8. Question No. 8—Local GovernmentTĀMATI COFFEY (Labour) to the Minister of Local GovernmentQuestion No. 8—Local Government8. TĀMATI COFFEY (Labour) to the Minister of Local Government: What alternative models if any did officials consider and why were they not accepted as possible solutions to address the level of underinvestment in Three Waters infrastructure?Hon NANAIA MAHUTA (Minister of Local Government): The Government has been investigating options for addressing the significant challenges facing councils in delivering three waters services for four years using the best of international and local expertise. We've robustly tested the options with oversight and guidance of a joint central local government steering committee. This includes assessing options such as central government funding for the status quo; sector-led shared-service delivery and regional models; introducing a national centralised fund similar to the New Zealand Transport Agency - type model; and relying on regulatory reform alone. None of these models adequately achieved the Government's rationale for reform which is safe reliable drinking water; better environmental performance of waste-water and stormwater services; efficient sustainable resilient and accountable multi-regional water and sewerage services making it affordable for future generations; balance sheet separation; and leveraging the advantage of scale for asset management and waters infrastructure investment. In terms of how many entities is best the Water Industry Commission for Scotland assessed 30 different aggregation scenarios ranging from one to 16 entities. For example we did consider a regional model based on regional council boundaries. This option however would have perpetuated significant cost variations across the country including disadvantaging rural regions.Tāmati Coffey: Is scale the sole determinant of a successful solution to the three waters challenge in the New Zealand context?Hon NANAIA MAHUTA: No. Scale is important for improving the financing capacity of water entities for achieving improvements and operating in capital efficiency and for helping to make the cost of infrastructure upgrades in small communities affordable. However the full benefits of reform cannot be achieved by scale alone. The ability of new water service entities to perform effectively and efficiently also requires effective professional independent governance arrangements and the ability to attract and retain appropriately skilled management and workforce; the establishment of an economic and consumer protection regulation; clear ongoing national policy direction for the three waters sector aligning Te Mana o te Wai aspirations and water services entities with access to the necessary finance to make the required investments over time. The model that we've settled upon as a Government will deliver on these goals whilst striking a balance on scale which delivers increased efficiencies while keeping the entities responsive.Tāmati Coffey: Why was the council-controlled organisations (CCO) model an unviable option for addressing three waters?Hon NANAIA MAHUTA: The CCO model was considered by the Department of Internal Affairs but was ruled out for a number of reasons. CCOs are unlikely to be viewed as sufficiently separate from local government to achieve balance sheet separation from councils. As such they would continue to be constrained in their ability to borrow to fund the infrastructure deficit in much the same way as Watercare is currently limited in its ability to borrow due to debt constraints faced by Auckland Council. This is a key reason why the household water charges in Auckland are proposed to double over the next few years as increased investment needs to be paid for through water charges rather than being funded with debt and paid for over the lifetime of the assets. Establishing CCOs requires the agreement of all councils with each required to engage separately with its constituents. This would take time and create uncertainty. Wellington Water provides a good example of how different councils' views on priorities and charging has limited its ability to plan and invest strategically across the whole network.Tāmati Coffey: Has she seen any evidence to support claims that the Government's preferred model is inconsistent with the Public Finance Act?Hon NANAIA MAHUTA: I've not received any advice to indicate the Government's preferred model is inconsistent with the Public Finance Act. Treasury has been regularly consulted as the reform processes unfolded and have not raised any concerns to this end. The reforms will create entities that are structurally separated from local councils and the New Zealand Government have financial and operational autonomy and borrow in their own right. As such there would be no explicit liability for the debt of the water services entities recorded on the Crown's or the local authorities' balance sheets. The Government has not committed to providing a Crown guarantee to the water service entities. However it has agreed to make available to water service entities a liquidity facility accessible under certain conditions on similar terms to the liquidity facility enjoyed by the Local Government Funding Agency (LGFA). Standard and Poor's advise there would be no changes to their credit ratings or outlooks for the New Zealand sovereign or the LGFA under the proposed reform scenarios.