The AUTHORITY, June/July 1997.             Back

Franchise first scores for Papakura.

By Fiona Rotherham.

Papakura District Council's decision to franchise its water services has helped cut its annual budget by 28 per cent. The small Auckland council is the country's first to put its water and wastewater operations into private hands. Other local bodies are scrutinising the move as water remains the public sector's last natural monopoly. It is also a big part of many councils' core business.

Local Government New Zealand says up to 12 councils are investigating water and wastewater reforms, ranging from setting up business units, establishing council-owned companies, to franchising and full privatisation.

Papakura's draft annual plan slashes rating income to $9.3 million in the 1997/98 financial year, down $3.6 million from the present financial year. Franchising water services shaved $2.6 million off the budget, and the council also made $1.2 million savings in other areas. It received $13.1 million from the franchising deal. The impact on individual ratepayers will vary with higher-value residential properties benefiting the most.

But all ratepayers will get an additional bill from the Anglo-French consortium, United Water, charged on a user pays basis. United Water takes over on 1 July. It has already called for community input into its customer services charter covering issues such as water quality and supply interruptions.

Like many local bodies, Papakura has contracted out maintenance of its water services for some years. Mayor David Hawkins says franchising seemed a logical next step. The council stopped short of full privatisation, believing the city's 40,000 population was not ready to sell off the infrastructure.

The United Water contract is for 30 years with a 20-year right of renewal. After 5O years, the infrastructure reverts to council ownership.

United Water is a consortium comprising Thames Water (47.5 per cent), Compagnie Generale des Eaux (47.5 per cent) and Australian-owned Kinhill Engineers (five per cent).

The company has been a political football in Australia, facing bribery and corruption claims relating to its $A1.5 billion water management contract with the South Australian Government. Labour MPs used parliamentary privilege to raise allegations of fraternisation and bribes between members of the bid negotiation team and United Water during the bid process. A probe by the South Australia Police anti-corruption unit revealed no evidence of corruption.

There have been no complaints over United Water's supply and maintenance of the water operations. Efficiencies have cut costs by 20 percent but South Australian consumers are paying more for better quality water.

The Papakura District Council was aware of the allegations before accepting United's bid. According to Hawkins, "none of the bidders made any attempt to improperly influence council's decision." Papakura opted for United because it demanded fewer changes than other bidders to the franchise agreement. The Serious Fraud Office is investigating two complaints over the United Water contract.

United has to return the assets in a better slate than it received them. But Papakura is not certain of exactly what it is handing over.

In 1994 the Audit Office told Parliament that three-quarters of councils had little or no reliable knowledge of the condition of infrastructural assets and were thus unable to report on their value or condition. Work carried out by United during due diligence indicate Papakura's pipes to be of average quality. It has to report back to council within a year on the results of a comprehensive survey of the infrastructure assets' value. If council disagrees with the assessment it can go to arbitration. United also has to maintain the water quality at its current B-grade.

Prices are frozen for the first two years and capped at the regional average after that. Papakura currently charges 81 cents a cubic metre - the cheapest in Auckland. Other councils charge up to $1.09 a cubic metre. It is anticipated water prices win increase almost 28 per cent from years three to five from 81 cents a cubic metre to $1.035 cents, the present regional average.

Water industry sources question why, if privatisation leads to efficiencies, will Papakura no longer get the cheapest water in the region?

The Auckland Regional Services Trust-owned Watercare currently supplies bulk water to all councils in the Auckland region. The catalyst for Papakura's move was pending heavy rises in Watercare's charges to pay for the proposed $155 million Waikato pipeline and $360 million Mangere wastewater upgrade. Watercare has forecast prices of $1.57 a cubic metre by the year 2002.

New Zealand's water supply industry lags behind other networked utilities such as gas, electricity and communications.

The Business Roundtable says local authorities and the government need an urgent wake-up call on water industry reform as it is moving at "glacial pace." In response the Alliance released warnings about water privatisation, based on overseas experience.

It claims water privatisation in Britain led to higher prices and lower quality water for householders. In areas controlled by private operators French consumers pay between 16 percent and 44 per cent more for water than people living in areas handled by the local body sector.

In New Zealand central government has made no push to end the water industry's natural monopoly. Local Government Minister Christine Fletcher is currently reviewing the ARST's future and thus the future of the region's water supply.

The LEK water industry report recommended forming a fully-integrated company owned by the ARST to handle the region's water supply from dam to tap. The trouble was the other Auckland stakeholders - the city councils - didn't want to let go of their valuable assets without compensation. Any change would require new legislation. Fletcher's ministry is reviewing the LEK report and is due to report back soon. In the next decade Auckland alone needs $5 billion spent on infrastructure, including water and wastewater.

Keen to avoid adding water price hikes to already increasing rates bills, the Auckland councils are moving towards more business-like structures. Charging by user pays for water services allows the general rate to come down. The Auckland City Council narrowly approved setting up a water and wastewater LATE in April by a 12-11 vote. An earlier vote rejected the idea. Opponents say there has been insufficient public consultation and no mandate for the move.

A LATE establishment plan, including tariff proposals, will be put to council for approval in June with a planned 1 July start-up date. The Waitakere City and Manukau City Councils are also moving towards a LATE structure. They say the same efficiencies can be gained through a council-owned entity as from a private manager. The impetus for change is strongest in Auckland and Wellington where a bulk water supplier sells to the local bodies who handle the retail end. In other parts of the country councils handle supply from source to tap.

The Wellington Regional Council supplies bulk water to the four councils, Wellington City, Lower Hutt, Hutt Valley and Porirua. All four handle their own wastewater operations and the WRC also manages Wellington City's retail water supply. Wellington City's decision to put part of its retail operation out to public tender pushed the WRC to consider corporatising its wholesale water operations under Metro Water. It is first conducting a similar review to the LEK report. "We're looking whether to continue to run as five operations or some other arrangement. We believe running the total operation under one utility may provide more benefits", says WRC utility services manager David Benham.

Wellington City's Dawn Brooks says the secondary question is whether that one company should be the regional council. The WCC's decision on tendering follows an overall review of its services to see if ratepayers are being delivered the best value for money. The lender will be for pipe maintenance, the delivery of water to homes and businesses and metering.

In the meantime the WCC is asking the WRC for more information on its own water service. "This situation is not untypical of many local authorities. If we do competitively tender that part of our business we need in a sense to re-learn about our system because it has been contracted for so long. We can't be a smart buyer if we don't have the information on our assets", Brooks says.

Under the new local government rules due to take effect in the July 1998 financial year, local bodies will have greater accountability. Water supply will be able to be charged on a user-pays basis.

The Christchurch City Council is one area where councillors have so far made no push for a privatised or corporate structure. Water and wastewater services are managed by a business unit. Water services manager Allan Watson says more information is needed to see if change is necessary. Christchurch is one of 20 local bodies taking part in a nation wide benchmarking survey on their water and wastewater services. Coopers and Lybrand's Doug McDonald says the study is not a scorecard or a national league and results will not be made publicly available. "It is hoped over the next few years as the industry undergoes likely restructuring this information will enable them to run their water operations as a business rather than just as an essential service."

Trends from the first year's results indicate a wide price variation in both water supply and wastewater. One of the councils charges certain customers almost double the amount of other councils for similar services. Wide discrepancies were also revealed in asset valuation. There is no industry standard for valuing water infrastructure assets as there is in the electricity industry.

Cost structures were also affected by the varying water quality coming out of customers' taps. Some councils spent more on treatment than others, in part reflecting the quality of the original water source. The councils can use the results to judge what parts of their operation need improvement.

But they won't be able to compare to the country's only franchised water operation. Papakura is not taking part.
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