude.
  • They note that there are certain limitations associated with the analysis which decision-makers should be mindful of, which relate to estimating the level of future investment requirements and potential efficiency savings that could be realised, particularly given differences in the nuances of the New Zealand regulatory and policy context.
  • While their review highlights several limitations associated with the analysis, they note that these are inherent and to be expected in modelling of this kind. Farrierswier also find that WICS’ approach to addressing these limitations appears reasonable.
  • Farrierswier notes that the approach WICS takes to assessing the potential efficiency gains appears reasonable but care needs to be taken in translating overseas experience into a New Zealand context. They agree with WICS on the factors that will promote efficiency gains in the water sector, including the quality of management, clear policy priorities, and an appropriate economic regulatory regime.
  • Farrierswier also explored the relevant literature to test whether any concerns arise that amalgamation might lead to water entities becoming large enough that diseconomies of scale may emerge. Their view is that the amalgamation scenarios under consideration – with entity sizes that do not exceed 2 million connected citizens – do not appear to include entities of a size that give rise to concerns about diseconomies of scale.

Beca independent review of WICS findings

  • Beca reviewed the standards and practices in the United Kingdom Three Waters industry and their relevance to New Zealand given WICS has used United Kingdom data and benchmarks as part of its analysis.
  • The Beca report considers that, on balance, the forecasts from WICS modelling may underestimate the estimated investment requirements and timeframes, suggesting that WICS modelling of future investment may be conservative.

Deloitte industry development study and economic impact assessment

  • Deloitte has undertaken a comprehensive study of the economic impacts of reform and the implications for affected industries. Key findings in their report include:
    • The reform is forecast to impact every corner of the economy and is estimated to increase Gross Domestic Product (GDP) by $14.4 billion to $23 billion in present value terms over the next 30 years when compared to the likely outcomes without reform. In relative terms this increased economic activity equates to an average increase in GDP of 0.3% – 0.5% per annum.
    • Every region is expected to be positively impacted by reform in terms of GDP and employment growth.
    • Reform is expected to support significant job creation across the economy. Relative to the counterfactual, the reforms are estimated to result in an extra 5,800 to 9,300 additional FTE jobs between 2022 and 2051.
    • Average real annual wages are expected to increase by 0.16% – 0.26% over the period from 2022 to 2051. The increase in real wages mainly reflects a projected increase in labour productivity.
    • The additional jobs are expected to be spread across a broad range of sectors. While there is likely to be changes in the configuration of jobs in the water sector and its supply chain in the short to medium term. Over 30 years significant growth of up to 80% is anticipated in the water sector workforce, presenting significant opportunities for employment growth, specialisation and increased career opportunities.
    • The report highlights a wide range of opportunities and challenges for the implementation of the reforms relating to the workforce, supply chain, management of the capital investment programme, innovation and productivity.

Source water neglected

The reports are all about infrastructure, says Victoria University of Wellington Senior Researcher, Dr Mike Joy. However, in the case of drinking water quality, infrastructure to treat water is the ambulance at the bottom of the cliff.

“I could find no mention of the fence at the top of the cliff, which is protecting water at the catchment scale – i.e. safeguarding the sources of the water. Missing this crucial ‘fourth water’ – the source water – seems odd.

“I note that the summary report on the workshops held for the Three Waters Reform Programme, released in March 2021, showed that in polls held during the workshop, taking a catchment view of water ranked as the second most important objective by attendees.

“Finally, I could find no mention of one of the emerging issues for New Zealand, that is nitrogen contamination of drinking water. There was no mention of it, nor just how expensive it is to remove nitrate from water,” concludes Joy.

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