Transitional Provisions For And Controls Over Councils

As interested parties continue to dissect the Water Services Entities Bill (the Bill) that was introduced in June of this year, questions still remain around much of the detail lacking in this first Bill.

The Bill outlines how the four Water Service Entities (Entities) will be established, governed, operated and regulated.  The Department of Internal Affairs (DIA) has indicated further legislation will be introduced later this year that is expected to provide for the transfer of assets, liabilities, and other matters from local authorities to new Entities.  In our recent article we questioned what this will look like in practice, and what the effect will be on the local authority and community left behind.

This leads us to further consider the impact on our councils, and more specifically, what are the transitional provisions for, and controls over councils?

The transition of contracts

The Bill proposes councils remain responsible for the delivery of the three waters services until the establishment date of the Bill on 1 July 2024.  From that point, the four Entities will manage drinking water, wastewater and stormwater services.  What isn't clear is the details as to the transition of existing contracts from councils to the Entities.

On a day-to-day basis councils must carry on in their role and are required to make long-term decisions regarding infrastructure contracts for the much-needed upgrades to water services.

However, following the establishment of an Entity, the chief executives of each Entity will prepare an allocation schedule setting out relevant contracts of councils that relate to water services.  The schedule may specify contracts that the chief executive thinks should not transfer to the Entity.  The Bill is currently lacking detail as to any criteria the Entity must consider when determining what contracts should not transfer to the Entity.

What happens to those contracts that are not transferred to the Entity?  Or, perhaps more importantly, if an Entity refused to take on a contract, where would this leave the relevant council?

What restrictions are placed on councils' decision-making during the transition period?

The Bill sets out the oversight powers of DIA (via a National Transition Unit, NTU) during the establishment period (the period between royal assent of the Bill and 1 July 2024).

During the establishment period, councils must notify certain decisions relating to water services to DIA and, the chief executive of DIA can refuse to confirm any "significant" decisions.  A significant decision is one that may prejudice the reform, constrain the powers or capacity of the Entities following the reform, or have a significant negative impact on matters transferred to the Entities as a result of the reform.

There is little detail as to how these oversight powers might play out in practice.  Councils should therefore be very careful to keep DIA informed, and seek approval as necessary, in relation to significant decisions.  If there is any doubt as to whether a decision is significant it would be prudent to check the position with the DIA.

Uncertainty is a risky business

The NTU has stated it intends to carry out 'discovery' of key three waters construction contracts and deliver "Transition Guidelines for alignment / extension of Three Waters Contracts" in quarter three of 2022.  Will this provide the answers that councils need to provide certainty of future work programmes?

Councils should consider the commercial risk, and the potential liability to councils, if the Entity did not take assignment of contracts that extend post establishment of the Entities.  Councils could look to mitigate this risk by structuring contracts so that the council has an 'off-ramp' for any obligations that extend beyond 30 June 2024.

It is unclear at this stage how contracts that are partly for water services and partly for other local government matters would be split and transferred to the Entity.  We expect this will need detailed consideration and may well have significant commercial impact on councils.

Will the answers be revealed?

The Three Waters reform is certainly a developing area with much of the detail yet to be provided.  We anticipate further detail will be included in the Transition Guidelines, the Bill following the select committee process, and the second Water Services Entities Bill (to be introduced later this year).