A scathing submission from Auditor-General John Ryan heaps yet more pressure on the government’s Three Waters Reform agenda.
Published today, the submission on the Water Entities Bill to form four regional “water services entities” (WSE) from the water infrastructure currently owned by New Zealand’s 67 local councils suggests that public scrutiny of the new organisations will be far weaker than is possible at present.
“I am concerned that, as currently drafted in the Bill, the accountability arrangements and potential governance weaknesses, combined with the diminution in independent assurance noted earlier, could have an adverse effect on public accountability, transparency, and organisational performance,” Ryan says in an unusually forthright submission.
The submission pitches its criticisms in four broad areas:
• Confusion over ownership.
• Confusion over who is in charge.
• Confusion over the policymaking process.
• Processes for public accountability falling between the cracks.
On ownership, the auditor-general comes close to the concerns expressed in a legal opinion for the Taxpayers Union by former Act party MP and solicitor Stephen Franks.
In that opinion, Franks argues that none of the usual definitions of ownership are met by giving councils shares in the entities, which will control the water assets those councils currently control.
The claim that councils would co-own the water assets is “false, misleading and deceptive”, Franks says. “The councils will have none of the bundle of rights that define and are conferred by ownership in any sense familiar to lawyers or understood as the common significance of ownership.
“Councils are expressly denied the rights of possession, control, derivation of benefits, and disposition that are the defining attributes of ownership.”
While not going nearly so far, the auditor-general’s submission makes it clear that the government’s primary auditor is not satisfied that the ownership concepts in the draft legislation are fit for purpose.
“We are in ongoing discussions with the Department of Internal Affairs about councils’ influence over water assets and whether any single council or group of councils will control any of the WSEs,” the submission says. “The bill alone does not provide enough information for us to form a view about these matters.”
Read: Govt urged to listen to communities on Three Waters
At the heart of the issue appears to be the need for the water entities to have completely separate balance sheets from their council owners.
This is in order to satisfy the advice of the international credit rating agency Standard & Poor’s on structuring the new water entities to give them strong enough credit ratings to achieve the key reform aim of being able to borrow more than if they remain under individual council ownership.
A June 30 Treasury paper released under the Official Information Act indicates officials remain concerned about the extent of the Regional Representative Group’s (RRG) ability to influence the investment priorities and the ability for councils “to comment on the draft asset management plan as it applies to their district”.
“Adopting all these recommendations could represent an increase in influence over the WSE by the RRG, and therefore may impact balance sheet separation. These matters will require careful judgement informed by engagement with Standard and Poor’s,” the paper says.
Describing the decision to create a structure with two boards of directors for the water entities as “unique”, the auditor-general is concerned that there will be overlap and confusion in their strategic direction.
“Roles and responsibilities need to be clear for this approach to be successful, with minimal conflicts, tensions, and overlaps between the two governance bodies,” Ryan says of proposals that will create a RRG involving council and iwi representatives and a separate commercial board.
“To avoid the risk of overlapping accountabilities, the RRG’s intended role, and the purpose of the statement of intent versus the statement of strategic and performance expectations should be clarified.”
Failure to do so could lead to both boards trying to set strategic priorities.
It is also more important that the role of the chief executive and the board “be more clearly delineated”, with the bill as drafted making “no explicit reference to the role of the chief executive” and being “unclear whether employees of the WSE are employed by the chief executive”.
The auditor-general also expresses serious concerns about the fact there are a total of nine different planning documents required of each water entity, that they are to be produced on a range of timetables, and that it is unclear how well they will mesh with other local government planning documents.
For a start, the bill should require 10-year plans from the water entities, to align with local government long-term plans and the legislation.
Also problematic is the fact that while one of the nine processes is local community consultation, there is no explicit mechanism for the results of that consultation to be incorporated into the planning process.
“I suggest that further consideration is given to integrating consumer and community engagement with reporting requirements in key accountability documents so that there is clarity on how the outcomes of such engagement are addressed by the WSEs,” said Ryan.
The auditor-general is also concerned that the auditing and accountability mechanisms that currently exist will disappear and not be replaced under the new system.
“We are concerned about whether the planning and reporting mechanisms in the bill will be sufficient to enable comprehensive and effective public scrutiny of WSEs,” he said.
Water services are currently managed by local authorities and accounted for in local authorities’ long-term plans and annual reports, which are then audited by the auditor-general.
“Only the annual financial statements and the statement of service delivery performance in the annual report are subject to audit.”
The water entities cannot be held accountable to central government “because they are not Crown entities”, says the auditor-general. Nor is there provision for planning documents to be audited or a replacement for the power of the secretary for local government to set performance measurements for water services.
“I am concerned about whether these mechanisms will be sufficient, individually or collectively, to enable comprehensive and effective public scrutiny and accountability.”
He is also concerned about “a risk of less opportunity for communities to be effectively engaged and less able to influence planning for water services”.
The National party’s Three Waters spokesperson Simon Watt said in a statement that the auditor-general’s critique is grounds for the government to scrap the proposed reforms altogether.
National is vowing to repeal the reforms, if enacted, although has not provided detail as to how the reforms would, in practice, be unwound if the four water entities are established before a change of government occurs.
