On 29 April 2022 the Ministers of Finance and Local Government announced the Government’s response to the report of the Independent Group on Three Waters Governance and Accountability (the Group). In essence the Government has accepted the Group’s recommendations pretty much ’as is‘. Of the 47 recommendations, the Government has agreed with 44 and signalled it is working on two further recommendations.
The two outstanding recommendations deal with significant matters. One, regarding the establishment of a water ombudsman to receive and resolve complaints, is being considered as part of the wider work on economic and consumer regulation. The other regarding the extension of Te Mana o Te Wai to all marine bodies is being considered alongside similar requirements in other legislation. The answers to these questions will most likely appear in the second Bill.
The media have been quick to report the Government’s response to recommendation 45 – in effect that the Crown has an ongoing role in supporting and investing in water services. The Government response to this recommendation is NOT an outright rejection, but highlights oversight and stewardship roles as the Government’s contribution to the system. Further investment is not categorically ruled out, but we suspect it will be more targeted to matters such as supporting initiatives out of the transformation strategy rather than to the water service entities (WSE) themselves.
The Regional Representative Groups
The Government has agreed with the recommendations that the Bill sets out a minimum of 12 and a maximum of 14 members on the Regional Representative Groups (RRGs). Local authority appointees to the WSE must be either elected members, chief executives, or senior managers of a territorial authority. There is no provision for regional council representation.
With 50/50 co-governance that means that there will be six to seven local authority appointees of the RRG. The processes for board appointments will be set out in the WSE constitution. One obvious point to note is that in three of the four entities only a third of the local authorities will have direct representation on the RRG.
RRGs may appoint regional advisory subgroups (termed sub-regional representative groups) as provided for in the WSE constitution. For example, Entity D might establish a South Canterbury sub-RRG or a West Coast RRG (or similar). The composition and number of these groups would be left for the constitutions to determine – beyond 50/50 membership.
We expect that most of the RRGs will take up the option to establish sub-RRGs, at least initially. It appears that much will depend on the effectiveness of these sub-RRGs in representing and advocating for the needs of local communities to the RRG proper.
Although the legislation appears to specifically provide for regionally based groupings, it appears other types of committees could be set up if the constitution enables it. For example, an RRG with a particular concern about stormwater matters might establish a stormwater committee.
Legislation does not preclude the RRGs from inviting a non-voting representative or representatives from central government.
All decisions are to be taken on a consensus basis, with provision for a 75 per cent majority after a period of time.
Role and powers of RRGs
This is one of the areas where there has been most significant change from the exposure draft of the Bill.
First, and perhaps most importantly, announcements before the establishment of the Governance Group made it clear that the Government was abandoning the notion of an independent Board appointment committee. Appointments to the WSE Board will be made by a committee drawn from the RRG, membership, to an agreed appointment policy (and a set of skills set in legislation – with any additions the RRG deems appropriate).
Further, the Bill will clarify that the WSE boards are directly accountable to the RRG for performance of the duties imposed on the Entity Board and permitting the RRG to remove Board members for failing to carry out these duties. Taken together these two decisions greatly strengthen the RRG’s hand in ‘hiring and firing’ Board members.
Second, the Board will be required to give effect to the Statement of Strategic and Performance Expectations (SSPE) issued by the RRG which provides more direct influence for the RRG over the WSEs’ strategic direction and priorities (but without dictating its day-to-day operations). Broadly speaking the SSPE is the equivalent of a Statement of Intent for a CCO.
The Government has agreed to recommendations that the RRG would also be given a further three levers to influence entity direction:
- the power of approval over entity statements of intent – this goes beyond the ability to comment on a draft. This gives the RRG power to not only set the strategic direction for the entity, but also gives the RRG right of approval over how the Board interprets this at a strategic level. This is stronger than the equivalent requirement for CCOs;
- the right to be consulted in the WSE’s development of its investment priority methodologies (this does not come with the right of final approval, but the Bill and the above recommendations provide mechanisms for resolving issues);
- the power to comment on water entities' operational direction in the Asset Management Plan and other key documents – again stronger than the equivalent provisions for CCOs.
The above levers are intended to operate at the strategic, rather than the operational level. They provide a greater level of strategic control than is the case with CCOs under the Local Government Act 2002.
Taken together, these changes appear to enhance the responsiveness of the WSE to communities provided the tools are used effectively. Again, the above are stronger than those available to manage CCOs under the Local Government Act. Taituarā will be working on offerings to help acquire skills in influencing without direct authority for its members and suggesting LGNZ does the same with the Equip offering for elected members.
The constitutions will be all important to the ongoing governance of the WSE. The Government is preparing a model constitution. This may be amended with Ministerial approval. We encourage all councils, to get involved in the development of these documents, regardless of their stance on the reforms.
Boards of RRGs will be appointed on a partnership basis, with 50 per cent appointed by local authority owners and 50 per cent appointed by Māori. The latter will be appointed on a tikanga basis reflecting whakapapa affiliations through waka groupings. Given Entity D reflects the takiwā of Ngāi Tahu, it appears appointments there will be made on a tikanga basis reflecting hapū groupings. The partnership principle will also extend to appointments to any sub-regional RRG.
RRGs will be required to appoint co-chairs, one from amongst the local government appointees and one from mana whenua. This is the basis on which many such arrangements in other spheres operate.
At several points in the announcement Ministers noted that the co-governance arrangements applied only to the RRGs, with Minister Robertson adding Māori had not sought to have co-governance extended to what he termed “the operational level”. Appointments to WSE boards will be made on a skills basis, subject to the RRG’s appointments policy and the criteria set out in the Act. Two of the skills that a WSE Board must possess are the principles of Te Tiriti o Waitangi and the perspectives of mana whenua, mātauranga, tikanga, and te ao Māori. 
The Government has accepted the Group’s recommendation that public ownership be strengthened by providing councils with a form of shareholding. Every territorial authority receives one share per 50,000 population (rounded up i.e. every council receives at least one share). Shares cannot be sold or transferred for any reason.
The shares do not carry any rights to any share of the assets or revenues of the water entities, nor carry voting rights at any meeting of the RRG in and of themselves. This is one of the main means by which the model demonstrates balance sheet separation. The only right attached to the shareholding is the right to vote on a proposal to divest.
The Government’s commitment to the retention of water assets in public ownership is further demonstrated by the steps that would have to happen for divestment:
the owners would have to vote unanimously for the divestment and the proposal would go to a poll, requiring a 75 per cent vote in favour to succeed.
And speaking of privatisation, the Government has accepted the Group’s recommendation that these provisions be entrenched in legislation. This means amendments to these provisions would require the consent of 75 per cent of MPs. This is the strongest constitutional step a Parliament could ever take to bind a future Parliament.
Entrenchment is an exceptionally rare step – as far as we are aware entrenchment has been afforded only to certain provisions in the Electoral Act 1993. Entrenching the provision in legislation itself requires the support of 75 per cent of the House – in practical terms that means the current Opposition would need to consent to entrenching these clauses.
The Government accepted that reforms as significant as these should come with a review. The Government proposes a two-stage review process with:
- an interim review of the WSE governance reforms within five years of the WSE establishment of the entities (i.e. 1 July 2029). and
- a comprehensive review of the entities by 1 July 2034.
What Happens Next ?
We understand that the testing of the model with rating agencies has not so far been completed. Bringing those discussions to a conclusion would be the first priority. (Though we would expect that the Government would not have made an announcement if there was any real prospect that the agencies would conclude balance sheet separation has not been achieved).
Our understanding is that the Bill is currently scheduled for introduction to the House in late May or early June. This timing strongly suggests that submissions will likely be required around the start of the official election period in mid-July.
In May, the Government will also be considering policy proposals around matters such as rural water supplies, economic and consumer protection regulation, the 2024 Long-term Plan and the more detailed powers and duties of the entities. These will go into a second Bill. At the present rate of progress we expect that to occur in September or October.
 See clause 48 of the exposure draft of the Water Services Entities Bill for details on these and other skill collectively expected of WSE Boards.