This story was originally published on February 19 2021.
UPDATE: Since the story was written, the Government’s Three Waters reform has been introduced, intended to resolve some of the issues around chronic historical underinvestment in water assets by many of the country’s councils. The plan is to merge water assets into four new regional water authorities focussing solely on providing good drinking water, wastewater and stormwater systems. But Three Waters has its own story of chaos. And meanwhile, the original problems are far from solved. Read on…
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Wellington’s water woes were utterly predictable, if only we’d listened to the accountants
Water chaos in the capital: a geyser in Aro Street; a sinkhole in Jervois Quay; sewage around Victoria St; residents without water in Karori after a burst water main, sewage overflowing into the harbour. Oh, and that’s just the past month.
If it’s chaotic on the surface, it’s far worse underground. Between 20 percent and 30 percent of Wellington’s 2500 or so kilometres of water and wastewater pipes have already passed their use-by date, according to a 2020 Mayoral Taskforce report. They are cracking, bursting and breaking.
Wellingtonians are paying for big failures from their council around depreciation.
Should councils be required to ringfence funds set aside from depreciation to cover maintenance of critical infrastructure? Click here to comment.
Bear with me: Depreciation may sound like a boring spreadsheet thing. Actually it’s critical to what’s happening in Wellington – and likely other parts of the country. Because depreciation is about how you deal with assets which will get old and need replacing.
Like water and sewage pipes.
Wellington City Councillors knew all about depreciation. For 30 years, they collected money from ratepayers to cover depreciation of their water pipes. They recorded that money on their balance sheet, as they have had to by law ever since 1996.
And then they spent up to 50 percent of that money on something else. They took the money, but they didn’t spend it on water and wastewater pipes.
To understand the chart above, you need to know that, in theory, councils should spend 100 percent of the water asset depreciation-related funding they raise to maintain service levels on their networks. Water New Zealand figures above show in 2019 the Council was far from achieving that – spending half, or less than half for all three lots of water asset – drinking water supply (36 percent), wastewater (51 percent) and storm water (44 percent).
In 2018 the range was 38-85 percent, and under-funding has been going on for decades.
Which meant instead of the quality of Wellington’s network of water pipes being maintained, slowly but surely it deteriorated. With disastrous, but not totally unexpected consequences.
Pernicious bookwork
Depreciation is tricky. A shiny new pipe doesn’t need any repairs in year one, or year two, or probably even in year 30 or 40. It’ll likely not need replacing for 50-70 years.
Yet most councils depreciate their assets on what’s called a straight line basis – a little bit every year.
A lot of New Zealand’s water assets date from the post-war boom of the 1950s, when there was money in Government coffers for growth and for upgrading our infrastructure. Thousands of kilometres of pipes were laid to bring clean water to people’s homes and take dirty water and sewage away.
The 50-70 year life of a pipe isn’t set in stone – some might last longer, some might fail faster, depending on things like the type of pipe, ground conditions, weather, and how good a job the original pipe layers did. But without detailed information about each pipe, that 50-70 year estimate was all the accountants had; the best guess was the 1950s pipes would start failing from the early 2000s.
Central government boffins started to worry and from the mid-1990s Parliament passed a variety of amendments to local government legislation to force councils to be prudent around asset renewal. In the simplest possible terms, government told councils that revenue they brought in each year had to cover the operating costs – including depreciation of council assets.
It was a good plan which might well have worked in terms of avoiding geysers, sinkholes and sewage overflows if councils had actually used the water pipe depreciation money for water pipe renewal.
But they didn’t. Because local government coffers are stretched and officials are human.
Pipes are just so … invisible
Wellington alone has 2500 or so kilometres of water pipes. They are underground and therefore invisible. Until recently, when fancy camera equipment has made it possible to examine bits of pipe underground, it’s been almost impossible to know what state individual pipes are in. It’s still difficult, labour-intensive and expensive.
And councils have lots of other things to spend ratepayer money on. Urgent things. Visible things.
Things people can see need replacing, like potholed roads and rusty swings. And things ratepayers love, like parks and community events.
I can imagine councillors around the table discussing budgets. Faced with a choice of spending money on a dilapidated playground or on checking the condition of a water pipe that may be (probably is?) absolutely fine, it must be easy for councillors to choose the playground.
And given the fact pipe timelines are such an inexact science, it’s must also be easy to ignore the water engineers’ warnings that pipes are getting old and are at risk of cracking or breaking, and money needs to be spent urgently to avoid them failing.
How do they know? They don’t.
Councils all over the country have opted to defer spending on water infrastructure in their three-yearly long term plans.
‘Those pipes will be fine. We’ll renew them next time.’
And then three years later they decide to defer them again.
It gets councils out of a spending hole and means better services for existing ratepayers.
But it’s also unfair. Existing ratepayers are not only getting the benefits of their water pipes; they are also benefitting from the non-water-renewal things the council is spending some of the water asset depreciation funding on. Parks or roads or whatever.
Which means their kids or grandkids will have to pay for new water pipes when they the old ones fail.
There are words for this sort of strategy. “Sweating the assets” or “Run to failure” – saving money by replacing assets only when they actually stop working. When water doesn’t arrive in your tap, or sewage flows regularly into the harbour.
“Sometimes it has been difficult to make the case to councils for spending as much as is required to build a resilient network,” says Water NZ’s Gillian Blythe.
“It’s only when you start to get problems that are more visible do you get councils to reconsider their prioritisation of their budget in the long term plan.
Which is what has happened in Wellington.
“The network is aging and deteriorating, leading to increases in pipe breakages and increasing water loss and wastewater leakage,” Wellington Mayor Andy Foster says.
“The scale of the financial challenge is very significant.”
“We will be tagging the depreciation to the renewals. What we collect for water, we will ring fence for water.”
– Wellington Mayor Andy Foster
Foster is promising the city’s stance on depreciating its water assets will change. He presented his first ten-year Long Term Plan to councillors last week, with water infrastructure at the top of the list of funding priorities.
“A key thing in the long term plan is fully funding renewals,” he told Newsroom. “We will be tagging the depreciation to the renewals. What we collect for water, we will ring fence for water.”
It’s essential, but it’s going to be very expensive.
“Achieving the desired level of performance will require a daunting sum of money over the next 20-30 years,” says the Mayoral Taskforce report.
And it’s ratepayers who will pay for that – not once, but twice. First for the backlog of renewals, but also because using 100 percent of water asset depreciation funding on those water assets will leaves a big hole in the city’s budget.
Wellington’s water assets are worth $3.86 billion, so that’s a lot of depreciation revenue no longer going into the city’s general coffers.
“Data presented to the taskforce showed renewals have typically been $10-20 million per year less than the depreciation revenues, or only 50-60 percent of what is required for investment to keep pace with asset depreciation,” the Mayoral Taskforce found.
“Collectively this adds up to hundreds of millions of dollars of under-investment.”
Or put another way, millions of dollars for the council to find – just to fund what it used to pay for from depreciation money.
They should have listened to their accountants.
