Local Water Done Well (LWDW) is in full swing, with almost all of the initial Water Service Delivery Plans (WSDP) being approved by the Department of Internal Affairs (DIA).
Now that the rubber is starting to hit the road, with Internal Business Units (IBUs) and Council Controlled Organisations (CCO) already starting to be stood up, boards being appointed and transition teams being put in place to manage the asset transfers, there will be a lot happening between now and 1 July 2027.
With the coming transition, there are questions that need to be answered, and challenges addressed in order to make the transition a success. Let us look at some of these questions and even suggest some solutions:
Accountability
With over 15 CCO’s being stood up, the accountability for the water service operations will fall under a Board of Directors and the related Executive Leadership team. With greater personal exposure to the Water Services Act 2021 (WSA 2021), how will this change the behaviour of the related water authorities – in particular, their investment focus?
Initial indications are that boards will have zero tolerance for non-compliances from day one, reducing directors' personal exposure in the event of a drinking water contamination event. But with so many unknowns around asset conditions, is zero tolerance achievable immediately, or is this a longer journey?
Based on what we know about the current level of non-compliances in the industry, this will be a difficult target to meet for many, and it is likely that technical non-compliances will still slip through. A strong focus and mindset shift on a zero tolerance for non-compliance is a great starting point and mindset, ensuring that any of the CCOs will be headed in the right, long term direction.
Ensuring that Standard Operating Procedures (SOPs), training and operational support are updated and available will also be key to success.
Will internal business units operate differently when the accountability for the services still sits with the same individuals to those prior to the reform?
In theory though everyone involved in ensuring water and wastewater is compliant should be trying their utmost to achieve this result, meaning no change is required. In reality it likely depends on the level of understanding the individuals have around their personal accountability.
Capacity
LWDW, whether moving into a CCO or an IBU, requires significant work to split or ringfence assets, systems and supporting operations into the new operating model, over relatively short timeframes.
In many cases, existing three waters teams are carrying this load on top of their day jobs. With the industry already being short of between 3,000-9,000 skilled workers over the next 30 years, coupled with ~8-10% existing vacancy rate across councils, the transition is stretching capacity further.
For CCOs in particular, the challenges are compounding: loss of institutional knowledge through retirement, younger staff leaving for offshore opportunities, change fatigue, and the pressure to keep capital works programmes moving while standing up entirely new organisations.
It is evident that many CCOs will need support during transition meaning spend on consultants is likely to increase. This may be in the form of hands-on operational support, training, updating documentation and SOPs or perhaps just an external asset audit to understand their true risk profile.
Treatment asset conditions
A single CCO could be inheriting more than fifty major treatment assets, plus supporting networks and pump stations, from multiple councils, each with varying levels of asset condition knowledge, compliance status, and capacity data.
How do councils build a coherent risk profile and investment strategy for these assets?
Whilst many of the existing council asset management teams will have knowledge of their own assets, bringing this data into a concise and comparable single source of truth will be difficult. With existing capacity constraints, items maybe missed, or potential risks maybe overlooked.
There is value in looking externally to get an audit of asset conditions, bringing together a consistent data source, with a comprehensive risk and investment plan – reducing the CCOs exposure.
How do the CCOs keep each of the member councils, and communities happy when cross subsidisation maybe required to address critical upgrades?
This is a particularly tricky one to manage, that will require a strong but diplomatic transition team, who can firmly but fairly assess the priority of upgrades using a strict risk profile.
Proceeding down an external audit pathway helps with this, as it removes and local bias, ensuring that investment is data driven and less politically weighted.
Shared services arrangements
As the new CCO’s and IBUs are being setup, shared service agreements will be in place for a period of time, covering things like customer billing, call centres, stormwater, and the likes.
These arrangements are necessary in the short term, but they delay the economies of scale that consolidation is meant to deliver. When does full transition occur, and how long can these interim arrangements be sustainable?
The answer will be different for each CCO, but will likely be in year 2-3 of the CCO being established – following the more important transitionary tasks of embedding and supporting their people, whilst also putting solid processes in place to support their day-to-day operation.
Consumers
With all of the noise around Three Waters Reform, the cost statistics and the introduction of water meters, and the water portion of the rates bill being split out, how will the end consumers respond to LWDW?
Many of those who are less engaged in the utilities space will for the first time see the monetary value of the services provided, potentially introducing bill shock as they come to grips with what was otherwise considered by many as a ‘free’ service.
Leadership will be required in the communication space, ensuring that consumers are brought on the journey, particularly following all of the scrutiny that three waters has been under since the first reform.
Economic Regulation
Beyond the accountability pressures of the WSA 2021, there is another layer of oversight being introduced that will change how water services are scrutinised – economic regulation.
For the first time, water providers will fall under the Commerce Commission's regulatory umbrella, joining electricity lines, gas pipelines, and airports under Part 4 of the Commerce Act. This means mandatory information disclosure, transparency of investment decisions, and a focus on whether ratepayers are getting value for money.
The regime is already being tested. Wellington Water has been designated for early information disclosure, and Watercare is operating under a Charter with enforceable service quality standards until mid-2028, after which full price-quality regulation kicks in.
For newly established CCOs, this creates a dual accountability1) personal liability under the WSA 2021 for drinking water safety, 2) combined with Commerce Commission oversight on investment efficiency and consumer outcomes.
How will boards balance the pressure to invest heavily in asset upgrades against the requirement to demonstrate efficient spending?
Whilst this is still a developing area within the water sector, I personally believe that it will help to drive the industry in the right direction, ensuring that focus is shared between delivering a high-quality service, whilst also investing in innovation and optimisation across existing assets.
I am sure that this economic regulation will continue to develop overtime, so it will be interesting to see how this will impact the waters sector long term.
Conclusion – The Unknown
Reform is well underway, but as highlighted, significant unknowns still remain. During this transition period, the risk profile for non-compliance is elevated with new structures being setup, inherited assets, and stretched teams increasing the potential for something to go wrong.
To give full credit to those involved, there is a strong focus on these challenges, with dedicated transition teams working through the detail, and companies like Lutra stepping up to assist.
As the reform continues to develop, Lutra will release a blog series, that will attempt to provide answers to some of the unknowns from our industry connection. Lutra will continue to support the industry as we have for many years and look forward to the new status quo!
Stay tuned as we enter the next phase of Local Water Done Well.
