The Local Government Act 2002 Amendment Bill – is it privatisation by stealth? Despite more than fifty clauses in the Local Government Act 2002 Amendment Bill which reduce the time councils spend consulting with people, it’s interesting that one proposal, to allow councils to extend contracts with the private sector for water services from 15 to 35 years, has caught the public’s eye.
The intent of the change is, according to the Bill, to give councils greater flexibility in how they construct and deliver water services, particularly in the use of public private partnerships of the “build, operate and transfer” type. These are schemes where a private sector entity puts up the capital, builds the scheme and operates it for a period before transferring it back to the councils. In some cases capital is provided by the public sector agency.
To understand the significance of the change some history might help. Most public water schemes are owned and operated by local authorities, their legal authority being drawn from the Local Government Act 2002. This legislation limits contracts with the private sector to 15 years or less. It requires councils to maintain control of policy, pricing and the management of water services. Water services involve the delivery and treatment of drinking water and waste water.
These provisions basically prevent public private partnerships of the build, operate and transfer type. It wasn’t always so. Prior to the LGA 2002 councils had considerably more discretion about the way they organised their water businesses. In fact the previous legislation, the very outdated LGA 1974, was silent on the subject. Not surprisingly, councils began to experiment, particularly in the 90’s.
Papakura District Council is an example. It entered into a franchise agreement for the operation of its water and waste water services. It’s argument was the franchise would transfer risk to a third party, improve the condition of existing assets and draw on international expertise. This approach proved to be controversial and a report by the Auditor General was critical, particularly of the agreement which was seen to inadequately document the franchisee’s obligations.
Wellington City Council took a different approach with its two waste water treatment plants. These were constructed under a design, build, operate, transfer contract that was let to British company Anglian Water International in 1995. In this model the council provided the capital but design, construction and management was left to Anglian water.
While Wellington City Council employed consultants and project managers to assist with the process a consortium built the plants at a cost of $150 million. At the time the council considered the scale of the project needed overseas expertise in order to get the best advice on wastewater-treatment technology for Wellington’s circumstances. The ability to use private sector expertise was the game breaker, according to the city’s former chief executive at the time.
The council is generally happy with the result. There are 10 years left to run on this contract. After that the plant will be transferred back to the council with an operational life of another 25 years. At this point the council will need to decide if a further contract should be let or run the treatment plants with its own staff.
The LGA 2002 put an end to these sorts of initiatives. It limited the length of contracts to 15 years, a period that was not long enough for private sector firms to recoup investments. It also made franchise agreements impossible. While councils could still use private sector skill and expertise, they were required to continue to control pricing, management and policy.
The Wellington model has not been replicated. It’s not clear whether this reflects a general lack of interest or the LGA 2002, although the Act’s requirement that councils control the management of water services could be read as a critical disincentive.
So how does the Amendment Bill change this? Essentially it does this in two ways. It extends the contracting period to 35 years and removes the requirement that councils control the management of water services. Treasury’s regulatory impact statement suggest the changes are necessary to give councils greater options in meeting forecast infrastructural challenges and that this option might be most attractive to some larger urban authorities. The case is not yet made.
While we might see fresh interest in models similar to Wellington City’s, it’s difficult to see much interest in private financing initiatives, as councils are able to borrow more cheaply than the private sector. Public private partnerships where the private sector supplies the capital are potentially attractive to highly indebted councils, those unable to increase their borrowing. Given most councils have rather low levels of debt I think this factor is unlikely to be a driver.
While it’s desirable to provide councils with greater flexibility when addressing major investment decisions, councillors are likely to be very wary of making long term commitments unless there are clear public benefits.
Mike Reid
Governance Manager, Local Government New Zealand
