Now that we know the flavour of the election result, we can expect that the new government will repeal the existing three waters legislation, restore council ownership and control, with much stronger central government oversight. Importantly, there will be strict rules for water quality and infrastructure investment.
It doesn’t look like there will be any central government funding assistance. Funding will be sourced from rates and from user-pays – no change there. But Councils will be required to ring fence money for water infrastructure instead of spending it on other services – a big change.
Councils will now face a serious challenge in how to deliver the massive capital programmes that will be required to address historic under investment - in both asset renewals and meeting increasing standards for water, wastewater, and stormwater. You only have to compare the constrained three waters budgets being presented to councils for the 2024 LTP with the unconstrained budgets being prepared by council staff for the ten proposed water entities to see the scale of the challenge.
Add in the review into the Future for Local Government that identified current local government funding and finance systems are not sustainable. The review recommended that the equivalent of the annual GST charged on rates (estimated $1billion) be transferred from central to local government each year. The review also recommended a reorganisation of local government to maximise the benefits of a regional approach. It is unlikely that either of these solutions are going to be delivered in the immediate future. Something needs to change now.
A readily available option to councils, is shared services. Overhead economies of scale can be achieved across core business functions to reduce cost. The extent and range of services included will be up to those participating, but for maximum benefit, councils will have to accept system and business process change. To achieve significant economies of scale all business partners will need to adopt the same systems – genuine shared services.
Currently many Councils are carrying “permanent vacancies”. In the tight job market, Councils are filling these roles by recruiting less experienced staff and supporting their growth into these roles. These vacancies, however, tend to understate the overall loss of skill and experience. A shared services model may help to not only fill some of the skill shortfall, but also improve internal capability, lift service levels, and reduce overall costs.
Shared services can be delivered by one host council, and each participating agency taking the delivery role in a specific functional area, or by a Council Controlled Organisation (CCO). Either way, it will be important to have an oversight structure that is in proportion to the scale of the services being delivered. The simpler the governance structure the lower the overheads.
Given it is unlikely that a shared services model will provide a suitable governance model or deliver the economies of scale and scope required. The viable alternative and most likely solution are Council Controlled Organisations (CCO). Regional CCOs have been floated pre-election and certainly have merit.
Under the CCO model one of the first questions that will need to be addressed is will this entity be an asset owning CCO? In simple terms will it own the networks on behalf of the councils, or will the councils retain ownership? If the councils do not want the debt on their balance sheets and expect the CCO to take on debt, then ownership of the assets will need to sit with the CCO (to act as security).
Another approach would be to retain ownership of the stormwater assets and contract management to the CCO. This arrangement would ensure that the CCO can provide the expertise to manage and maintain the assets, but the councils retain control of this public good service.
If responsibility for three waters does transfer to a CCO then most councils will be smaller in scale – expect to see staff numbers reducing by 10% with total revenue and expenditure reducing by more. Stranded overheads could well reveal themselves and any existing economies of scale will be reduced. The case for shared services for the remainder of council operations could well become more compelling.
Either way the current delivery model will not be sustainable as we already have a shortage of experienced three waters expertise. The additional work programs that are going to come on-line are going to worsen this situation. Greater scale will be required to keep operational costs down, maximise the effectiveness of existing staff and deliver bigger work programmes.
It looks like Councils will have 12 months from the repeal of the existing legislation to deliver a plan that shows how they will transition to meet the new requirements. It will be up to Councils to decide how they do this.
Crystal ball gazing is a little challenging at present because we don’t know what flexibility will be provided to councils in future legislation. If nothing else, this discussion piece may act as the start of the process for councils to consider what they would like to see in future legislation.
The only substantial conclusions that can be drawn so far is that time is tight, and the issues are complicated. These are areas where Tregaskis Brown can help – getting you from where you are now to where you need to be. We work regularly with complex organisations to reset strategy to address specific challenges. This includes:
If you want to discuss how we can assist, get in touch.
