Faulty assumptions and flawed analysis

Published on 03 September 2021

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Government claims of cost-savings for New Zealanders through proposed water reforms have been debunked in a new report by global economic consultants.

Commissioned by Whangarei District Council, the report from consultants Castalia discredits the underlying premise of the Government’s case for water reform. It refutes proposed efficiencies of amalgamation and predictions of massive price increases if water assets remain with councils.

Whangārei Mayor Sheryl Mai says the report findings are of national significance.

“The report shows the so-called savings promoted by Government are unlikely to occur, which means the reforms are likely to produce poorer outcomes for most New Zealanders,” says Mayor Mai.

The Government has been promoting the amalgamation of Council-run water, wastewater and stormwater services as part of its Three Waters Reform Programme, in line with its push for greater centralisation of public services like health, planning and polytechnics.

The Government has provisionally offered Whangarei District Council around $133m to surrender control of its water assets, which have a replacement cost of $1.2 billion. 

Mayor Mai described the sum offered by the Government as derisory given that much of this money will come out of future water bills levied by the proposed new entities.

The Government’s amalgamation proposals are based on work done by the Water Industry Commission of Scotland (WICS).

The WICS three waters reform proposals are discredited by the Castalia report:

“The WICS modelling approach uses a number of key discretionary assumptions that are highly favourable for the Reform Scenario and highly unfavourable for the Opt-Out Scenario. With such assumptions, it was inevitable that WICS modelling would reach the conclusions that it did.”

Mayor Mai said the report confirms that Whangarei District Council was 100% right to opt out provisionally of the reforms at this stage.

“We’re calling on the government to taihoa on the amalgamation components of the reforms and work directly with Councils as the owners of the waters assets to develop a fit-for-purpose system once the new water regulator, water services bill and water standards are in place.

“While we can all agree we need to protect our water for all New Zealanders; any change needs to be based on facts, not a deeply flawed ideology,” said Mayor Mai.

The Castalia report is available here:

Three Waters Reform

Summary of the Castalia Report

  • The Castalia Report shows that the massive investment Water Industry Commission of Scotland (WICS) say NZ needs to bring its waters up to scratch is overstated. 
  • Likewise, the capex cost savings that WICS claim from the amalgamated entities are not grounded in any actual evidence.
  • WICS estimate of opex efficiency is implausible because WDC already has comparable opex to Watercare.  Furthermore, the government and LGNZ representatives have assured councils that no jobs will be lost in the water sector. Given the profile of WDC’s opex (mostly power, labour and outsourced services), it seems unlikely that significant further savings are possible.
  • WICS “selectively and mechanistically” applies a model based on Scotland.
  • The Opt-Out scenario, as modelled by WICS, likely overstates WDC’s costs.
  • WICS’ modelling makes implausible assumptions about the efficiency in the Reform Scenario.
  • This report has shown that the Reform Scenario is founded on unsound evidence and faulty analysis.
  • The promised benefits of reform are unlikely to materialise. There are risks to the Whangārei community from losing control of water services, and accountability of those tasked with governance to local customers.
  • The WICS flaws are likely to apply to many councils, since the WICS analysis has consistent faults that apply to all local authorities.
  • Castalia also calculated the capital investment attributable to WDC in Entity A using WICS’ model and find that it is remarkably similar to WDC’s own investment plans.
  • The efficiency estimates are highly implausible.
  • Castalia has previously advised DIA, LGNZ and the Joint Steering Committee that the economies of scale claimed in WICS’ 2020 slidedecks from administrative amalgamations were implausible.
  • Economies of scale estimate is based on non-credible evidence.
  • The peer reviewer of the WICS data seems to agree with Castalia. FarrierSwier  state “significant care should be taken when relying on the capital efficiency gaps estimated by WICS. This is particularly important, given the significant step up in investment forecast for the 30-year period and the role that the capex efficiency assumption plays when estimating benefits from amalgamation and associated reform.”
  • WICS’ modelling approach uses a number of key discretionary assumptions that are highly favourable for the Reform Scenario and highly unfavourable for the Opt-Out Scenario. With such assumptions, it was inevitable that WICS modelling would reach the conclusions that it did.

In the Reform Scenario, Water Industry Commission of Scotland (WICS) has only included the large investment requirements after 2031. Yet, in the Opt-Out Scenario, WICS included the large investment requirements from 2021.

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