The Turning Point Choices Ahead for Water Reform

The turning point Choices ahead for water reform

Three Waters 2021 The turning point |Key considerations for the water industry The turning point |Key considerations for the water industry

Three Waters Reform The turning point

is the first step in In July 2020 the Government launched the There are potential benefits in the proposed Three Waters Programme, a three-year reform as we have seen well-resourced, the biggest change plan set to reform local government water dedicated, asset-owning water entities can services delivery arrangements along with work well. For example, greater scale helps to local government tightening water regulations and the way by being able to attract and retain specialist water services are managed. capability, and we see huge strides being made globally to enhance asset management arrangements in a The changes announced by the Government in asset-intensive infrastructure organisations are far-reaching, and when combined with that make use of new technologies. We also change plans for resource management, local generation. This change see that specialist organisations of scale are government, vocational education and training, often better able to identify and access the and health services including public health, the is not just about how capabilities needed to transition to a modern, overall economic and social impacts on our local sustainable sector. water services are communities are huge. But changes to ownership and organisational At Deloitte we recognise the challenge the arrangements on their own will not drive delivered, it will set Government faces. It needs delivery structures benefits. From our experience in other sector that will be effective in applying the financial reforms, it will take many years to see these support it provides to secure safe delivery of the tone for a more benefits emerge. What is important is getting three waters to New Zealanders. And it needs the establishment process right so that new arrangements to ensure these services can be fundamental reshaping arrangements are set up to succeed. This is not sustainably delivered to new, higher standards just a technical process of allocating revenue, in the long term. On the other hand, local of local government in assets, and people to any new structures. It communities and those who safeguard their is critical that all stakeholders – especially iwi, interests need to be comfortable they are being ratepayers, and their elected representatives the years ahead. treated fairly, and the benefits from the reform – are comfortable with the process and the justify the change and disruption. reasons for the changes and have trust that We think this balancing act can be managed, they are being treated fairly. but it will need a high-quality process with open and consistent stakeholder communication to be successful. Deloitte has supported central and local government through many sector reforms, and we understand how major change programmes need to be executed to ensure planned benefits are realised. We also know What is important is getting the there will always be unintended consequences establishment process right, so the new and it is crucial these are identified as they arise, and processes are put in place to ensure arrangements are set up to succeed. equitable outcomes.

2 3 The turning point |Key considerations for the water industry

Key choices ahead

Governance Stakeholder engagement Asset condition & transfer Entity form and function Timing of decisions

Governance arrangements need to In the consultation and change process can One of the first steps in moving towards Will need to consider the mandate, Many of the issues which need to be dealt consider both the need for performance only be done with an understanding of the a new water entity is understanding the core functions, management structure, with as part of the transition to new Three and the importance of representation. full set of stakeholders and their interests. Three Waters assets that will transfer and operating model, funding and revenue Waters arrangements will take years to Clarity around where decision rights sit In other sector changes we have seen data related to them. This is a critical input model, organisational structure, systems solve to a high degree of confidence. between the governance board, directors new stakeholder groups emerge, bringing into the overall planning process as it will and processes and cost structure of each It will be important to prioritise any of the new entities, executive teams, and perspectives that were not anticipated determine what assets move across, how entity. establishment decisions that need to be asset owners will be essential to achieve through the design and planning stages of these assets are accounted for by the new made to keep things moving forward. the dual aims of equity and superior the reform process. entity, and what risk the council bears for performance. assets which no longer have value.

Infrastructure delivery Regulation Increased investment Workforce Valuation

The sector is already facing significant Is driving higher standards of In water is an opportunity to improve the Councils are already facing significant Valuation of what each council contributes delivery pressures and constraints environmental compliance across the state of water assets for local communities pressure on their existing water teams. The to new entities is a major challenge, which will only get worse as the reform industry. Water entities must be able but is also a challenge to deliver. A detailed specialists required to deliver existing work particularly given the differences in how moves ahead and demand for specialist to respond to the changing regulatory process supported by open and consistent programmes are almost all operating at information related to age and condition water sector expertise grows. The key environment through their ability to communication across stakeholders will full capacity. The new entities need to get of assets is compiled across councils. We to delivering successful capital and access relevant data, invest in training and be needed to work out where and what and then sustain the capability to maintain expect too that any value transfer will not operational programmes is capability and systems, and to develop, capture, and new investments should be made. It is also infrastructure and deliver services to just be in the form of the current assets capacity growth, innovative new ways assess performance data that makes sense important to make sure there is no slow- new standards. History shows that major dedicated to the delivery of water services of working, and better use of materials, for a broad range of stakeholders. There is down of investment during the transition to changes in a sector can be highly disruptive but will also include claims on the future equipment, and new technology. also the likelihood of economic regulation new entities. with a high risk of losing key people who ratepayer revenue base and the current to make things more challenging. will be hard to replace. council staff who are expected to move to the new entity.

Role of the Establishment Board Transition Revenue & Debt Allocation Climate change

Includes enabling the new water entities Processes should be planned in detail and Needs to be balanced in a way that ensures Will bring additional challenges including to be successful and setting their strategic guided by principles that help maintain both the new water entity and contributing the way water is sourced, allocated, direction. One early challenge will be to equity across all stakeholders – ratepayers, councils are not compromised from a and provided for urban, rural, and secure the right leadership talent, with this employees, contractors, and other financial capacity perspective, and that environmental users. It will also threaten talent being both scarce and expensive. suppliers. equity is preserved between contributing infrastructure that must be rebuilt or councils. maintained.

4 5 Our team

The Deloitte team brings extensive experience with the implementation of government reforms across multiple sectors.

We have been involved with all aspects David Lovatt Partner | Public Sector Leader of the establishment process including +64 4 470 3690 the design of transitional arrangements, [email protected]

valuation and capital structure advice, View online profile organisation design, systems integration,

revenue and cost modelling, and debt Mary Kilkelly advisory services. Director | Water +64 4 470 3732 The Deloitte team assembled to support [email protected]

Councils through the Three Waters View online profile reform process hold a combination of the technical skills required to deal with David Morgan the needs presented by that process Partner | Energy & Utilities combined with the experience learned +64 4 470 3870 [email protected] from earlier processes. They have a deep understanding of the Three Waters View online profile Programme including the strengths and challenges of the different delivery models Alan Dent Advisor | Water that apply across New Zealand and in +64 4 495 3913 overseas jurisdictions. [email protected]

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