Nick Davis and Sarah Baddeley, both Partners at MartinJenkins, continue their series of articles on implementing Local Water Done Well. Councils have developed their water services delivery plans, and some of these already have government approval. Nick and Sarah explore the critical elements councils need to address next as they prepare to establish financially sustainable water services organisations or in-house delivery units.
For New Zealand councils, government approval of their water services delivery plans (WSDPs) marks a pivotal moment in the Local Water Done Well journey. Attention is now shifting from planning to implementing – and the stakes are still high.
The transition from council-delivered water services to new organisational models is about establishing entities that can deliver reliable, affordable water services for generations to come while also navigating increasingly complex financial and regulatory terrain.
Based on our experience supporting councils through this transition, we’ve identified three critical areas that councils must get right as they move from approved delivery plans to operational water services organisations.
1. Building financial foundations that enable success
The financial sustainability requirements under Local Water Done Well aren't just regulatory hurdles – they're fundamental to whether new water services organisations can deliver on their promises to communities. Many councils are discovering that achieving real financial sustainability will require more than simply meeting all the statutory requirements by the 30 June 2028 deadline.
Understanding the full financial picture
MartinJenkins' recent two-part report to Local Government New Zealand on financial sustainability noted that investment in water infrastructure has increased markedly over successive Long-Term Plans. Planned water investment in the 2024 LTPs show significant growth compared to previous cycles, and this trend is set to continue as WSDPs typically project even higher capital expenditure than councils' current plans.
This is an emerging pattern across the country as councils grapple with the true cost of maintaining and upgrading aging infrastructure while meeting new regulatory standards.
Balancing investment with affordability
The challenge isn't just about finding the money for necessary investment – it's about doing this while also keeping services affordable for communities. New water services organisations will need to navigate the tension between:
- meeting regulatory requirements for water quality and environmental standards
- addressing decades of underinvestment in infrastructure
- keeping water charges at levels communities can afford, and
- maintaining intergenerational fairness in funding decisions that meet the expectations of the emerging economic regulatory regime.
For some councils, the process of putting together a water services delivery plan has revealed just how much they may need to respond to growth pressures. Looking forward, the adage “Growth pays for growth” will be critical: achieving more equitable funding and financing means reconsidering the balance of revenues, just as Watercare has had to do.
Councils working together in setting up stand-alone water service organisations will also have the opportunity to shape newer, leaner structures that share common support systems and resources with their shareholding councils, and so reduce duplication and minimise costs.
Longer term, councils with new entities will also be able to build mechanisms for discipline on financial sustainability, not just when they’re established but throughout the organisation's life. This includes developing sophisticated financial models that can adapt to changing circumstances and clearly communicate trade-offs to governance bodies, communities, and regulators.
Leveraging new financing opportunities
One advantage of the new delivery models is access to higher borrowing limits through the Local Government Funding Agency. Watercare's experience after financially separating from Auckland Council is instructive: it has been able to increase its borrowing capacity by approximately $3.5 billion compared to pre-separation projections.
However, in the establishment phase it will also be important to ensure the new organisations have solid treasury management policies, clear strategies for managing debt, and strong governance oversight of financial decisions.
2. Managing the broader financial implications for the council and its other activities
Much attention has focussed on the financial sustainability of new water services organisations, but councils must now address the equally critical question: what happens to the rest of the council when water services separate? The financial implications for some councils are going to be significant and will need immediate attention.
Understanding the impact on council overheads
For some councils, separating out water services creates a fundamental challenge for the council’s overhead structures.
Water services typically contribute from 30% to 40% of councils' total revenue, and carry a proportionate share of corporate overheads – everything from CEO and governance costs to IT systems, HR support, and finance functions. When water services separate, these fixed costs don't disappear: they must be redistributed across remaining council activities and the structure of those other services may need to be adjusted.
Depending on the particular council and its plans for water services, there may also be potential to transition or enter into new shared-service arrangements.
Our analysis shows that some councils will face a 15% to 25% increase in overhead allocation to their remaining activities. For a medium-sized council, this could mean millions of dollars in additional costs that it will have to recover through rates or fees.
Councils need to think about:
- reviewing their overhead allocation in detail so they understand their current cost distributions
- modelling the impact of water separation on their remaining activities
- identifying opportunities to reduce corporate costs including through new target operating models or delivery arrangements, and
- developing transition plans to minimise disruption to their other services.
Reviewing fees, charges, and rating structures
The separation of water services may also require a more comprehensive rating review that fundamentally reassesses the council’s funding model.
This review could encompass the following areas:
- Third-party fees and charges – For some councils their regulatory and user fees may not have been reviewed for years, and the council may be significantly under-recovering costs.
- Development contributions – The method of calculating development contributions will need to be updated to reflect the new arrangements and to ensure growth continues to pay its fair share across both water and non-water infrastructure.
- General rates requirements – With water services no longer available to share overheads and potentially no longer contributing to general council reserves, general rates may need to be adjusted to meet service levels in areas like roading, parks, and community facilities.
Preparing communities for the financial reality
Perhaps the most difficult aspect will be communicating these changes well to their communities.
Ratepayers will also be expecting to see their general rates fall as ring-fenced water charges take over. At the same time, some councils have become excited at the prospect of having more debt capacity on their remaining balance sheet. Councils will need to support discussions about those issues with their communities, including whether some of the choices for councils will need to be factored into Annual Plans and revised Long-Term Plans.
Councils will need to explain:
- why separation is necessary for sustainable water services in the long term
- how it’s managing overhead costs through the transition
- what the council is doing to minimise the impact on ratepayers, and
- the true cost of delivering council services without cross-subsidisation from water services.
This clear communication and transparency will be essential for maintaining the trust of the community through what will be a challenging transition period.
3. Creating operational readiness from Day 1
The transition to new water services organisations will be one of the most complicated operational changes many councils have faced. Success will depend on paying careful attention to the nuts and bolts of operational delivery while building the foundations for long-term excellence.
Getting good governance in place
Without strong governance, even the best-designed water services organisations risk falling into short-term decision making that undermines their fundamental purpose of delivering safe, reliable water services for generations to come.
Governance needs to be underpinned by directors who have expertise in infrastructure and utility management, financial sustainability, and regulatory compliance. This will provide the strategic oversight and accountability essential for these organisations to make complex trade-offs between investment and affordability.
Some councils have also identified competency in and understanding of te ao Māori and Treaty-related issues as essential for directors to provide good governance given the significance of water to iwi and hapū.
Governance boards will need to combine sector-specific knowledge with strong commercial acumen and the ability to balance stakeholders’ interests while keeping a focus on long-term sustainability.
Managing the workforce transition
Uncertainty during times of transition often leads to loss of critical expertise precisely when it's needed most. Local government can’t afford to lose its experienced water professionals during this transition.
Councils will need to:
- provide early clarity on employment arrangements and transition provisions
- consider retention strategies for key staff during the transition (particularly if your council isn’t an early mover)
- plan for transferring knowledge from council staff to the new organisation’s people
- address concerns about career progression and job security, and
- build capability in areas where new expertise is needed.
Clear communication, fair treatment, and genuine engagement with affected staff aren’t just good practice – they're essential for maintaining service delivery. This includes being transparent about how the transition will affect not just water services staff, but also other staff who could be affected by the change.
Ensuring service continuity
Organisational structures may change, but communities still need reliable water services every day. The transition must be seamless from the customer’s perspective.
New organisations in the establishment phase need to:
- establish clear transition plans that maintain service levels throughout the change process
- develop contingency arrangements for critical functions
- ensure a smooth handover of operational responsibilities, with no gaps in accountability
- maintain strong relationships with contractors and suppliers who may be uncertain about future arrangements, and
- build resilience into systems to handle any unexpected challenges during the transition.
The organisations will need to have a plan for maintaining 24/7 response capabilities, ensuring billing systems continue to function, and keeping customer service standards high even as back-office functions are restructured.
Building organisational culture and capability
Perhaps most important, new water services organisations need to establish their own identity and culture from Day 1. This isn't just about logos and branding – it's about creating organisations with the capability and culture to deliver excellence over the long term.
First off, it means articulating a clear vision and purpose that resonates with staff and communities, and building pride in the organisation's role in public health and environmental protection.
It also means creating systems and processes that support excellence in service delivery, along with building a culture that fosters innovation and continuous improvement. A strong organisation will also develop strong relationships with communities, iwi and hapū, and stakeholders.
In our experience of establishing new public organisations this transition is really critical. There are different models of establishment that weight ease, speed, and disruption. Best practice, if it can be afforded, will be to enable the new organisation time and space to set itself up right.
New organisations should also prioritise building critical capabilities that may have been underinvested in previously, such as:
- asset-management expertise, to support long-term planning
- financial modelling capabilities, to support pricing and investment decisions
- regulatory compliance systems, to meet regulatory requirements
- customer engagement and communication functions, and
- data analytics, to drive performance improvement.
The organisations that succeed will be those that use the transition as an opportunity to build world-class capabilities rather than simply replicating existing council approaches.
Setting up for long-term success
The transition to new delivery models under Local Water Done Well is a once-in-a-generation opportunity to reset our water services in New Zealand. But this comes with risks if the transition isn't managed well.
To succeed, councils need to think broadly about the financial and operational implications – not just for water services but for all council operations. The decisions they make now about cost allocation, rating structures, and organisational design will drive the way they can respond to their communities into the future.
By focussing on the three critical areas we’ve discussed in this article – building strong financial foundations, managing the wider financial implications for councils, and creating operational readiness from Day 1 – councils can navigate this complex transition while maintaining community trust and service delivery. The path ahead is challenging, but with careful planning, transparent communication, and unwavering focus on long-term sustainability, the vision of excellent water services and resilient councils can become reality.
The communities of Aotearoa New Zealand are counting on councils to get this right. Now is the time for bold leadership, careful planning, and meticulous execution to ensure water services are sustainable for generations to come.
