Hamilton City and Waikato District are transitioning their water services (drinking water, wastewater, stormwater) to a new, jointly owned Council Controlled Organisation (CCO) called IAWAI - Flowing Waters. IAWAI will deliver water services across all of Hamilton City and Waikato District, and is a response to the central government's 'Local Water Done Well' plan "to address New Zealand’s long-standing water infrastructure challenges". What are likely to be some of the consequences of the merging of water services across Hamilton and Waikato?
Interestingly, this recent article by Mehdi Guelmamen, Serge Garcia (both University of Lorraine), and Alexandre Mayol (University of Lille), published in the journal International Review of Law and Economics (open access), may provide us with some idea. They look at inter-municipal cooperation in the provision of drinking water in France. France provides an interesting case study because:
With roughly 12,000 water services—90 % serving populations under 10,000—and over 70 % managed by individual municipalities acting independently, there is substantial heterogeneity in governance arrangements.
That is similar in spirit to our situation. Although Hamilton City (population around 192,000) and Waikato District (population around 86,000) are substantially larger than the municipalities in Guelmamen et al.'s sample, Waikato District is made up of many communities with their own separate water infrastructure (Huntly, Ngāruawāhia, Raglan, Pōkeno, Te Kauwhata, and others). Those many communities, aggregated into a single water entity, mimics the French context.
Guelmamen et al. investigate the determinants of inter-municipal cooperation (IMC) in drinking water supply, as well as how IMC affects pricing of drinking water, water quality, and scarcity of water, using data from 10,000 water services operations over the period from 2008 to 2021. Their analysis involves a two-step approach, where they first look at the associations with pricing, and then look at how the services are organised, conditional on the prices. They find that public water services are more likely to cooperate than privatised services, but of more interest to me, they also found that:
First, IMC does not necessarily lead to lower water prices; on the contrary, water prices are often higher under IMC, reflecting additional transaction costs and the financing of investments enabled or encouraged by cooperative arrangements... Third, while IMC generally improves network performance—as evidenced by lower loss rates—the quality improvements are more pronounced in some institutional forms (e.g., communities rather than syndicates).
That first finding arises in spite of an expectation of economies of scale from larger water services operations. Guelmamen et al. explain this as follows:
First, cooperation often involves additional administrative costs due to the need for inter-municipal coordination, governance structures and compliance with multi-party agreements. Second, the larger scale management facilitated by IMC may lead to increased investment in infrastructure, which, while beneficial in the long run, increases short-term costs that are passed on to consumers...
So, even though there may be economies of scale in terms of water provision, these were more than offset by coordination and governance costs, and investment in higher quality water services. In their estimates, this showed up in a combination of three effects. First, there was a negative (and convex) relationship between network size and price (representing economies of scale, as bigger networks have lower average costs, but the cost savings from bigger networks get smaller as network size gets bigger). Second, there was a negative (but concave) relationship between the number of municipalities in the IMC and price (again representing economics of scale, but in this case they become less negative as more municipalities are included). Third, there was a positive relationship between population size and price. The combination of those three effects is that larger IMCs, particularly those that involve more municipalities, have higher, rather than lower prices.
The greater investment in higher quality water services is supported by their third finding above, which shows that IMCs have better network performance (less water is lost). IMCs also had higher quality water, measured as fewer breaches of microbiological and physico-chemical water standards).
What does this tell us for Hamilton and Waikato? Obviously, the context is different, but many of the elements (such as combining multiple municipal water services suppliers into one, and potential economics of scale) are the same. Moreover, Waikato District already has many small water services combined into a single entity, which is not dissimilar to the situation in France. So, if we take these French results at face value, then the risk is that the price of water will go up. Hamilton and Waikato don't currently have water meters, so the unit price of water will remain zero (which in itself may be a problem, because it incentives overuse of water). Instead, water is charged as a fixed charge in annual property rates. The higher price of water will need to be covered by a higher annual fixed charge within the rates bills in Hamilton and Waikato. On the other hand, the quality of drinking water may increase, and drinking water provision may be more sustainable due to higher investment spending. And, of course, a more sustainable provision of water services is what the central government's plan was intended to achieve.
How will we know if the creation of IAWAI is a good thing? Earlier indicators will be decreases in total administration and overhead costs, increases in capital expenditure (both for new construction and for maintenance), and improvements in water quality.
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