Councils are starting to prepare their Water Service Delivery Plans as part of Local Water Done Well legislation, and are considering the choice between forming two or three Water Council-Controlled Organisations, either independently or in partnership with other councils, or continuing to deliver water services within wider council operations.
We believe there are four critical choices that councils need to focus on as they determine the most appropriate path forward with regards to the formation of Water Council-Controlled Organisations (WCCOs). These choices will set the foundations for a sustainable future in water services, and are outlined below.
- The strategic choice – whether or not to set up a WCCO for Local Water Done Well: Transferring water assets, operations, people and related costs, water-related rates, fees, charges, and debt to new WCCOs in exchange for the promise of superior performance, lower cost to ratepayers, greater financial capacity for councils, and the transfer of regulatory and financial risk will be weighed against current performance of in-house service delivery.
- The financial choice – settling on the detail of the financial transaction and funding delivery plans: This involves designing the financial transaction that will establish a sustainable financial model for delivery plans, including what is ring fenced; what stays and what goes; what the financial costs of the process are and who pays; what the key risks are, and who manages these and how; and what the critical commitments being made are, and how these will be honoured and enforced.
- The implementation choice – implementing the detailed work program required to enable ring fencing or separation, and transfer of two‑ or three-water operations: This requires identifying the assets and activities to transfer; addressing all the IT, people, financing, regulatory and other operational issues created by ring fencing or separation; and managing the process while ensuring that ongoing activities and services are not disrupted.
- The legacy choice – ensuring the council is set up to effectively play its redefined role: The internal ring fencing or voluntary transfer of water services responsibility from councils to newly created joint or individual WCCOs creates the opportunity for a fundamental redefinition of the role that councils can play in their communities – but council operating and funding models will need to change.
The Strategic Choice
Over the next 12 months, councils will need to develop 10-year Water Services Delivery Plans, either individually or jointly, covering three key areas: financial and asset information, investment required, and service delivery arrangements. These plans are intended to outline councils’ preferred service delivery model, investment requirements and service levels, funding and financing options, proposed pricing, and projected revenues.
Preparation for any transition is critical to ensure success. New operating models need to be carefully designed and implemented as there are various moving parts, including: people, information, contracts, core functions, management structure, operations, funding and revenue models, systems, processes, and the cost structure of delivering water services in the future. Councils should also conduct due diligence on transferring assets, including value and condition, in alignment with their long-term potentiation and Water Service Delivery Plan.
In addition to developing Water Service Delivery Plans, councils will need to consider the potential impacts of economic regulation. Economic regulation means that your ability to raise revenue will be linked to investments required to deliver an efficient, quality service. There are lots of lessons to be learnt from other regulated sectors about how to approach this, but poor choices at the start will stay with you for decades and place stress on water entities, councils, and customers. Councils will need to understand what may be required from upcoming economic regulation, and the long‑term impact of what they do now on revenues and pricing in the future.
The Financial Choice
Participation in the Local Water Done Well process may involve councils voluntarily entering into a material transaction or undertaking detailed ring fencing of services, costs and revenues. Regardless of the strategic rationale for the choice, the ‘devil is in the detail’ and, in this case, the detail will have fundamental implications for future capability and capacity. Councils will need to address matters such as what assets to transfer, what rates/revenues are designated as water-related, which staff transfer, how shared services are unravelled, how stranded assets and overheads are identified and dealt with, what contractual obligations need to be identified and shifted or cancelled, and what organisational restructure will be needed.
As part of this process, it’s critical that councils perform detailed analysis to identify the financial implications of any ring fencing or separation, including the potential implications of future economic regulation. This will involve financial modelling of the cost and revenue base to ensure that the council isn’t compromised as a consequence of the transaction. Particular focus will need to be given to the cost of affecting any transaction. Then, the outputs of that modelling need to be fed back into any negotiation process to ensure that the council doesn’t end up assuming an unacceptable level of risk or financial exposure.
The Implementation Choice
Executing the implementation plan will be a complex and expensive process, which typically imposes huge strains on the business-as-usual activities of an organisation. If transition is to be successful, councils will need to devote significant leadership capability and capacity to making it happen.
Successful execution will involve robust planning and program management. It’s likely that councils will need dedicated program management to ensure the execution process runs to plan, and that risks and issues are identified and tackled early. Proper planning can remove uncertainty and ambiguity, identify and recognise people issues, ensure that there is a plan for change at all levels, and ensure that a comprehensive communication and relationship management plan is in place that anticipates the needs and anxieties of all stakeholders.
The Legacy Choice
The new water services system represents the most fundamental change to local government arrangements in Aotearoa New Zealand in a generation. Any change comes with associated risks, and councils will need to have faith that the promised benefits will eventuate; however, the proposed changes have the potential to serve as a catalyst for a fundamental rethink of the role of local government in New Zealand.
While the case for forming WCCOs has benefits of scale and specialisation associated with consolidation, there are equally strong arguments for increased ‘localism’ in the delivery of other services – particularly social- and people‑orientated services, such as social housing, transport, education, and primary health services. The opportunity for local iwi participation in any new construct for these services could potentially be huge.
A change to a people rather than an infrastructure focus offers the opportunity for local authorities to fundamentally redefine their relationship with their community, while also improving the effectiveness of centrally funded interventions.
Conclusion
The government’s Local Water Done Well plans present councils with critical choices, the scale and implications of which will have a decades-long impact. The two most important considerations facing councils are how to position for the future and how to prepare for the transition.
However, as part of that decision-making process, councils will need to think hard about the detail behind what’s proposed and the strategic choice they have to make, how any separation transaction could be executed and, most critically, how their role and the relationship they enjoy with their community could be redefined as a consequence of the new water services system.