FIXING WATER WITHOUT BREAKING THE BANK

D. Norman (Chief Economist, GHD Australia New Zealand)

ABSTRACT

Decades of under-investment, limited maintenance, inadequate depreciation, and higher service expectations have together led to a crisis point in infrastructure in New Zealand. Stormwater has not escaped this reality.

The new government has a different strategy for water, with details yet to be ironed out. But the need to fix water infrastructure remains. At the same time, many New Zealand councils face a funding and finance crisis. Double digit rate rises have become the norm today, and the likely future, as we seek to deliver for communities.

The awkward questions

Given the challenging financial position of many councils, and the often-dire state of infrastructure and of water infrastructure more narrowly, many questions arise, including:

• How do Councils prioritise among the competing lists of desperate needs within stormwater, within water more widely, and across the other domains councils work in such as community infrastructure or transport?
• How do we avoid optimism bias and minimise subjectivity such that certain projects are elevated while others that may have a less glamorous scope are pushed down the list of projects?
• How do we make what are inevitable implicit trade-offs into explicitly understood trade-offs?
• How do we fund the improvements, especially for stormwater, where a “user pays” approach is less easily adopted?
• How do we deal with existing under-provision in built-up areas where existing properties are already contributing to the stormwater challenge, regardless of growth?
• Can we improve water quality at a price we can afford?
• What do affordability constraints mean for the reasonableness of target setting via National Policy Statements, water regulators or Regional Council regulators?

The bad news

There are several pieces of bad news to digest before considering solutions.

First, in many cases, estimates of the affordability of proposed water improvements do not make happy reading. Work in some council areas demonstrated that rates would need to rise by up to 70% on average, sustained for 20 years, to achieve stated objectives from either a stormwater perspective, or a wastewater perspective, with much higher rises to achieve both simultaneously.

Second, the seriousness of the water crisis is not always well-understood or appreciated by the public or even some politicians and officials. The compounding effect of a changing climate on heavy rain events and weather uncertainty will only exacerbate the extremity of outcomes. But when the next extreme event occurs and beaches become unsafe or certain areas flood and people are directly affected, it is a sign of acting far too late.

Third, there is no silver bullet that will solve these problems overnight, or even within a decade. The tools that will be used to solve water’s woes are, by and large, tools that already exist. We will need to prioritise far better across multiple domains (not just stormwater) to find the funds to do the most important work first. Ultimately, whether ratepayers, taxpayers or water service customers foot the bill, these are broadly the same set of people. While third party investment from here or abroad will be part of a balanced solution, that investment will only happen on commercial terms, which brings us back to the fact that New Zealanders will need to fund these infrastructure improvements.

Fourth, uncomfortable trade-offs are unavoidable. The money simply does not stretch to all that we would like it to, from stormwater to wastewater and fresh water, road and public transport, rubbish collection, park purchase and maintenance, libraries, community centres, sports fields and noise control services in the case of local government. We will have to make uncomfortable trade-offs deciding between fixing stormwater and replacing the earthquake-prone library.

Fifth, at the moment, these trade-offs are often made poorly, on weak information, with more publicly-visible projects often prioritised at the expense of hidden infrastructure like pipes and treatment plants. This is why a more joined-up approach to prioritisation and a careful choice of funding tool, is so important.

Project work underpinning our analysis

The GHD team has worked with several councils over the last couple of years to answer some of these questions. Our work has included:

• Understanding the scale of the water challenge (whether stormwater, waste or fresh) at a local level in dollar terms and over various timeframes
• Evaluating the impact of different ways of tackling water challenges on affordability from a rates, household income, Council debt and ability to pay perspective
• Developing a prioritisation approach that can be adopted within one domain (like stormwater) or across domains like three waters or even the entire council remit including transport and social infrastructure
• Considering the best tools in the local and central government kitties for dealing with water infrastructure challenges, ranging from development contributions to general and targeted rates, developer agreements, levies, value capture taxes and third party funding.

Working with one client with over $5 billion of identified projects to fund, but much less money to spend, GHD helped to prioritise projects in a simple but defensible, rational way, based on how well different projects met the organisation’s stated objectives and provided value for money. This approach can be applied across New Zealand, whether for stormwater or for other areas of focus. It can also be used to prioritise project across domains, so a sensible way is found to make the uncomfortable trade-offs between that new community centre over there and the stormwater pipe renewals needed over here.

GHD has also worked with multiple clients to understand how a preferred set of water improvements and timeframes will affect rates. A higher rates bill is not a bad thing if it is achieving better outcomes for communities. But rates affordability, set against the Shand report recommendations, for instance, is a key metric and consideration under the Local Government Act. This makes it important to understand rates within the context of local incomes and household structure. For instance, are there many retirees or families with young children in a community with a low or single income stream and what does that mean for affordability?

As councils face higher borrowing costs and many find themselves at their debt limits post-COVID, there is a further lid on new borrowing. Council debt structures limit the sorts of tools that can be used to fund this borrowing from the community. GHD has worked with several councils and central government agencies to evaluate the various funding tools that can be used to build infrastructure. Ideally, these tools need to either be off-balance sheet (i.e. not a liability for delivery by the council) or need to be tools that can be borrowed against, which immediately yields some tools often used for stormwater in greenfield areas, like development contributions, undesirable.

Insights for attendees

• This paper will give attendees insights into:
• Appropriate ways of determining affordability and how improvement implementation timeframes affect rates increases and affordability. This discussion will highlight some of the pitfalls in decision-making.
• The strengths and weaknesses of the range of funding tools, ranging from commonly used local tools like development contributions and general rates to Infrastrcutrure Funding and Finance (IFF) Act targeted levies and third party tools like Public-Private Partnerships (PPPs). This discussion will explain which tools are better in different circumstances.
• An innovative way to streamline the prioritisation process that reduces subjectivity, highlights and eliminates optimism bias for certain projects, is relatively immune to the regular review of projects post-election. This discussion will demonstrate how we model cost-effective ways of adjusting capital works programmes appropriately based on the funding envelope.