About the Reports
Phase 2 Analysis – advancing the evidence base
Today the Department of Internal Affairs (DIA) released a second tranche of evidence-based reports, commissioned to inform the case for change for the Three Waters Reform Programme. The complete reports are published here.
This analysis further demonstrates the need for reform and its potential benefits and addresses key questions raised by local government members through recent engagements. The analysis uses the Request for Information (RfI) data provided by councils and publicly available information, including international benchmarks, to undertake economic analysis of reform options.
This information release provides national-level analysis on the case for change (the size of infrastructure investment need into the future, and how reform options could help us meet this more affordably) – WICS Phase 2.
The release includes two independent reviews of the WICS Phase 2 methodology and assumptions to ensure it is fit-for-purpose in a New Zealand context – undertaken by Beca and Farrierswier.
The release also contains a broader economic analysis on the potential impacts of reform on the economy and workforce – Deloitte report.
This national level information release is just one part of a series of information packages DIA will provide to support understanding of the potential impacts and opportunities of reform at a national and local level.
Further council-specific analysis and supporting information will be provided in the coming months as key decisions are taken by Cabinet, including on the number and boundaries of new water services entities.
Infrastructure New Zealand will partner with DIA to provide several workshops on the reform programme in the coming months.
Background on Phase 1 information
- In December 2020, DIA released a package of information on the case for change, commissioned as part of the Three Waters Reform Programme.
- This early analysis was conducted by the Water Industry Commission for Scotland (WICS), a respected three waters economic regulator familiar with the New Zealand context and with experience of water services reform in the United Kingdom and parts of the European Union.
- The Phase 1 report was high level and directional in nature as it used publicly accessible council information. Several limitations were noted at the time, including not accounting for population growth. However, the report provided was valuable in providing an early indicative view on the size of New Zealand’s Three Waters infrastructure deficit and the potential benefits of reform.
- Local government representatives have expressed concerns over the validity of parts of this analysis (particularly the size of the investment deficit and potential efficiencies of scale) and its applicability to the New Zealand context.
The Request for Information (RfI) process
- In late 2020/early 2021 councils undertook a Request for Information (RfI) as part of the Three Waters Reform Programme.
- This RfI provided up-to-date and more detailed information at a local level to inform further economic analysis, and other commercial and financial analysis as part of the reform programme.
- This process represents a major undertaking by the local government sector to improve the state of knowledge and understanding about three waters assets, network performance, service delivery costs, commercial arrangements, and future investment requirements and is no small feat.
- Given the timeframes with which councils had to complete the RfI, not all information provided could be audited or fully researched. To reflect this, the Department and WICS asked councils to apply confidence grades to their raw data.
- This will of course mean there is variability across the country in this foundational data, and it should be treated as indicative and reflective of the point in time at which it was commissioned and provided.
- The analysis has also been informed by emerging draft long-term plans that councils have been producing during this period.
WICS Phase 2
The WICS Phase 2 report builds on the findings of the earlier report to provide a more up-to-date analysis. The key findings of the report are in three parts:
- The modelling indicates a likely range for future investment requirements at a national level in the order of $120 billion to $185 billion. This investment is estimated as necessary for New Zealand to meet current levels of compliance that water utilities in the United Kingdom achieve with EU standards over the next 30 years. These standards are assessed by WICS (and confirmed by Beca) to be broadly comparable with equivalent New Zealand standards.
- WICS assesses the scope for efficiency by looking at the performance of regulated water utilities in the United Kingdom and making adjustments to take account of factors specific to the New Zealand context. It demonstrates that New Zealand’s Three Waters sector is in a broadly similar position to Scotland in 2002, in terms of relative operating efficiency and levels of service. In just under two decades, Scottish Water has lowered its unit costs by 45% and closed the levels of service gap on the best-performing water companies in the United Kingdom. WICS considers that New Zealand can achieve similar outcomes to Scottish Water over a longer period (30 years).
- WICS has analysed around 30 possible aggregation scenarios, reflecting the large number of possible number and boundary configurations. The WICS analysis shows that scenarios ranging from one to four entities provide the greatest opportunities for scale efficiencies and related benefits in terms of improved levels of service and more affordable household bills (when compared against the likely outcomes ‘without reform’).
Farrierswier independent review of WICS findings
- Farrierswier find that the overall approach WICS takes to its analysis should give reasonable estimates in terms of direction and order of magnitude.
- They note that there are certain limitations associated with the analysis which decision-makers should be mindful of, which relate to estimating the level of future investment requirements and potential efficiency savings that could be realised, particularly given differences in the nuances of the New Zealand regulatory and policy context.
- While their review highlights several limitations associated with the analysis, they note that these are inherent and to be expected in modelling of this kind. Farrierswier also find that WICS’ approach to addressing these limitations appears reasonable.
- Farrierswier notes that the approach WICS takes to assessing the potential efficiency gains appears reasonable but care needs to be taken in translating overseas experience into a New Zealand context. They agree with WICS on the factors that will promote efficiency gains in the water sector, including the quality of management, clear policy priorities, and an appropriate economic regulatory regime.
- Farrierswier also explored the relevant literature to test whether any concerns arise that amalgamation might lead to water entities becoming large enough that diseconomies of scale may emerge. Their view is that the amalgamation scenarios under consideration – with entity sizes that do not exceed 2 million connected citizens – do not appear to include entities of a size that give rise to concerns about diseconomies of scale.
Beca independent review of WICS findings
- Beca reviewed the standards and practices in the United Kingdom Three Waters industry and their relevance to New Zealand given WICS has used United Kingdom data and benchmarks as part of its analysis.
- The Beca report considers that, on balance, the forecasts from WICS modelling may underestimate the estimated investment requirements and timeframes, suggesting that WICS modelling of future investment may be conservative.
Deloitte industry development study and economic impact assessment
- Deloitte has undertaken a comprehensive study of the economic impacts of reform and the implications for affected industries. Key findings in their report include:
- The reform is forecast to impact every corner of the economy and is estimated to increase Gross Domestic Product (GDP) by $14.4 billion to $23 billion in present value terms over the next 30 years when compared to the likely outcomes without reform. In relative terms this increased economic activity equates to an average increase in GDP of 0.3% – 0.5% per annum.
- Every region is expected to be positively impacted by reform in terms of GDP and employment growth.
- Reform is expected to support significant job creation across the economy. Relative to the counterfactual, the reforms are estimated to result in an extra 5,800 to 9,300 additional FTE jobs between 2022 and 2051.
- Average real annual wages are expected to increase by 0.16% – 0.26% over the period from 2022 to 2051. The increase in real wages mainly reflects a projected increase in labour productivity.
- The additional jobs are expected to be spread across a broad range of sectors. While there is likely to be changes in the configuration of jobs in the water sector and its supply chain in the short to medium term. Over 30 years significant growth of up to 80% is anticipated in the water sector workforce, presenting significant opportunities for employment growth, specialisation and increased career opportunities.
- The report highlights a wide range of opportunities and challenges for the implementation of the reforms relating to the workforce, supply chain, management of the capital investment programme, innovation and productivity.
For further information and comment on the Three Waters Reform, contact Claire Edmondson, Chief Advisor, on 021 272 7879, email@example.com.