Governance Failure and The Three Waters

Published in Newsroom, 10th November 2021

The Government has decided to move ahead with its reform programme for the so-called “Three Waters” (drinking water, wastewater, and stormwater) despite broad opposition to it, including from two leading Labour Mayors, Lianne Dalziel of Christchurch and Phil Goff of Auckland.

For a government that is often seen as risk-averse and keen to protect its popularity, this suggests either a gross political misstep, or an otherwise overwhelming case. What is the case?

Almost everybody in local government accepts that something needs to change. Eighty-five per cent of the population receive their water services from their local council, and yet:

  • A fifth are supplied with drinking water that does not meet New Zealand standards
  • A quarter of wastewater treatment services are operating on expired consents.
  • At least half of all stormwater services are not monitored for quality.
  • 21 per cent of water supplied is lost before use, and water loss could be reduced in 83% of districts.
  • According to overall performance standards for water delivery systems, New Zealand’s local councils are at less than half of that of UK equivalents.
  • Most systems serve fewer than 100,000 users, when at least half a million is desirable.
  • Only about half of earmarked economic depreciation is spent on infrastructure each year.
  • It is estimated that there is an accumulated infrastructure deficit across the three waters of $120-185 billion.
  • Almost all local authorities are unable to raise debt for the investment required.
  • To meet required investment, household costs would need to increase from two to ten times.

And this is without even mentioning the public events that brought this crisis to a head, such as the outbreak of gastroenteritis in Havelock North in 2016, human waste on Auckland beaches in 2018, the Auckland drought of 2020, and raw sewage in Wellington streets and wastewater in Porirua in 2021.

These are governance failures of a major dimension – usually associated with the failing urban infrastructures of developing countries and not of a modern democratic state like New Zealand.

How did it come to this? After all, New Zealand has prided itself on the thorough-going nature of the reforms to the public sector carried out in the 1980s and since, which included changes at the local level such as achieving dramatic improvements in productivity in the ports and deregulating electricity supply – but the structure, size, and number of local government entities have been largely left untouched since the major changes of 1989.

The fundamental problem for the policy community is that the glory of local government – its democracy and responsiveness to local communities of interest – is also its weakness. Where elected politicians are answerable every three years to ratepayers concerned about the costs they might incur in the near future, long-term investment is the first to suffer. Indeed, it is evident that funding of roads and footpaths – the visible manifestation of local government – is privileged over funding of long-term infrastructure that lies under ground and is hard for the average voter to monitor and appreciate.

The only substantial reform of local government since the restructuring of the late 1980s was the establishment of a single entity to replace the seven Auckland councils following the report of the Royal Commission in 2009. This new structure, with more arm’s length operational bodies run by competency-selected professionals, has given Auckland a greater ability to plan ahead, hire talent, raise capital, harmonise water rates, and settle on water rate rises of up to 9.5% through to 2029.

While the case for reform in the governance of the three waters may be strong, and while the benefits will be substantial – improvements in GDP, productivity gains, more jobs, lower increases in household costs for all councils (particularly those in rural areas), and the ability to raise capital, the sector remains opposed, often most vehemently from those most likely to benefit, such as the 43 out of 67 councils that at this moment do not have the revenue to cover water services operating expenditure.

The Government has proposed an elaborate structure that gives ownership of four regional entities to constituent councils, but the ownership of the actual waters infrastructure will rest with those entities, which in turn will be governed by independent boards run by competent professionals. There will be regional representative boards, and Maori will be involved as partners. This is an attempt to find the right form of interface between local democracy on the one hand and effective stewardship of long-term investment in infrastructure on the other. The proposal is now open for further discussion with the sector.

What this episode suggests is that there may be an agenda for longer-term and “future proofing” of local government. If the outcomes of the Royal Commission on Auckland Governance are any guide, this may involve a mixture of amalgamation at the council level balanced by local committees or boards, together with greater involvement of Maori and, where necessary, competency-based boards for some functions with longer-term time horizons.

The Three Waters reform programme attempts to address a significant failure in governance at the local level. The government needs to show flexibility in implementing it, without losing the essence of the key reform proposals.

New Zealand is among the most centralised of countries. There may now be an opportunity, after the three waters reform programme is through, to give local government another chance at reshaping itself to develop a more fulfilling and constitutionally useful role for the future.

6 comments

  1. Fair comment. But what’s the alternative? The key thing here is to keep the politicians at arm’s length, not because they are bad or incompetent people, but because they are subject to re-election and the experience has been that ratepayers elect people who will keep rates down, and that has meant that longer-term infrastructure needs have been overlooked. There are almost no large-scale organisations that I can think of, particularly semi-commercial (like NZ Post) or utilities (like ports), that do not have boards of experienced directors/governors. Of course they can be selected carefully and they can be changed, but I agree this is not guaranteed. My own view is that some public sector organisations should never have been put into a semi-commercial, competitive position – like the CRIs. Universities and techs are other examples where you have to be careful, and often they get people steeped in the sector in one way or another so are not subject to just generic appointments. The other thing would be to have training programmes, and to have review mechanisms. For example, I think both the the water and harbour utility organisations in Auckland recently lost their CEOs and had their boards changed around a bit. Actually, I think the management and the CEO are more important selections than the Board itself. If you have inappropriate or weak people there, then the work of the Board is harder.

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    • I would like a consideration of alternative models, that’s what I am saying is missing. We keep on using our current type of Board and governance model without due assessment. Even when it appears suboptimal. We assume that you can get sufficiently competent people that they can perform governance functions with about 2 days of attention per month! That’s impressive, if it were believable. Once you go to a few Board meetings and realise that many Directors don’t even read their papers fully before meetings you start to get a bit disillusioned.

      That we don’t have other models in NZ tells us nothing other than perhaps that the Institute of Directors, as the foxes guarding the hen house, promote the one model rules them all. The Institute of Directors has both review and training of Directors, it doesn’t solve the time/focus problem.

      People elect politicians who promise to keep rates down. But Board Directors are just as compromised by wanting to keep their Board positions – they won’t get to stay or get appointed to other Boards if they upset too many people by too high a degree of questioning.

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      • Well, you need to come up with an alternative model. From my experience on Auckland District Health Board, you are very reliant on a strong chair, a good management team, and directors with a mixture of backgrounds and with experience in the sector. As I see it, the directors don’t do it on their own. Remember there are two other actors – the “shareholders” and management. We are talking here about the State-Owned Enterprise model where the government is the shareholder (or in the case of Three Waters, it would be the local authorities that still in principle own the water assets). I have seen in this in action in Auckland where there is a publicly-owned Port, a Water utility, and several other arms-length “council-controlled organisations”. The key weakness is the failure of Auckland council to establish something like a specially-tasked committee of councillors, supported by adequate Council staff, to establish clear expectations of these arm’s length organisations – and follow through, monitor them, and report back. This is what central government is supposed to do with SOEs, with the assistance of key arms of the state like Treasury. As far as I can tell, most SOEs operate perfectly effectively, and are monitored for their performance (however that might defined) by, say Treasure and maybe MBIE too. As it happens, the return on capital in many of the SOEs does not meet market rates, but then many of these organisatioins have social objectives. For example, would you want NZ Post to be meeting market rates of return, or just making some return and at least breaking even and not requiring government subsidies (as happens in most countries) or potentially ripping off the consumer (as happens in many places where these have been privatised)? Also, management makes a huge difference I can see that at ADHB. There is no way we could do our job if we were having to second-guess management. We just do not have the time or the expertise, but we can ask questions, some of which can be and should be searching. The alternative for the Three Waters is privatisation. If the current proposals fail, and if the sector continues to fail to deliver for its populations, I can’t really see what the options are, short of privatisation, or a full-scale reorganisation of local government.

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  2. Isn’t one of the glaring potential holes in the system the ‘competency based boards’ that are going to provide the excellent oversight required? My experience of Boards doesn’t give me great confidence in the competence of such boards to fulfil the role – there is plenty of discussion and evidence around the traps about the conflicts between the needs for people to be good directors and the people who end up in those position having both the ability and interest to do what is needed. A particular flaw, to my mind, is that most people are directors of many organisations (generally to get sufficient income in terms of what they consider sufficient). Therefore, even given they have sufficient capability, they will not (and demonstrably do not) have sufficient concentration to make meaningful inputs.

    The focus on Boards to save the day reminds me of the reforms of the 1980s where we were assured that corporate models were the best way of running things, including corporate governance structures. They clearly are not in many cases. When did we last have a good overhaul of the functionality of the corporate governance structure? Perhaps we would be better to think about good governance structures before, rather than after, trying to restructure our water systems or we might be expensively replacing one flawed model with another.

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  3. Dear Peter
    A lovely well rounded article. Cheers and thanks K
    Professor Kevin P Clements,
    Director, Toda Peace Institute.
    Samon Eleven Bldg., 5th Floor, 3-1 Samon-cho, Shinjukuku, Tokyo 160-0017, Japan
    Contact: kevin.clements@otago.ac.nz
    Phone:64 3 4761747
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    E Mail: kevin.clements@otago.ac.nz
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    Web: http://www.otago.ac.nz/ncpacs
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    Latest Books:

    (i) Kevin P Clements and Daisaku Ikeda,2019. Toward a Century of Peace:A Dialogue on the Role of Civil Society in Peace Building, London Routledge. ISBN 978-1-138-58576-8

    (ii) Kevin.P Clements, Identity, Trust and Reconciliation in East Asia:Dealing with Painful History to Create a peaceful Present. https://link.springer.com/book/10.1007%2F978-3-319-54897-5#editorsandaffiliations

    (iii) Kevin .P. Clements and Sung Yong Lee (Eds) 2020 Multi-Level Reconciliation and Peacebuilding:Stakeholder Perspectves, London Routledge

    Recent Articles:

    (i) https://www.tandfonline.com/toc/rjpd20/13/3

    (ii) http://www.21global.ucsb.edu/global-e/january-2018/politics-compassion-age-ruthless-power

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