Comparing the intergenerational inequities of governance and operating models for an urban water provider in a time of economic decline

Share this article:

Wide Bay Water Corporation (WBWC) is a Queensland Local Government Owned Corporation (LGOC) providing water and wastewater services to residents and businesses of the Fraser Coast. WBWC transformed from operating within Council to a corporatised entity owned by Fraser Coast Regional Council (FCRC) under the National Competition Policy (NCP) economic reform.

The Fraser Coast has experienced a decline in customer and new development growth within the region since the global financial crisis. This has increased financial pressure on WBWC to meet a number of its financial performance targets, whilst being able to maintain quality and reliability of supply standards in accordance with its Statement of Corporate Intent (SCI). Given the economic profile of the Fraser Coast, and the scale of WBWC’s operations, WBWC was interested in understanding the efficiencies of different governance and operating models, and the implications for WBWC’s sustainability from both a financial and a service level perspective.

MHC was appointed in early-May 2012 to conduct an independent review to determine the ‘best’ governance and operating models for WBWC with the following objectives:

  • Minimise or ensure the long-term least cost of supply of water and wastewater services to FCRC, and
  • Ensure compliance with WBWC’s water, wastewater, environmental, health, employment, legal and regulatory obligations.

The scope of this work encompassed four distinct phases (as shown in Figure 1 below):

QSI other

Figure 1: Approach to This Engagement

To assess alternative governance and operating models for WBWC, MHC prepared an assessment framework which expanded on the financial sustainability indicators provided within Local Government Regulation 2010 (i.e. relating to Finance, Economic, Sustainability, Environment and Social). In doing so, MHC gave greater consideration to the likely implications of intergenerational equality through the investment and operation of long-lived water and wastewater assets. MHC assessed the proposed governance and operating models for WBWC using the categories and measures shown in Figure 2 below.

qsi

Figure 2: MHC’s Assessment Framework

 MHC’s assessment provided WBWC with both quantitative and qualitative analysis of the likely outcomes in moving from an LGOC model towards a Commercialised Business Unit (CBU) within Council. Further, MHC considered the observable performance of the current model by examining WBWC’s SCI with Council’s and WBWC’s 10-year financial forecasts.

MHC delivered a report to senior management and local government representatives, with the recommendation that both models are effective in the provision of water and wastewater assets – when implemented correctly. However, the heightened legal obligations of the LGOC model benefits communities by addressing key risks:

  • Lack of focus on providing water and wastewater services where these services compete for resources and funding within Council, and
  • Political short-term decision making resulting in intergenerational equity problems in long-lived assets.

Expanding on the report, MHC developed a comprehensive revenue model (building block) for a 10-year forecast period, with a range of scenarios based on WBWC’s capex and opex forecasts. The model tests different costing scenarios and:

  • Is consistent with economic regulatory precedents in terms of optimising revenue and pricing outcomes, and
  • Presents output reports consistent with the current SCI, financial reporting, financial and sustainability reporting, and pricing outcomes.

One possible benefit of the Commercialised Business Unit (CBU) model is a reduction in overheads. MHC recommended remaining with the LGOC model as any savings to Fraser Coast rate payers, through a reduction in corporate overheads by moving to a CBU, would be completely lost if the CBU made the same poor water and wastewater asset investment decisions made by the previous Council. MHC’s analysis shows that the LGOC model incorporates separation of decision making, and provides more checks and balances to reduce the risks of poor decision making on asset investments.

 

To see the full report, visit Wide Bay Water’s website:

http://www.widebaywater.qld.gov.au/corporate/fcrcreviewofwbwc.