Business Case For Water Services - Waikato District Council

Transcription

1 Business Case For Water Services - Waikato District Council Expanded Watercare Relationship Option Issue date: 5 June 2015

2 Table of Contents 1. ACKNOWLEDGEMENT Introduction Qualifications The Team EXECUTIVE SUMMARY Introduction and Key Recommendations Summary of Analysis INTRODUCTION Background to Report Business Case Scope and Approach CURRENT WDC DELIVERY MODEL Description WSL Relationship EWR OPTION In-house Business Unit WSL Cooperation FINANCIAL ANALYSIS Overview Methodology EWR Option Other Financial Comparisons of Options ENVIRONMENTAL, RESILIENCE AND ECONOMIC FACTORS Environmental & Regulatory Compliance Resilience Economic Impact RISK ANALYSIS...20 Business Case For Water Services EWR Option 5 June

3 9. IMPACT ON COUNCIL OPTIONS ASSESSMENT AND CONCLUSION Options Criteria Multi-Criteria Analysis Summary and Recommendation IMPLEMENTATION Timeline Project Governance Securing Benefits...25 APPENDIX 1: RISK EVALUATION...26 APPENDIX 2: OPTION ASSESSMENT...30 APPENDIX 3: CAPITAL WORKS SYNERGIES ASSESSMENT...37 Business Case For Water Services EWR Option 5 June

4 1. ACKNOWLEDGEMENT 1.1 Introduction Cranleigh, in partnership with Mott MacDonald and Martin Jenkins, was commissioned in November 2014 to undertake a study on behalf of Hamilton City Council, Waikato District Council and Waipa District Councils (Councils). The study was to determine how each Council should manage water, wastewater and stormwater services across the sub-region. Three options were to be investigated: retaining the status quo, boosting shared services and forming a council owned CCO. The results of that study were presented in a set of reports to the three Councils on 11 May Waikato District Council also commissioned Cranleigh to investigate a fourth option whereby WDC would seek to gain efficiencies by expanding their existing collaboration with Watercare Services Ltd. Mott MacDonald were also engaged to consider any capital expenditure synergies between WDC and WSL. The evaluation of this fourth option has been undertaken using the same methodologies as used for the other three options to allow a fair comparison. This report is designed to be read in conjunction with reports covering the other three options so as to avoid unnecessary duplication. In developing this report we have had the benefit of discussions with both Council officials and some elected members and WSL management. We would like to thank them for their substantial commitment of time and knowledge towards the project. 1.2 Qualifications We have not been asked to consider any form of privatisation of water services. We note that privatisation of water services is prohibited by the Local Government Act Consideration of water rights or the allocation of water is also outside the scope of the project. The possible cost savings identified in this report have been developed from initial discussions with WSL staff. Detailed commercial negotiations will be required to substantiate the final savings achievable. As a result the savings identified are considered conservative but should be regarded as indicative at this stage. 1.3 The Team Cranleigh Cranleigh is a leading Australasian advisory firm which has strong company valuation and commercial structuring skills. The firm also includes a specialist infrastructure advisory team. Cranleigh advise both public and private sector organisations to develop large scale infrastructure projects across multiple sectors. Water infrastructure has formed a core part of Cranleigh s practice and the firm has successfully completed water, waste and stormwater asset projects in both New Zealand and Australia. Mott MacDonald Mott MacDonald is a global management, engineering and development consultancy business that has 16,000 staff in 180 principal offices that provide local experts to 140 countries. Mott MacDonald has a specialist asset management advisory team working across multiple sectors internationally. With substantial water industry experience across many jurisdictions globally, Mott MacDonald provide strategic advice enabling organisations to manage their assets efficiently and effectively. Business Case For Water Services EWR Option 5 June

5 DEFINITIONS 2 Waters: Water and wastewater 3 Waters: Water, wastewater and stormwater. Also refers to 3 Waters Strategy produced by Hamilton, Waikato and Waipa Councils in Base Case: The most likely financial forecasts CCO scenario which uses conservative assumptions for opex and opex savings. BBC: Business Unit : Capex: CCO: Councils: Discount Rate: ESS: Better Business Case methodology developed by NZ Treasury NIU. A department or division within council which is run as a ring-fenced unit with responsibility for managing all its relevant revenues, expenses, assets and liabilities, but with support services continuing to be provided by council corporate services. Capital expenditure Council Controlled Organisation. An entity in which one or more local authorities control 50% or more of the voting rights or has the right to appoint 50% (or more) of the organisation s directors. This refers to Waikato and Waipa District Councils and Hamilton City Council. A percentage annual rate used to calculate the present value (PV) of cash flows which will occur in the future. For this business case a nominal (including inflation) rate of 8% per annum has been used. Enhanced Shared Services. An option where the Councils would pool most of their water teams in one unit to manage most water services for all three Councils. EWR: Expanded Watercare Relationship option otherwise know as option 4. Forum: The Waikato Mayoral Forum represents 11 local authorities in the Waikato Region Hamilton, Hauraki, Matamata-Piako, Otorohanga, South Waikato, Thames- Coromandel, Taupo, Waikato, Waipa, Waitomo, and Waikato Regional Council. Gearing: A measure of how indebted an organisation is, calculated here as debt divided by equity times 100. E.g. if you owned a house worth $500,000 and had a mortgage of $200,000 you would have a gearing ratio of 66.6% calculated as $200,000 ($500,000 - $200,000) X 100. FTEs: Full time equivalent staff members. LGA: Local Government Act 2002 LGC: LOS: Local Government Commission. The Commission is an independent statutory body whose main role is to make decisions on the structure and representation requirements of local government in New Zealand. Level of Service. In its 2007 publication Developing Levels of Service and Performance Measures, the National Asset Management Steering (NAMS) Group defines Levels of Service as the descriptions of the service output for a particular activity or service area against which performance may be measured. In broad terms it can be thought of as standards for service quality, delivery, reliability and resilience. LTP: Long-Term Plan. 10 year plans that councils are required to prepare and update every 3 years. Current plans are being produced (in draft form) for the period. NIP National Infrastructure Plan. A national, strategic infrastructure plan issued in 2011 covering five key areas Transport, Telecommunications, Energy, Water and Social. A NIU: 2015 NIP has been released for consultation. National Infrastructure Unit. A department within Treasury reporting to an independent National Infrastructure Board, which in turn reports to the Minister of Infrastructure. Nominal Dollars: A value expressed in monetary terms for a specific year or years, without adjusting for inflation. Business Case For Water Services EWR Option 5 June

6 Not-for-Profit: O&M: Opex: Options: Positive Case: PV: Real Dollars: SOI: Sub- Region: TLA: VFM: Vested Assets: WDC: WOL: WPDC: WSL: A not-for-profit organisation is one that does not earn profits for its owners. All of the money earned by or donated to a not-for-profit organisation is used in pursuing the organisation's objectives. Typically not-for-profit organisations are charities or other types of public service organisations. Note that a not-for-profit organisation may actually report a profit or income surplus in any given year so that it can raise funds for growth and investment to further benefit its objectives. Operations and maintenance. Operational expenditure the ongoing, routine costs incurred in managing an activity. It includes maintenance, loan servicing, depreciation and administration expenditure. The three options which are the subject of the Core Work business case plus the EWR Option i.e. Status Quo, ESS and CCO. A more optimistic financial forecasts CCO scenario which uses more optimistic assumptions for opex and opex savings than the Base Case. Present Value. Value today of a cash flow or series of cash flows that will occur at some future date or dates. It is calculated by applying a Discount Rate which takes into account of how risky or how likely it is that the cash flow will occur. Dollar amounts which have been adjusted for inflation. Statement of Intent. A key public document agreed between a CCO and its council shareholder/s describing the activities and intentions of a CCO for the year. It will typically include key performance indicators (KPIs) that the CCO is expected to meet. It also provides the basis of accountability for the CCO s performance. The sub-region refers to the three districts of Waikato, Waipa and Hamilton. Territorial Local Authorities Value for Money Assets that are transferred to a public entity at nominal or zero cost. Typically, this might result from a situation where a developer has installed assets as part of developing a site and passes them to a public entity to manage, maintain, and deliver services through. (Source: Audit NZ) Waikato District Council Whole of Life Waipa District Council Watercare Services Limited. A CCO 100% owned by Auckland Council. WSL provides water and wastewater services in the Auckland Council area. Business Case For Water Services EWR Option 5 June

7 2. EXECUTIVE SUMMARY 2.1 Introduction and Key Recommendations Introduction In 2014, Hamilton City, Waipa and Waikato District Councils agreed to co-fund a study looking at how best to manage water infrastructure across the sub-region in the future. Three options were considered: the status quo; enhancing shared services; and forming a ratepayer-owned CCO. This study is known as the Core Work The results of that study were presented in a business case to the three Councils on 11 May In addition, WDC wish to consider a fourth option based on expanding the existing collaboration with Watercare Services Ltd. This is known as the EWR Option or Option 4 and is the subject of this report. This report should be read in conjunction with the Core Work business case. Key Recommendations for Waikato District Council The three Councils should transfer their water and wastewater assets into a jointly owned notfor-profit CCO; The three Councils should retain ownership of their urban stormwater assets, but outsource management of those assets to the CCO on a cost recovery basis; and If it is not possible to proceed with the CCO option then Waikato District Council should establish its water activities as a business unit within Council and seek to leverage WSL services as described in this report. Key Benefits for Waikato District Council of the EWR Option over ESS and the Status Quo Exploits economies of scale by leveraging WSL s size and capabilities; Will be simple to implement; Assists with staff retention by offering a better organisational framework, better tools and opportunities for professional development; Low impact on Council with little in the way of stranded overheads; Better governance and simpler decision making than ESS; and Lower risk. 2.2 Summary of Analysis Current Relationship with WSL WDC has a strong ongoing relationship with WSL which includes a number of areas of cooperation including WSL already supplying water to Pokeno and removing wastewater from Pokeno and Tuakau. It is also planned to extend the service to provide water to Tuakau as well. The proposed arrangements under the EWR Option are simply incremental improvements to the existing relationship. EWR Option The model for enhanced cooperation with WSL was based on discussions and workshops held between WSL managers and Council officials. Features of the EWR Option are: Reestablishment of WDC s water department as a business unit within council with responsibility for all relevant revenues, expenses, assets and liabilities to create greater focus on water operations and management, better information leading to better founded decisions; Business Case For Water Services EWR Option 5 June

8 WDC would create economies of scale by using selected WSL systems, services and expertise; and No cross subsidisation between the parties i.e. all services are paid for. Financial Assessment The following table represents the total operating and capital expenditure savings that the EWR Option is expected to generate compared to the Status Quo. Total Cost Savings WDC First Ten Years 28 Years 2017/ /27 Opex Capex Total Opex Capex Total $m $m $m $m $m $m Base Case Positive Case This is an initial, high level assessment, but is felt to be conservative. Risk Assessment Risk evaluation was conducted with Council and WSL staff in March 2015 and results were refined as the structure of the option evolved. Based on the results of analysis the EWR Option was rated as a Medium to Low Risk. Conclusion & Recommendation Aspects of the BBC methodology were used in the analysis, including the use of multi-criteria analysis to fairly score non-quantitative factors in the decision process. Based on the total analysis Cranleigh assessed a combined multi-criteria score for each option. The results are shown below with the risk assessment and financial results. The financial results have been modified to show only the WDC elements so as to provide a direct comparison between the options. Decision Factor Status Quo ESS CCO EWR Multi Criteria Score 58% 60% 82% 68% Combined $ Savings (10 years) NA $5.6m $28.1m $5.8m Combined $ Savings (28 years) NA $20.6m $105.5m $20.7m Risk Rating Medium High Low Medium/ Low Overall Ranking Enhanced Shared Services has an overall ranking less that the Status Quo as possible financial benefits are offset by the risks. The risk/reward ratio does not justify a change from the Status Quo. The CCO is clearly the highest ranking option and therefore is recommended by Cranleigh as the preferred option. It meets all the agreed investment objectives well, is lower risk and offers substantial financial benefits. Should it not be possible to implement the CCO option then the EWR Option offers the next best balance of rewards and risks. Key advantages of the EWR Option include: Business Case For Water Services EWR Option 5 June

9 Offers worthwhile cost savings and improved performance at relatively low risk. Relativity easy implementation. Both the recommended improvements to the organisation of WDC s water department and further cooperation with WSL represent manageable, incremental change. Can be expanded over time, with agreement. Business Case For Water Services EWR Option 5 June

10 3. INTRODUCTION 3.1 Background to Report In 2014, the three Councils agreed to co-fund a study looking at a CCO, as well as two further options(this is referred to as the Core Work). The three options to be investigated were: Retaining the status quo with each council running its own operations; Boosting existing shared services into an enhanced shared services model (ESS) between the Councils; and Considering forming a council-owned CCO to run water services on behalf of all three Councils. The study was not asked to consider establishing a private water company because the privatisation of council-delivered water services is against the law in New Zealand. The results of that study were presented in a business case to the three Councils on 11 May In addition, WDC wish to consider a fourth option based on expanding the existing collaboration with Watercare Services Ltd. This is known as the EWR Option or Option 4. Strategic Context The overall strategic context for Council has been described in the three Council Core Work business case. The key drivers for change identified include population and economic growth; environmental and regulatory compliance and capital investment. These are all pressing issues for WDC. Waikato District Council and Watercare have an existing partnership as a result of the Auckland boundary changes in This relationship has grown and matured over time. 3.2 Business Case Scope and Approach Cranleigh was appointed in November 2014 to independently investigate the EWR Option in a way that would allow it to be directly compared to the three other options available to Council under the Core Work business case. The project scope was split into two stages: Stage 1: Initial Identification of Preferred Option Identify a shortlist of options; and Determine the preferred option following a workshop with Cranleigh on 29 January Stage 2: Evaluation of the Preferred Option The preferred option was further developed at a workshop on 5 March Following additional discussions with Watercare the structure of this option was modified to more closely align with both parties objectives. An additional workshop was held in May 2015 to refine the modified option structure. Having completed this workshop, Cranleigh was to: Further evaluate the preferred option; Undertake financial modelling of this option; Review potential organisational and governance arrangements; Undertake high-level risk analysis; and Confirm the decision support criteria for assessing the preferred option. As with the Core Study, the following aspects are out of scope: review of tariff structures including water metering or fixed rate options, community engagement including iwi engagement or consideration of water allocation within the catchment. Business Case For Water Services EWR Option 5 June

11 Approach To ensure that the results are directly comparable, the same methodology has been applied as that used in the Core Work business case. Business Case For Water Services EWR Option 5 June

12 4. CURRENT WDC DELIVERY MODEL 4.1 Description As described in the Core Work business case, WDC s water services are delivered by an in-house water department. Council Total Staff FTEs Water Connections % of Ratepayers Connected 2015 Revenue $m June 2015 Total Waters Debt $m June Waters Fixed Assets $m June 2014 Deprec. As % of Replacement Cost June 2015 Waters Debt/ Equity Hamilton ,161 83% , % 12.4% Waikato ,277 37% % 24.0% Waipa ,171 61% 19.8 (5.2) % 2.7% Total , , % 4.2 WSL Relationship In the north of its district WDC borders Auckland Council whose bulk and waste water activates are owned and managed by WSL. This border sharing followed the Local Government Auckland amalgamation carried out in This has facilitated the development of a close working relationship between the two organisations and a number of co-operative arrangements such as: WDC sending waste water north from Tuakau for treatment at a Watercare plant; WDC arranging to collect wastewater from Pokeno including Yashili s new dairy plant and pipe it to a Watercare treatment plant; and WSL supplying drinking water to Pokeno (and in the future to Tuakau). These arrangements are documented in a formal agreement between the two parties and are in the spirit of LGA provisions which encourage councils to co-operate. Business Case For Water Services EWR Option 5 June

13 5. EWR OPTION The EWR Option actually consists of two elements: The establishment of council water services as a distinct business unit within council; and The expansion of the existing co-operative arrangement with WSL to include additional activities. 5.1 In-house Business Unit The key features of any in house Business Unit are: Not a separate legal entity, but part of Council; Operates as a full profit centre with all waters revenues, expenses, assets and liabilities attributed to the Business Unit; and Business Unit General Manager reporting to the CEO is responsible for all aspects of the activity as if he/she were running a separate business, but receiving support from internal council services such as IT, HR, Finance etc. A Business Unit offers the following benefits: Clear managerial responsibility and accountability for all activities; Transparency as to the full costs, including capital costs of all water activities and services; Better decision making due to a full understanding of all costs and revenues; Assists more accurate tariff design due to better cost base data; Better ability to identify critical success factors and activity drivers; and Assists in benchmarking council water activities against international and domestic water utilities. We recommend that Council appoint a small advisory team to support the Business Unit. The team would be made up of one or two senior WDC staff members, one or two WSL senior staff and an external expert. The purpose of the advisory team is to initially assist in the expansion of the WSL agreement, set up the Business Unit and develop Key Result Areas and Key Performance Indicators. Short term the team would support the Business Unit with advice and expertise and monitor performance. We would expect them to meet with council staff no more than 4-5 times a year. Longer term the need for the team would need to be confirmed. It is not expected that there will be any staff savings from establishing the business unit itself, although some small savings may be possible in the provision of certain functions in cooperation with WSL. Rather it should allow the development of a stronger water team culture and a more focused approach. It is also recommended that WDC introduces a more streamlined water billing system. This would mean combining targeted rates on the current rates bill with volumetric charges for water metered properties together on one bill issued on a quarterly or monthly basis. This does not require a change to tariff structures which we have not been asked to review. As well as smoothing Council cash flows this assists customers with budgeting and provides a regular means of communication with them. Business Case For Water Services EWR Option 5 June

14 5.2 WSL Cooperation The opportunity exists to expand on the existing cooperative arrangements with WSL. This could allow WDC to gain economies of scale by leveraging some of WSL s systems and capabilities. The following key principles have been identified in discussions with WSL and would underpin any future arrangements: There should be no cross subsidisation between the two parties; and There is a desire to maximise the effectiveness of current human resources from both organisations. Business Case For Water Services EWR Option 5 June

15 The following services offer potential for cooperation between the two parties. Service Description Systems AMS Field Data (mobile) Billing SCADA Consenting Day to day Compliance Forward (renewals) New consents Operational Procurement Chemicals Power Maintenance ECI electrical control (instrumentation) Pokeno, Tuakau (currently 2 x WDC FTE) General advice/ IP H & S Secondments A large water utility, WSL is able to procure and operate more sophisticated systems than those affordable for WDC. Use of these systems will allow WDC to achieve operating efficiencies and make more informed capex decisions. WDC could benefit from working closely with WSL s consenting team or potentially creating a combined team with WSL. This could help ensure that all consents are obtained in a timely manner and are fit for purpose. Given WSL s greater buying power and procurement expertise there is the potential for useful savings in purchasing consumables and services. Northern Network Operation Wastewater is pumped from these two northern towns to WSL s Pukekohe treatment plant and drinking water is supplied to Pokeno and in the future Tuakau There are potential operational synergies by having WSL manage that part of WDC s networks which handle these flows. Advisory/ Consulting WSL has highly developed operating procedures and techniques which WDC could learn from and apply to its own operation. This could assist in improving standards and reducing costs. There are potential gains for both organisations from seconding staff from time to time. This can aid knowledge transfer and staff retention through professional development opportunities With the existing agreement in place, any future further cooperation between the parties would not require complex legal and transactional arrangements, but merely the addition of a service focused appendix to the existing agreement framework. In addition the potential for further network capital expenditure synergies through the supply of water and wastewater services by WSL south of Pokeno has been subject to a high level review by Motts MacDonald. The results of this review are attached in Appendix 3. In summary, this has been found to be more expensive than current plans and so is unlikely to be proceeded with in the short term. Business Case For Water Services EWR Option 5 June

16 6. FINANCIAL ANALYSIS 6.1 Overview Waikato District Council s water activities essentially comprises of water delivery, wastewater and stormwater. By their nature they are comprised of large capital assets including water reservoirs, water pipes and water treatment plants. These typically have long lives which can extend to greater than 100 years. Given the size of these assets, careful planning and timing of major capital expenditure can have a significant influence on the effective operation of these types of businesses which benefit from strong economies of scale. Under the EWR Option, Watercare can assist WDC to achieve savings across a number of expense areas. 6.2 Methodology The Financial analysis compares the financial differences between the Status Quo, the ESS, the CCO and the EWR options. Financial forecasts for the Status Quo were developed for the water activities for each of the three councils using the current LTPs and 30 year infrastructure strategies. These were consolidated to provide the Status Quo view. The model has been built taking inflation into account and is expressed in nominal dollars. ESS and CCO models were established using the Status Quo as a base and deducting estimated operational and capital expenditure savings that are potentially achievable under those structures. Operational savings were phased in gradually over three years and the costs of establishment, ongoing council monitoring costs and stranded overheads were included in the operational costs of the CCO and ESS. For the EWR Option financial analysis has been undertaken which assesses the operational and capital expenditure savings achievable. This was based on detailed discussions between WDC and WSL management with input on potential capital expenditure synergies from Mott MacDonald. The model developed is a 30 year model starting with the 2015/16 financial year. A realistic start for an ESS unit or CCO would be at the beginning of the 2017/18 financial year and the analysis undertaken compares the first ten years from 2017/18, two years beyond the current LTPs and over the total 28 year period of the Infrastructure Strategies after the CCO start date. To allow a direct comparison we have assumed the same start date for the EWR Option. It should be noted that the projections for the first ten years, which are largely based on the LTPs, are more reliable than years 11-28, which are partially based on the councils 30 years infrastructure strategies which are long term estimates and have less moderation of capital expenditure. The 28 year results should be seen as a possible outcome based on councils current long term estimates driven by factors such as population growth rates and long term capital expenditure requirements. Changes in the years forecasts will impact both the SQ, ESS, WSL and CCO models. For example if the capital expenditure forecasts change this will have the impact of under or overstating the potential savings in the ESS, CCO and WSL models. 6.3 EWR Option The EWR Option assumes that the water activities of WDC are formed into a business unit within Council and a two year transition period is assumed. Business Case For Water Services EWR Option 5 June

17 Total Operating and Capital Savings EWR Option The following table represents the total operating and capital expenditure savings that the EWR Option is expected to generate compared to the SQ. Total Cost Savings WDC First Ten Years 28 Years 2017/ /27 Opex Capex Total Opex Capex Total $m $m $m $m $m $m Base Case Positive Case The key operating savings assumptions include the following: Direct Staffing Savings of between 5% and 7.5% representing between 1 and 1.5 FTE s Specific savings on Chemicals and Utilities (power and gas) of between 5.0% and 10% Savings on Professional Services of between 10% and 15% Other Operating Costs General savings of between 2.0% and 5.0% Overheads are assumed to stay constant The overall operating savings represents around $400k (3.2%) and $700k (5.3%) per annum It is assumed only 50% of savings are achieved in the first year. Capital Expenditure savings are expected to be between 1.5% and 2.5%. Additional ongoing costs of $100k per annum have been included. This includes the option of 3 advisory team members at $20k per annum each and WSL consulting services of $40k per annum, which equates to around 4 hours per week at typical consultancy rates. Implementation Costs The establishment and transition costs of the EWR Option are relatively low. They would include the migration of data and amendments to existing service level agreements. We have assumed these costs amount to $200k. Business Case For Water Services EWR Option 5 June

18 6.4 Other Financial Comparisons of Options The following table lists other key financial comparisons between the options. Other Key Financial Comparisons WDC Savings over the Status Quo CCO Base $m ESS $m EWR Base $m First Ten Years Operating Savings Capital Expenditure Savings Debt Optimisation Total Savings Years Operating Savings Capital Expenditure Savings Debt Optimisation Total Savings The EWR Option is very similar to the ESS option in terms of Operating Cost Savings and Capital Expenditure Savings. These are both considerably lower than the CCO option and do not have the same potential for debt optimisation. Business Case For Water Services EWR Option 5 June

19 7. ENVIRONMENTAL, RESILIENCE AND ECONOMIC FACTORS 7.1 Environmental & Regulatory Compliance All the councils have suffered from some compliance issues in terms of drinking and wastewater standards. WDC s drinking water is of low grade in most locations and a number of its wastewater treatment plants have shown inadequate effluent quality in their last audit. Aware of these problems, Council has put considerable focus in the draft LTP on improving compliance and ensuring it can support growth. The Councils capex programmes are designed to address these issues over the forecast period, but the risk is that future councils may decide on a change in priorities. Like an ESS the WDC waters Business Unit will be dependent on council funding and debt policies, it is expected that inroads to the environmental and compliance challenges currently faced by the Councils will be more at risk. The unit must compete for resources with other council functions and while some capex and opex savings can be expected, there is no guarantee that these funds would be applied to waters investment. Also, as with the Status Quo, there are not strong legal consequences for noncompliance by individual councils or their staff. However, the probability of improvements is higher as the Business Unit will provide more explicit focus on water activities. 7.2 Resilience While the Councils have the ability to address resilience issues in their own areas, some of the gains would come from optimising the network on a sub regional basis. This has proved very difficult to achieve under the Status Quo model as the individual councils command less dedicated water services resources than either the ESS or CCO option; they cannot exhibit the same specialised organisational and team capabilities that better support long-term resilience. The EWR Option can be expected to make some substantive, demonstrable improvements over the Status Quo and ESS due to greater focus, better systems and clearer governance structures. 7.3 Economic Impact The Council is required to provide water infrastructure in a timely manner in order to provide water services to businesses, the economic drivers for the district, as well as residential and other properties. The EWR Option and ESS option would operate similarly to the Status Quo currently; where further development is governed by the individual Councils funding constraints. Business Case For Water Services EWR Option 5 June

20 8. RISK ANALYSIS In order to assess the risks involved in each of the options, a risk evaluation workshop was undertaken with council engineering and finance officials on Friday 13 February The purpose was to identify key risks and evaluate the consequence and likelihood of each under each of the three options. This was subsequently moderated by the project team and a scoring matrix was applied. Weights were applied to the scores which were then summed to give a total score. The lower the score; the lower the risk. This same methodology was applied to the EWR Option in a workshop with WSL and Council officials on Thursday 5 March 2015 and then modified and moderated by the project team to reflect changes to the preferred option over time. Based on this analysis (with the detailed risk assessment available in Appendix 1): The Status Quo option has been rated as more risky than the CCO option, but lower risk than the ESS. While regarded as suboptimal, the Status Quo option avoids the coordination problems and multiple agendas of the ESS model. Overall risk rating: Medium. The ESS option has been rated as more risky than the Status Quo. While not substantially different the lower scoring principally reflects the expectation that the coordination and multiple agendas of the model will make it more difficult to manage and mitigate the identified risks. Overall risk rating: High. The CCO option has been rated as the least risky option. The option scored best or equal best in all categories except three: customer services, planning alignment and the relative likelihood of perceived low transparency. The likelihood of customer service problems is thought to be lower than other options, but the consequence higher. $200,000 per year per council has been allowed for any additional costs incurred coordinating planning activities. The CCO option s overall risk profile reflects the stronger governance, independent structure, business focus and resourcing of a specialist, high profile water services organisation. Overall risk rating: Low. The EWR Option has been rated as more risky than the CCO option, but less risky than the Status Quo making it the second least risky option. It offers benefits over the Status Quo and avoids the coordination problems and multiple agendas of the ESS model. Overall risk rating: Medium/Low. Business Case For Water Services EWR Option 5 June

21 9. IMPACT ON COUNCIL Implementing the EWR Option will have a number of effects for Council in addition to specific financial impacts. Resource Consents. Obtaining and maintaining consents could be overseen by the appropriate WSL teams with the secondment of one WDC FTE to WSL for a period of time. Legal liability will remain with WDC. Systems. Use of WSL systems can offer real benefits, but at the loss of an in-house capability as is common with any out-sourcing model. The following table shows the impact on key Financial Ratios of the various options in the first year of change (2017/18) and also at the end of the LTP period (2024/25). Impact on Key Financial ratios Status Quo CCO Base ESS EWR Base $m $m $m $m Gearing 2017/18 6% 3% 6% 6% 2024/25 5% 3% 4% 4% Debt / Revenue 2017/18 94% 50% 94% 94% 2024/25 79% 46% 75% 75% Interest Cover 2017/ / For the ESS and EWR Options we have assumed that savings are deducted from debt. In practice some of these savings could be passed onto customers by way of lower rates. The financial impact of the EWR and ESS options are very similar with both showing a small improvement in all key ratios over the period of the LTP. However the CCO option clearly has a greater positive impact on key ratios during the LTP period. Business Case For Water Services EWR Option 5 June

22 10. OPTIONS ASSESSMENT AND CONCLUSION 10.1 Options Criteria The financial impacts associated with each option have been quantified as far as possible and this analysis is a key component of the options assessment. However, not all impacts can be readily quantified in monetary terms. It is appropriate to also take non-monetary considerations into account. To this end, a simple form of multi-criteria decision analysis has been used to complement the financial analysis. A decision support workshop discussed and agreed a range of criteria against which to assess the options taking in to account the factors driving change. The criteria were grouped under two headings; objectives and critical success factors (CSFs). Detail regarding the criteria is in section 2.6 of the Part B report. A percentage weighting given to each objective and CSF was discussed and agreed at the workshop. The weighting is designed to give a sense of relative importance of each criteria in the decision making process Multi-Criteria Analysis Based on the total business case analysis Cranleigh has independently scored each option against the criteria to give an overall score out of 10, but displayed as a percentage as shown in the table below. An explanation of the scoring is available in Appendix 2. Assessment Criteria Weight % Objectives: Status Quo ESS CCO EWR Effectiveness 25% 3/5 2/5 4/5 3.5/5 Efficiency 15% 3/5 3/5 4/5 3.5/5 Improved Financial Sustainability 20% 3/5 3.5/5 4/5 3.5/5 Alignment 10% 2/5 3/5 4/5 3/5 Reducing Risk 10% 3/5 2/5 4/5 3.5/5 Customer Voice/ Focus 20% 3.5/5 3.5/5 4/5 3.5/5 Critical Success Factors: Strategic fit 25% 3/5 3.5/5 4.5/5 3.5/5 Value for Money 17% 2/5 2.5/5 4/5 2.5/5 Affordable 20% 3/5 3.5/5 4.5/5 3.5/5 Achievable 23% 3/5 3/5 4/5 4/5 Regulatory Compliance 15% 2.5/5 3/5 4/5 3/5 Overall Weighted Score Out of % 60% 82% 68% Given the level of accuracy of this form of analysis, the overall scores for the Status Quo and ESS can be considered the same. Business Case For Water Services EWR Option 5 June

23 10.3 Summary and Recommendation The different assessments of each option are brought together in the following table: Decision Factor Status Quo ESS CCO EWR Multi Criteria Score 58% 60% 82% 68% Combined $ Savings (10 years) NA $5.6m $28.1m $5.8m Combined $ Savings (28 years) NA $20.6m $105.5m $20.7m Risk Rating Medium High Low Medium/ Low Overall Ranking ESS has an overall ranking less that the Status Quo as possible financial benefits are offset by the risks. The risk/reward ratio does not justify a change from the Status Quo. The CCO is clearly the highest ranking option and therefore is recommended by Cranleigh as the preferred option. It meets all the agreed investment objectives well, is lower risk and offers substantial financial benefits. Should it not be possible to implement the CCO option then the EWR Option offers the next best balance of rewards and risks. Key advantages include: The EWR Option offers some worthwhile cost savings and improved performance at relatively low risk. Relativity easy implementation. Both the recommended improvements to the organisation of WDC s water department and further cooperation with WSL represent manageable, incremental change. Business Case For Water Services EWR Option 5 June

24 11. IMPLEMENTATION A comprehensive implementation plan will be critical to ensuring the chosen option is properly established and can quickly and effectively commence operations. An important part of the implementation plan will be establishing a strong change management programme Timeline ESS It would be best to commence the ESS option from mid-2016 (i.e., 1 July) to fit within Council balance date timeframes. The process would be staged over a six month to one year period, ensuring service continuity and easier management transition. CCO If councils decided to proceed with the CCO option in late 2015 (and this has yet to be determined), it should be possible with good planning and project management to have documentation ready for signing and settlement by 1 July It is expected that a transition period of up to three years will be required to implement all systems and transfer all activities from councils. In practice it may be considerably less than this, but a conservative approach has been taken. The CCO Implementation Timeline is detailed below. Implementation Timeline Structuring Transition Period EWR A realistic start date for re-establishing Council s water department as a business unit within Council would be 1 July Further evaluation will be required to prioritise cooperation initiatives with WSL. This work can start immediately and implementation of some of the less complex initiatives could start before the establishment of the business unit Project Governance ESS Governance arrangements would be similar to current operations. A project establishment team would be required. No special public consultation is required to establish this option, unlike the CCO option. CCO Council Approvals Settlement Date Financial Model Start Date Recommend high level arrangements continue with the Project Governance Group, Project Management Group plus a Project Manager to assist governance transition to new board at an appropriate stage. Public consultation will be required prior to implementation. Business Case For Water Services EWR Option 5 June

25 EWR It is recommended that Council establish a small project governance group to oversee the establishment of the business unit and monitor implementation of initial initiatives. This could consist of the chair of the Infrastructure committee, the Chief Executive and the GM Service Delivery. A project team consisting of the GM Service Delivery, the GM Strategy & Support, Finance Manager and Waters GM would be charged with detailed implementation. Once the business unit is established and initial projects developed the Governance Group and project team would no longer be required Securing Benefits ESS To ensure that benefits of the option are realised, the ESS option will require a very carefully developed set of contractual arrangements, strong governance and most of all goodwill and cooperation between the councils at both a staff and governance level, sustained over time. CCO An assessment of the anticipated benefits is essential to maintain the focus of the CCO and to ensure objectives are realised. Specific key performance measures will also need to be developed that address relevant benefit measures and these will need to be included in the CCO s Statement of Intent. EWR An assessment of the expected benefits will also be required if this option is pursued. This will need to be matched against a set of key performance indicators. Strong coordinating mechanisms with WSL will be essential. Business Case For Water Services EWR Option 5 June

26 Consequence APPENDIX 1: RISK EVALUATION A risk evaluation workshop was undertaken with council engineering and finance officials on Friday 13 February The purpose was to identify key risks and evaluate the consequence and likelihood of each under each of the three options. This was subsequently moderated by the project team and the following scoring matrix was applied. Weights were then applied to the scores which were then summed to give a total score. The lower the score; the lower the risk. This same methodology was applied to the EWR Option in a workshop with WSL and Council officials on Thursday 5 March 2015 and then modified and moderated by the project team. Composite Scoring Guide Composite Consequence Score 5 Severe Significant Moderate Minor Minimal Likelihood AN PBU P HP AC Severe Significant Moderate Minor Minimal High Medium Medium Low Low High High Medium Medium Low Very High High Medium Medium Medium Very High High High Medium Medium Very High Very High High High Medium Almost Never Possible but Unlikely Possible Highly Probable Almost Certain Likelihood Business Case For Water Services EWR Option 5 June

27 Status Quo Scores ESS Scores CCO Scores EWR Scores Risk Public perception Customer services Human Resources AM planning Regulatory compliance - Description Lack of public confidence in the provision of water services and how they are delivered Services do not deliver to customer expectations The inability to attract and retain the best people - opportunities for professional development Poor decision making around AMP Failure to meet regulatory compliance requirements with the delivery of water and WW services - WW resource consents, NZDW standards etc. Consequence Likelihood Cons Likely Total Consequence Likelihood Cons Likely Total Consequence Likelihood Cons Likely Total Consequence Likelihood Cons Likely Total Significant Possible Significant HP Significant Possible Significant PBU Moderate Possible Significant HP Significant PBU Moderate PBU Significant HP Significant AC Significant PBU Significant Possible Severe Possible Severe HP Severe PBU Severe PBU Significant AC Significant AC Severe PBU Significant Possible Business Case For Water Services EWR Option 5 June

28 Status Quo Scores ESS Scores CCO Scores EWR Scores Risk Affordability Planning alignment Economic growth Network optimisation Capital works Resilience Business focus Description Growth and LOS requirements cannot be delivered at an affordable cost Lack of Alignment to the 3 councils planning and growth requirements Responsiveness to water business (growth) opportunities Network (plants and pipes) are not well optimised - operations and renewals. Capital works programme is not delivered in the time frame Inability to meet future adverse events Loss of focus on core activities Consequence Likelihood Cons Likely Total Consequence Likelihood Cons Likely Total Consequence Likelihood Cons Likely Total Consequence Likelihood Cons Likely Total Significant HP Significant AC Significant PBU Significant Possible Significant PBU Significant Possible Significant Possible Significant PBU Significant HP Significant AC Significant AN Significant Possible Moderate HP Moderate HP Significant PBU Moderate Possible Significant AC Significant AC Severe PBU Significant Possible Moderate HP Moderate HP Moderate PBU Moderate Possible Moderate HP Moderate AC Moderate AN Moderate PBU Business Case For Water Services EWR Option 5 June

29 Status Quo Scores ESS Scores CCO Scores EWR Scores Risk Health & Safety Legal Political influence Low transparency Bad decisions Social disconnect Cultural disconnect WSL Disestablishment Partner service disruption Composite Score (lowest is best) Description Not meeting H & S compliance requirements Exposure to liability Direct political influence in decision making Lack of transparency with decisions Poor quality of governance decisions Lack of social conscience Disengagement with Iwi Fundemental change in Watercare's operation that negatively impacts WDC Breakdown of relationship with other councils Consequence Likelihood Cons Likely Total Consequence Likelihood Cons Likely Total Consequence Likelihood Cons Likely Total Consequence Likelihood Cons Likely Total Significant Possible Significant HP Significant PBU Significant Possible Moderate Possible Moderate HP Moderate PBU Moderate Possible Moderate AC Moderate AC Moderate PBU Moderate AC Moderate PBU Moderate Possible Moderate HP Moderate PBU Significant Possible Significant Possible Severe AN Significant PBU Moderate PBU Moderate PBU Moderate Possible Moderate PBU Severe PBU Severe PBU Severe PBU Severe PBU Moderate PBU Moderate PBU Minor PBU Significant PBU Moderate AN Severe HP Significant PBU Significant Possible Business Case For Water Services EWR Option 5 June

30 APPENDIX 2: OPTION ASSESSMENT Option assessment against objectives Objective Status Quo Enhanced Shared Services Council Controlled Organisation EWR Option Effectiveness (strong focus on water customers and their needs) Weight = 25% Score: 3/5 - Council water businesses have control of own assets, but compete with other council priorities Score: 2/5 - Asset/network planning and management functions undertaken by the ESS (with sub-region drivers) but underlying assets owned by Councils (with Council-specific drivers). Inherent tension between the two sets of drivers which is likely to create risk of an unstable relationship between the ESS and Councils and risk of losing customer focus as a consequence (so worse situation than under the status quo) Score: 4/5 - Sole focus on water and needs of water customers - Business specific objectives rather than multi-faceted political objectives - Direct (contractual) relationship with customers established - Focus on customers; not a combination of customers and ratepayers - Not competing against other Council priorities and issues Score:3.5/5 - Stronger focus on water due to business unit - Focus on customers; not a combination of customers and ratepayers Efficiency (improved cost effectiveness) Weight = 15% Score: 3/5 - Base level of efficiency achieved Score: 3/5 - Economies of scale across functions that are part of shared services (e.g. joint contracts for provision of services, stronger buying power, less duplication of systems, more efficient use of scarce specialist capabilities) - Some gains from joined up asset and growth planning and demand management (but limited because of separation from asset ownership) - Draw on experience of advisory board of experts - However, gains offset by higher transaction costs involved in ESS Score: 4/5 - Economies of scale from combining like-with-like functions - Sub-regional approach to asset, network and demand management and planning and full control over underlying assets - More financial flexibility - important for timing of major capital investments - More effective governance - More independence from Score: 3.5/5 - Economies of scale from leveraging WSL systems - Access to more advanced information and consenting systems leads to better opex and capex decisions - More effective governance - More independence from direct political intervention Business Case For Water Services EWR Option 5 June

31 Objective Status Quo Enhanced Shared Services Council Controlled Organisation EWR Option having to coordinate with three sets of councils direct political intervention - Greater ability to attract and retain expertise and specialist skills - Creation of centre of excellence - Efficiencies through aligning systems and processes to the specific needs of the business (rather than three separate councils) - From Councils perspectives, divesting direct responsibility for managing the water system allows them to focus on other roles including strategy, policy and regulatory functions Improved financial sustainability (costs lower than the LTP) Weight = 20% Score: 3/5 NA. Base case benchmark Score: 3.5/5 - Some cost savings - $20.7m over 28 years Score: 4/5 - Major cost savings up to $105.5m over 30 years - Ability to raise debt which helps to smooth impact of major investments Score: 3.5/5 Some cost savings - $20.7m over 28 years - Enables modest improvement in councils debt/revenue ratios Alignment (regulatory compliance, meet customer expectations, manage and influence Score: 2/5 - Some areas of non-compliance now - No direct Score: 3/5 - Greater consistency of systems and processes across some, but not all functions, helps to achieve compliance - No direct relationship with customers Score: 4/5 - Director liability creates very strong incentives to ensure regulatory compliance - Direct relationship with Score: 3/5 Reason: - Access to more effective systems and processes across some, but not all functions, helps to achieve compliance Business Case For Water Services EWR Option 5 June

32 Objective Status Quo Enhanced Shared Services Council Controlled Organisation EWR Option regulatory outcomes) Weight = 10% relationship with customers - Customer needs compete against other Council priorities - Customer needs compete against other Council priorities customers - Focus on customers and not subject to competing Council priorities Reducing risk (resilient organisation) Weight = 10% Score: 3/5 - Need for major capital investments but questions over ability to fund - Issues with asset condition in some areas Score: 2/5 - More joined up planning helps to reduce infrastructure risk but ability to match demand and supply still subject to Council priorities re funding and capital investment for water versus other priorities - Reduced human capital and technical risk through pooling of resources and more consistency of systems and processes - Doesn t address financial risk (no balance sheet to raise funds) Score: 4/5 - Stronger focus on risk management at governance level (subject to getting the right directors) - Lower infrastructure risk through joined up planning coupled with asset ownership - Reduced human capital and technical risk through pooling of resources and more consistency of systems and processes Score: 3.5/5 - Reduced human capital and technical risk through pooling of resources and more consistency of systems and processes - Ability to match demand and supply still subject to Council priorities re funding and capital investment for water versus other priorities - Business unit structure gives greater focus - Longer term resilience depends on ability to keep the collaborative ESS model functioning. Inherent tensions in this regard threaten the sustainability of this model. Accordingly, from a risk perspective this option does not rate more highly than the status quo - Less risk of activity being diminished or not prioritised because of competing Council priorities - In theory, councils not exposed to financial risk beyond the value of their investment - More security of supply if networks managed on an integrated basis Business Case For Water Services EWR Option 5 June

33 Objective Status Quo Enhanced Shared Services Council Controlled Organisation EWR Option Customer voice/focus Score: 3.5/5 Score: 3.5/5 Score: 4/5 Score: 3.5/5 Weight = 20% - Direct access to councillors - Local council oversight - Direct access to councillors - Local council oversight - Focus on customers, not customers and ratepayers - Corporate social responsibility/good citizen requirements - Direct access to councillors - Local council oversight - Greater transparency through process for developing customer charter - Council monitoring oversight Business Case For Water Services EWR Option 5 June

34 Option assessment against CSFs Critical Success Factor Strategic fit (customer focus, support 3 waters strategy (3WS), meet future growth) Weight = 25% Value for Money (delivers value over long term, benefits for subregion, reduces risk) Weight = 17% Status Quo Enhanced Shared Services Council Controlled Organisation EWR Option Score: 3/5 - Base level contribution Score: 2/5 - Ability to deliver VfM over the long term at risk because of funding constraints and competing demands on Councils resources - Duplication of processes, systems etc. across Councils - Diseconomies reflecting small scale of the Councils - Council rather than subregion focus Score: 3.5/5 - Unlikely to lead to stronger customer focus - Unlikely to make material difference to meeting future growth because no change in financing arrangements and asset ownership and decisions ultimately still with Councils - Some contribution to 3WS objectives; implement shared services, more integrated functions including management of networks Score: 2.5/5 - Ability to deliver VfM over the long term at risk because of funding constraints and competing demands on Councils resources - Some economies achieved through combining functions - Sub-region approach to some functions, but ultimately decision making is still Council focused rather than sub-region Score: 4.5/5 - Much stronger contribution to 3WS especially in terms of integration of functions, efficient and sustainable infrastructure, meeting growth, adoption of best practices - Much stronger customer focus Score: 4/5 - Significantly more efficient option (cost savings 3-5 times more than ESS option) - Stronger customer and subregion focus - Stronger incentives for innovation and continuous improvement - 3 water activities are stronger collectively than they are separately in financial, technical and organisational terms - Greater financial ability to fund capital investment and Score: 3.5/5 - Stronger customer focus Score: 2.5/5 - Stronger customer focus - Some economies achieved through leveraging WSL functions - Ability to deliver VfM over the long term at risk because of funding constraints and competing demands on Council s resources Business Case For Water Services EWR Option 5 June

35 Critical Success Factor Affordable Weight = 20% Status Quo Enhanced Shared Services Council Controlled Organisation EWR Option Score: 3/5 Customers and councils can afford to fund operations and investments, but at a reasonably high price levels Score: 3.5/5 - Modest cost savings meet future demand (not constrained by competing demand on councils) - More security of supply if networks managed on an integrated basis Score: 4.5/5 - Significant cost savings - Ability to raise debt to smooth spikes caused by large capital investment - But up-front establishment costs Score: Modest cost savings Achievable (community support, deals with stranded overheads, retention of high quality staff) Weight = 23% Score: 3/5 - Doesn t align well with Waikato Mayoral Forum s strong commitment to working collaboratively (existing shared services very limited in scope) or with 3WS or with Local Government Infrastructure Efficiency Expert Advisory Group recommendation for regionalisation of water - Legislative encouragement for councils to cooperate and collaborate - Unlikely to be strong public opposition (but some may voice concern about lack of Score: 3/5 - Partial alignment with commitment to collaboration - Enhance ability to attract and retain high quality staff in areas where functions are combined - No stranded overheads - Unlikely to be public opposition (ESS option flies below the radar) Score: 4/5 - Full alignment with commitment to collaboration - Loss of sense of local ownership - Some stranded overheads - More likely to spur opposition based on concerns around privatisation (not on the table) and metering (this is a decision separate to that or organisational design) Score: 4 - Doesn t align well with Waikato Mayoral Forum s strong commitment to working collaboratively (existing shared services very limited in scope) or with 3WS or with Local Government Infrastructure Efficiency Expert Advisory Group recommendation for regionalisation of water - No stranded overheads - Enhanced ability to attract and retain staff through collaboration with WSL - Easy to implement Business Case For Water Services EWR Option 5 June

36 Critical Success Factor Status Quo Enhanced Shared Services Council Controlled Organisation EWR Option change) Regulatory compliance Score: 2.5/5 Score: 3/5 Score: 4/5 Score: 3/5 Weight = 25% - Not currently meeting all regulatory requirements - Greater consistency of systems and processes across some, but not all, 3 waters functions will contribute to higher levels of compliance - Director liability creates very strong incentives to ensure regulatory compliance - Consistency of systems and processes across all aspects of 3 waters functions will maximise ability to achieve full compliance - Greater consistency of systems and processes across some, but not all, 3 waters functions will contribute to higher levels of compliance Business Case For Water Services EWR Option 5 June

37 Business Case Analysis for Water Services - Option 4 Capital Works Synergies Assessment and Evaluation June 2015 Waikato District Council

38 Business Case Analysis for Water Services - Option A P:\Auckland\NZL\01 Projects\ Waikato CCO Business Case Analysis\04 Working\Template 1 (Document Type)\02 Documents\Deliverables\150529_Waikato_WSL_CAPEXAssessment.do 02 June 2015 Capital Works Synergies Assessment and Business Case Analysis for Water Services - Option 4 cx Evaluation Capital Works Synergies Assessment and Evaluation June 2015 Waikato District Council Mott MacDonald, L1, 23 Union Street, Auckland 1010, New Zealand PO Box 37525, Auckland 1151, New Zealand T +64 (0) W

39 Business Case Analysis for Water Services - Option 4 Capital Works Synergies Assessment and Evaluation Issue and revision record Revision Date Originator Checker Approver Description A June 2015 Nasrine Tomasi Steve Couper Steve Couper Working Draft B June 2015 Nasrine Tomasi Steve Couper Steve Couper Final Information Class: Standard This document is issued for the party which commissioned it and for specific purposes connected with the above-captioned project only. It should not be relied upon by any other party or used for any other purpose. We accept no responsibility for the consequences of this document being relied upon by any other party, or being used for any other purpose, or containing any error or omission which is due to an error or omission in data supplied to us by other parties. This document contains confidential information and proprietary intellectual property. It should not be shown to other parties without consent from us and from the party which commissioned it ///0/A 02 June 2015 P:\Auckland\NZL\01 Projects\ Waikato CCO Business Case Analysis\04 Working\Template 1 (Document Type)\02 Documents\Deliverables\150529_Waikato_WSL_CAPEXAssessment.docx

40 Business Case Analysis for Water Services - Option 4 Capital Works Synergies Assessment and Evaluation Contents Chapter Title Page 1 Introduction and Assumptions Study Area and Documents Considered Assumptions 1 2 Water Supply Synergies Current Operation and Limitations Pokeno and Tuakau Te Kauwhata Potential Project Synergies 2 3 Wastewater Synergies Current Operation and Limitations Pokeno and Tuakau Meremere Te Kauwhata Potential Project Synergies 4 4 Summary ///0/A 02 June 2015 P:\Auckland\NZL\01 Projects\ Waikato CCO Business Case Analysis\04 Working\Template 1 (Document Type)\02 Documents\Deliverables\150529_Waikato_WSL_CAPEXAssessment.docx

41 Business Case Analysis for Water Services - Option 4 Capital Works Synergies Assessment and Evaluation 1 Introduction and Assumptions A workshop was organised with representatives from Waikato District Council and Watercare Services Limited (Watecare) to identify potential capital works synergies should the existing relationship between Watercare and Waikato be reinforced to manage water and wastewater services. The synergies described below provide a high-level overview of potential projects that could lead to a better level of performance for the water and wastewater services provided by the Waikato District Council. This list of synergies is not exhaustive and is likely to be conservative. 1.1 Study Area and Documents Considered The study area was focused around the boundary between Auckland and Waikato. Isolated and distant schemes were excluded from the extent of this analysis. The schemes considered are listed below: Tuakau Pokeno Mercer Meremere Te Kauwhata The documents considered as the base information to determine the capital works programme defined for Waikato District Council are listed below: 10 year plan MWH 50 year long term strategy plan Draft Activity Management Plans Draft 30 year infrastructure strategy plan 1.2 Assumptions The following assumptions were made when estimating Capex for project synergies: Compliance: All the synergies identified should provide more effective solutions. No savings would be obtained by reduction in service. CAPEX Estimates: Capital cost estimates required for the establishment of the synergies were estimated based upon Watercare planning cost database. A large portion of Watercare s work is not rural which is accounted for in their planning rates. Therefore the rates were not inflated any further. Pipe costs were estimated from their diameter and pipe length. Pipe diameters were selected to ensure head losses remain smaller than 3m/km when year 2045 peak flows need to be conveyed (peak wet weather flows were considered for wastewater). Pipe lengths were estimated from the distance taken along roads. Shorter alignments may be possible subject to further investigations. Exclusions: Capital cost estimates do not take into account savings on consenting resulting from a lower number of treatment plants as these costs are variable and not easy to identify. Capital cost estimates do not take into consideration potential incomes resulting from selling land where treatment plant will be decommissioned. The cost of asset disposal (such as disposal of small water and wastewater treatment plants) was not included ///0/A 02 June 2015 P:\Auckland\NZL\01 Projects\ Waikato CCO Business Case Analysis\04 Working\Template 1 (Document Type)\02 Documents\Deliverables\150529_Waikato_WSL_CAPEXAssessment.docx

42 Business Case Analysis for Water Services - Option 4 Capital Works Synergies Assessment and Evaluation 2 Water Supply Synergies 2.1 Current Operation and Limitations Pokeno and Tuakau Current Operation and Issues: Pokeno and Tuakau are currently undergoing major development. The water bores used until now as a water source to service these two schemes have insufficient capacity to meet the forecast residential and industrial growth. Current option: Following a strategic option assessment, Waikato District Council selected to have Watercare providing a third party water supply to both schemes through a bulk water supply point for each scheme. We understand that Watercare will provide a third party water supply within the next year to supply the forecast demands in both schemes Te Kauwhata Current Operation: The Te Kauwhata scheme supplies water from the Waikato River to the communities of Te Kauwhata, Rangiriri, Meremere, Whangamarino, Te Kauwhata rural areas and the Springhill Corrections Facility (650 bed prison). The water take and raw water pipeline are owned and managed by a third party, the Te Kauwhata Irrigation Association but Waikato District Council is responsible for the maintenance and operation of these assets. Issues: The Te Kauwhata Water Treatment Plant (WTP) does not have enough capacity to meet future demand forecasts. The agreement between the Te Kauwhata Irrigation Association and Waikato District expires in 2016 and needs to be reconsidered to increase Waikato maximum intake. Current option: It is planned to increase the capacity of the existing WTP at Te Kauwhata and to renegotiate the agreement with TKIA. Options looking at servicing Te Kauwhata from Huntly were discarded due to their cost. 2.2 Potential Project Synergies Supply to Pokeno and Tuakau from Watercare is currently being implemented. An option looking at extending the Watercare supply to the Te Kauwhata scheme was assessed as part of the potential project synergies. If this option was implemented the Te Kauwhata WTP upgrade and the water source agreements would no longer be required. Mercer could also be serviced from the connecting pipe line. The distance between Pokeno and Te Kauwhata is approximately 23km. A 300mm diameter pipeline is required to ensure sufficient capacity in the future. Using a $1,400/m unit rate for pipeline installation and a $1.8 million allowance for a pump station this would result in a total cost of approximately $34 million. The cost for this option is significantly higher than the Te Kauwhata WTP upgrade ($6.4 million) however the following benefits would results from this option: Capacity to meet growth and increased economic development opportunities Improved water quality. Consolidated water allocation and savings on Resource Consent costs. Use of Watercare management systems for capital works and system operation ///0/A 02 June 2015 P:\Auckland\NZL\01 Projects\ Waikato CCO Business Case Analysis\04 Working\Template 1 (Document Type)\02 Documents\Deliverables\150529_Waikato_WSL_CAPEXAssessment.docx

43 Business Case Analysis for Water Services - Option 4 Capital Works Synergies Assessment and Evaluation 3 Wastewater Synergies 3.1 Current Operation and Limitations Pokeno and Tuakau Operation: Wastewater from Tuakau and Pokeno is currently transferred to the Pukekohe Wastewater Treatment Plant (WWTP) operated by Watercare. Issues: Wastewater flows are anticipated to increase due to industrial growth and to exceed the agreed maximum discharge flow to the Pukekohe WWTP. Maximum discharge concentration and load limits to the Pukekohe WWTP are also likely to be exceeded. Current options: Pokeno and Tuakau will keep on discharging wastewater to the Pukekohe WWTP owned by Watercare. Infrastructure growth charges will apply for new development and requirements to manage trade waste discharge quality into the wastewater network will remain with Waikato District Council Meremere Operation: Meremere wastewater is conveyed to the Meremere WWTP, which comprises an oxidation pond, subsurface wetland, holding pond, UV disinfection, and a discharge to the Waikato River. Issues: The current Meremere WWTP has enough capacity to contain future flows but the WWTP currently consistently exceeds the consent limit for all parameters except pathogens. In addition the existing river discharge standards cannot be guaranteed with pond based technology. Current options: The two options shortlisted as part the 50 year wastewater strategy are either to transfer Meremere wastewater to Pokeno and ultimately to the Pukekohe WWTP managed by Watercare or to upgrade the existing Meremere WWTP. Although the preferred option would be to transfer wastewater flows to Pokeno, the cost estimated for this option may be prohibitive Te Kauwhata Operation: The Te Kauwhata WWTP services the main township of Te Kauwhata, the community of Rangiriri and the Springhill Correction Facility. The WWTP comprises inlet screening, aerated ponds with Aquamats, wetland, rock filter and a discharge to Lake Waikare. Issues: The Te Kauwhata WWTP discharge resource consent limits for both average and peak flows are predicted to be exceeded near the time the current consent expires in Options: Relocating the discharge point to the Waikato River with rapid infiltration columns was seen as the preferred long term solution in the 50 year wastewater strategy. Other options considered included maintaining a lake discharge with improved standard of treatment, development of a land irrigation scheme for effluent disposal and transferring the wastewater to either the Huntly WWTP or Pokeno (for treatment at Watercare Pukekohe WWTP ///0/A 02 June 2015 P:\Auckland\NZL\01 Projects\ Waikato CCO Business Case Analysis\04 Working\Template 1 (Document Type)\02 Documents\Deliverables\150529_Waikato_WSL_CAPEXAssessment.docx

44 Business Case Analysis for Water Services - Option 4 Capital Works Synergies Assessment and Evaluation 3.2 Potential Project Synergies Pokeno and Tuakau wastewater flows are currently transferred to the Pukekohe WWTP operated by Watercare. An option looking at transferring flows from Meremere and Te Kauwhata to the Pukekohe WWTP was assessed as part of the potential project synergies investigations. If this option was implemented the WWTP upgrades at Meremere and Te Kauwhata would no longer be required. Wastewater flows from Mercer could also be transferred using the connecting pipe line. The distance between Pokeno and Te Kauwhata is approximately 23km. A minimum 300mm diameter pipeline is required to ensure sufficient capacity in the future (2045). Using a $1,400/m unit rate for pipeline installation and a $2.8 million allowance for pump stations and toxixity management this would result in a total cost of approximately $35 million. The cost for this option is significantly higher than the Meremere and Te Kauwhata WWTP upgrades (respectively $2.2 million and $1.7 million) however the following benefits would results from this option: Capacity to meet growth and increased economic development opportunities Environmental benefits with removing two points of discharge down the Waikato River and into the Lake Waikare. The wastewater flows would be treated at a single WWTP with a very high effluent quality and a single point of discharge lower down the River. Better compliance and resolution of consenting issues for Meremere and Te Kauwhata. Use of Watercare management systems for capital works and system operation ///0/A 02 June 2015 P:\Auckland\NZL\01 Projects\ Waikato CCO Business Case Analysis\04 Working\Template 1 (Document Type)\02 Documents\Deliverables\150529_Waikato_WSL_CAPEXAssessment.docx

45 Business Case Analysis for Water Services - Option 4 Capital Works Synergies Assessment and Evaluation 4 Summary Existing agreements are established between Watercare and Waikato District Council to provide water and wastewater services to Pokeno and Tuakau. Reinforcing the existing relationship between Watercare and Waikato District Council could enable the connection of Mercer, Meremere and Te Kauwhata to the Watercare water and wastewater systems. The high level investigations carried out in this report have shown that the options of connecting Meremere and Te Kauwhata to the Watercare systems are significantly more expensive than local upgrade options. However these options include a number of benefits highlighted below: Capacity to meet growth and increased economic development opportunities. Improved water supply quality and wastewater effluent quality. Better compliance and resolution of consenting issues for Meremere and Te Kauwhata. Use of Watercare management systems for capital works and system operation. The synergies highlighted above can be considered independently of the delivery model chosen (status quo, CCO, ESS or enhanced relationship with Watercare as the benefits highlighted would be valid for any of these conditions. Since the identified project synergies do not provide any Capex savings it is recommended to use the status quo investment programme of work for the next 30 years in this analysis ///0/A 02 June 2015 P:\Auckland\NZL\01 Projects\ Waikato CCO Business Case Analysis\04 Working\Template 1 (Document Type)\02 Documents\Deliverables\150529_Waikato_WSL_CAPEXAssessment.docx