Are Water Users the Magic Money Tree?

Sorting out the ownership, governance and regulation of three waters looks likely to be the flagship initiative for Christopher Luxon’s first 100 days. It’s got solid support from the majority of New Zealand’s councils. It plays to the anti-co-governance base. It is intended to demonstrate a shift from an overly centralising government short on expertise to a decentralising government with a high degree of strategic and implementation capability. Get it right and the new government will be looking ahead to at least two or three terms.

Or will it?

The devil is in the detail and this devil has a deadly pair of sharp horns and a fiercely barbed tail.

Consider what’s proposed. Water assets will remain in Council ownership with a strong incentive to vest them in CCOs with balance-sheet separation. Councils will be required to restore water assets to meet minimum standards and ensure they are investing to accommodate growth. Funding to meet capital and operating expenses will be met through a combination of borrowing, and charging local users. But will water users turn out to be the Magic money tree this assumes? In the words of Eric Crampton, the chief economist for the New Zealand Initiative:

The proposed CCO structure would mean water would stop cross-subsidising other council activities. Water utilities would be able to charge what is needed to bring their networks up to standard and to keep it at standard.

It would also mean that other councils, or taxpayers more generally, would not be on the hook for some councils’ long-term negligence.

It reads as though we’re moving into the best of all worlds; restored local ownership and control; councils properly funding infrastructure for their own communities, not compelled by government reforms to cross subsidise other councils.

What’s the reality? First, in a recent article by Jonathan Milne on Newsroom he comments:

Auckland Mayor Wayne Brown has warned that?if National's water policy goes ahead, water bills will either double over the next four years or the city will have to stop fixing the pipes. And Wellington mayor Tory Whanau tells me?that?leaving the water infrastructure on council balance sheets?will have a significant impact on the long-term plans for Wellington and?every other council. "The reality is we cannot afford it."

The proposed regulatory framework will take away from councils the option to decide not to invest because they can’t afford it. They will be compelled to invest regardless with the cost of doing so to be recovered from their communities.

Next, the reference to “some councils’ long-term negligence” needs to be put into context. In local government many remember the previous National led government’s Better Local Government initiative which was deliberately and successfully targeted at normalising the proposition rates should not rise faster than inflation other than in exceptional circumstances. This turned out to be a great way of knee capping increased local government investment in three waters. At one level what that government was doing could be seen as simply pandering to its base. At another level it could be seen as a somewhat inadequate response to the reality local government’s rating powers have for many years been inadequate to manage ongoing investment in infrastructure so long as local government’s decisions are taken in a democratic context.

The real challenge though, for Christopher Luxon’s government, will be how to deal with the impact on water users of government enforced requirements that councils fully fund bringing water assets up to a regulated standard, and also invest for growth. It is quite likely that, across the country as a whole, councils, or rather council owned CCOs, will be looking to recover from water users more or less double the amount they are currently paying in rates or metered charges.

If this happens Christopher Luxon’s squeezed middle may get some tax relief but the impact of increased water charges will turn them into the squashed middle - and the impact on lower income households will be even more significant.

There is another complication; only approximately half of New Zealand’s water users are metered - those in Auckland, Tauranga, Christchurch and a handful of smaller councils. Under the new regime, they will continue to be billed on a basis which reflects their consumption. In council districts where meters are not in place it is likely CCOs will bulk bill the council which will then need to recover the amount through rates. There is a high probability the so-called asset rich income poor will end up paying a more than proportionate share of the additional cost for water services - they are typically relatively low so recovering water charges through rates will hit them particularly hard.

Research published last year by the retirement Commissioner looking at the total income of superannuitants provides some insight into how severe the impact could be:

Nowadays, 40% of people aged 65 and over have virtually no other income besides NZ Super. And another 20% have only a little more. People are increasingly relying on additional allowances or having to go without the essentials of food, health or power, especially among those who rely on it completely.

Among councils those which will be hardest hit include a number of rural and provincial councils who often face the double dilemma of a number of relatively small but high cost per capita schemes and a relatively low rating base.

Christopher Luxon the pragmatic market oriented Chief Executive with little experience of local government may simply ignore the social impacts of National’s policy in the long tradition of governments unaware of or unconcerned with the realities of local government. Christopher Luxon as a visionary and strategic Chief Executive focused on both improving the efficiency and productivity of the economy and on restoring a more cohesive society may decide to think again.

This will be tough. He leads a party with a strong low tax philosophy and a belief that somehow we can do everything we want to in the public sector simply by eliminating waste. The realities of National’s “Local water done well” policy could well force a rethink. He certainly won’t want to be seen as turning the squeezed middle into the squashed middle or for that matter impoverishing many superannuitants.

If he does what someone with his background should do and, as part of designing the implementation of “Local water done well”, has a hard look at the underlying causes of the problems New Zealand faces with both physical and social infrastructure, he is going to find this is not just about eliminating waste and inefficiency. Rather, it reflects decades of successive governments’ failure to address the fundamental mismatch between New Zealanders’ appetite (need) for public services and willingness to meet the cost through taxation or other means, a failure compounded by our collective belief that we are a high income country when the reality is otherwise.

It’s a bit like the advice the Irishman gave a tourist asking for directions - first you need to work out where you are starting from! The starting point for Christopher Luxon is not just dealing with water; it’s the need for a national approach to determining what to do about the state of local roads and their vulnerability in extreme weather and other events; it’s the billions of dollars needed to ensure that health services, both in terms of physical capital and human capital, are capable of delivering the quality and timeliness of service New Zealander’s need; it’s gradually failing infrastructure across the entire court system; it’s addressing the major physical and human capital problems in the education sector from preschool through to tertiary and much more besides.

This could be a tough starting point. It demands challenging the low tax philosophy of both National and ACT. It requires rethinking the approach of central government. One major contributor to the problems we now have is the silo-based structure of central government and the adversarial way in which different silos compete against each other for resources.

It will be very easy for Christopher Luxon to push much of this to one side and fall back on chanting a few market-based mantras as though they were the solution.

Coalition negotiations may provide both the need and the opportunity to do better. “Local water done well” will have its most severe negative impacts on New Zealand First’s two principal constituencies; older New Zealanders especially superannuitants and rural and provincial New Zealand. This is likely to be Winston Peters’ last term in Parliament. Expect New Zealand First, in any coalition negotiations, to have in mind the implications for the legacy Winston Peters leaves behind. It seems inconceivable it would accept that legacy being the major negative impact which “Local water done well” would have on the basis that each community bears its own costs.

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Is there an opportunity for coalition discussions to lead to an agreement that New Zealand finally needs to address the various imbalances it faces in terms of infrastructure, services and available revenue? That would be an outcome which could enhance the standing and the legacy of both Christopher Luxon and Winston Peters. Neither on their own would have the scope to develop the mandate for this kind of first principles rethink. In combination (and hopefully with ACT not getting too much in the way) there might just be the possibility of developing the necessary mandate - Winston Peters as the guarantor that this was not just some kind of market led way of enriching long-term investors; Christopher Luxon as the guarantor that this was driven by a focus on longer term efficiency, productivity and both social and economic stability.