Economist Brian Easton asks: Why is there so much local opposition to the Three Waters restructuring?

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

The previous column suggested that the government’s proposed restructuring of the delivery of the three-water services – fresh, waste and storm water – could be thought of as a muddled version of corporatisation which could be remedied. However it left the puzzle as to why there was so much local anger towards them. It cannot all be misunderstandings.

The corporatisation benchmark provides a guide. Practically it is proposed to have four ‘corporations’ – water service entities (WSEs). There has to be fewer than the current 67 local authorities – some of them are too small to have their own plumber, let alone a water engineer.

Arguably the central government could have gone for about a dozen based on the existing regional councils, or a single national entity with a dozen districts. However, aside from devolving to Maori, this is a very centralist government, treating local governments as its handmaidens rather than partners in the governance of the country. This long tradition in New Zealand politics has strengthened as the country has become increasingly spatially unified. (The same tendencies are evident in the proposed changes to the health system.) The centralist tradition has been especially on the left, although even the National Party is struggling with how far its internal organisation is centralised (on Auckland) or decentralised.

The consequence of choosing but four entities is that they are large and straggly. The one on the east coast of the North Island crosses Cook Strait to the top of the South Island and so runs from East Cape to the Kahurangi National Park; it is likely to cost a fortune in travel costs – hooray! says Air New Zealand. Another odd one is to the north, where Auckland City’s Watercare – the most successful of all the current water agencies – is to be lumbered with rural Northland.

Centralists commonly argue that there will benefits from economies of scale. While there are almost certainly gains from reducing the number from 67 to a dozen, I doubt there are many more from reducing the number from a dozen to four. It is also argued that the entities are going to have to undertake a huge borrowing program and that their large size reduces their borrowing costs. Probably true, but that suggests a single entity with a dozen districts.

It may be that the large water service entities are necessary because the rural areas will not be able to afford to meet the required three-water standards, there being no simple correlation between population and a region’s water challenges – especially the spread-out rural ones. The urban centres are to cross-subsidise the rural areas; Auckland is going to support Northland, while Wellington is going to be up for Pupu Springs and Ruatoria.

I accept that the water challenges in the rural areas should have an element of outside funding – we value them and visit them. But I see such funding as a national problem, not as one to be dumped on the closest townies. My economist instincts are to be cautious when it comes to hidden cross-subsidies.

Not surprisingly, the rural areas are angry because think they will lose control to urban centres, often far, far, away, while the urban centres are not enthusiastic about bailing out their rural cousins.

However, an almost unanimous grievance is about the proposals as to what to do with the existing three-waters infrastructure. The first proposal of the WCE designers amounted to seizing them from the current owners; a nationalisation without compensation – confiscating the handmaidens’ knickers.

I think what they had in mind is that while the local authority owners would lose the infrastructural asset, they would also lose the obligation to service them and the local authorities would be quits or even ahead – reducing their rates (Hurrah!). But the WSE would have to raise offsetting rates (Boo!). There would be very little room for additional fiscal manouevre by the local authorities (Boo, boo, boo!).

What the WCE designer seem to have overlooked is how any changes to the existing structural relationships will impact upon the balance sheets of the affected local bodies. After three decades of insisting local bodies should take them seriously, the accounts are, apparently, to be ignored.

The government proposals are very confusing. Any required changes in accounting requirements will depend upon the precise nature of the new relationships created for the control and use of infrastructures. Nationalisation without compensation, for example, would have a significant impact since the local body would lose the assets but retain the liabilities while at the same time have to write down their public equity. Other arrangements will impact in other ways. (Observe too that public balance sheets are not designed to include all the obligations of government such as local bodies providing three-waters services or for that matter, central government as when they provide universal income support for the elderly.)

Backing down, the government seems to be proposing to leave the assets on the local body books so that while the locals would technically still own them, they would possess none of the usual attributes of ownership – the rights to use, to transform or to alienate. Moreover, it is not clear what would happen with the infrastructure the WCEs construct. Suppose they replace a crapped-out sewer pipe. What is theirs and what is the local body’s?

A corporatisation would handle the issue quite differently. The WCEs would purchase the three-waters assets outright from the local authorities, who would use the funds to retire their debt. Alternately, again as happened in the 1980s, the WCEs might issue shares (equity) which would appear among their assets to the local bodies. (This would shift the WCEs more towards the second tier of government than is the centralists’ natural preference.)

The financials of this are complicated – smart people got confused over the corporatisation in the 1980s. The result would be

            - either, a single entity with about 12 regional divisions or about 12 separate entities;

            - in either case there would be an overt mechanism transferring funds from the urban ones to the more rural ones to reflect, among other things, the involvement townies have in the rural environment;

            - the long-term funding strategy would also be towards charging by water use both for equity and to encourage conservation;

            - the WCEs would purchase the three-water infrastructure with cash, loan and equity;

            - ideally, the local authorities would own (hold equity in) the WCEs.

I doubt that is what we will get. It is always difficult to undo a botch job. But the negotiations going on between local authorities and the central government which could use a corporatisation framework.

What is puzzling has been the lack of attention to the politics. It is almost as if the central government does not care about next year’s local government elections. Its current three-waters policy will make it easy to campaign against an overbearing central government and for local independence. The prospects for Labour candidates do not look good; that will have a knock-on effect in the 2023 General Election. If you are of a leftish persuasion and interested in local governance, you may well join your local Greens.

Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.