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Water And Sewerage Legislation (Corporate Governance And Pricing) Amendment Bill 2018 - Second Reading

18 October 2018
Rosalie Woodruff MP

Dr WOODRUFF (Franklin) - Mr Deputy Speaker, I was wryly amused to hear the 
Treasurer's comments in his second reading speech about his interest in 
working on cooperative models and working together. Mr O'Byrne made such 
obvious points that this was -

Ms O'Byrne - Yes, they were obvious, but they were salient.

Dr WOODRUFF - I meant they were obvious for those of us who had not seen 
the Treasurer in his full form, his way of responding to TasWater was 
exceptional and illuminating and revealed his capacity to be a bully in a 
public forum and in this place, including publicly belittling and 
attacking the chair of TasWater, Mr Miles Hampton, when he responded - as 
any good chair of a board looking after the risk of its corporation would - 
to the broadside takeover bid by the Treasurer of TasWater without any 
discussions with the board, the chair or the 29 councils who are 
shareholders of that company. 

When the Treasurer released that statement on 19 February 2017 he said he 
believed the state's water and sewerage situation had reached a crisis 
point and the Government was no longer prepared to stand by and let the 
situation continue. It was a so-called situation and so-called 
mismanagement by TasWater of our vast water and sewerage network. He 
followed that up on 24 February 2017 by meeting with the council owner 
representatives to explain what he believed was the urgent action 
necessary, which was the takeover of TasWater and bringing it into state 
government ownership, and on 7 March 2017 the Premier announced the 
Government had decided to take control of TasWater.

What followed was a public display of attack and bullying by this 
Treasurer which revealed it as a political stunt designed to exert some 
level of control over local councils and enhance the destabilisation of 
local government, which this Minister for Local Government has 
successfully done in the last term of government on a number of levels by 
allowing councils to go into states of dysfunction and by holding back 
from appropriate investigations early enough into complaints of misconduct 
that have occurred in councils around Tasmania. He allowed them to go to 
a point where they fell over and essentially imploded into a state of 
dysfunction because the councillors were not being supported in the proper 
governance and the investigations and complaints being made.

The takeover bid by the state last year came on the back of the very poor 
relationship this minister had as Local Government minister for the 
preceding three years. Into that space, when he as Treasurer attempted 
the takeover bid, then it was on. Councils responded strongly. There 
were 23 of 29 councils opposed to that takeover and the proposal 
ultimately failed on 23 November last year when the Legislative Council 
voted 10 to 4 against that proposed legislation. 

On 5 February this year the Treasurer revived the failed TasWater takeover 
bid with a revised offer which included a one-year price freeze for 
customers and a guarantee that councils would receive an annual total 
dividend of $20 million or up to 50 per cent of TasWater's profits, which 
ever would be the greater, indexed forever instead of until 2025. On 6 
February that sweetened TasWater takeover bid was criticised by TasWater 
chairman Miles Hampton and the president of the Local Government 
Association, Mayor Doug Chipman, both of whom criticised the plan. Miles 
Hampton said:

The state Government's artificially managed pricing structure an 
accelerated works program would rack up a state debt equivalent to $2675 
for every TasWater customer, accruing interest for decades to come. 

He also said that committing an annual payment to councils of at least $
20 million a year will, 'lock in an even greater commitment to debt'. 

LGAT president at the time, Mayor Chipman, said: 

Tasmanian councils are always mindful of cost-of-living pressures facing 
their communities but we have to take a very long-term view. It is 
important that disproportionate costs are not shifted to future 
generations, particularly for short-term or minimal gains.

I could add 'or political gains'.

It is important for the House to understand the history of where we are 
today. By May this year the Treasurer had finally learnt the value of 
having conversations and bringing people on and doing a deal the right way, 
which is by bringing parties to the discussions and providing financial 
evidence of the value of the proposal being made. An MOU was signed on 1 
May between Miles Hampton and the chief owner representative of TasWater, 
Mayor David Downie, with the Treasurer on behalf of the state Government.

That MOU has a number of key features in it. In relation to ownership and 
governance, governance will be by an independent skills-based board, and 
that will continue. That is a very important fact. The state government 
will contribute $200 million over 10 years in new equity and for each $
20 million contributed the state government will receive 1 per cent of the 
voting capital. The state government shareholding will not receive 
dividends. The annual TasWater corporate plan will be jointly agreed 
between the board, the owner councils and the state government, with 
defined arrangements in place in the event of a deadlock. 

The state government representatives will sit on the board's selection 
committee and will be consulted, along with the chief representative, on 
the appointment of a CEO. The state government will not have the right to 
appoint a director. If the state government does not meet its commitments 
to make equity injections it will lose its rights in respect of the rights 
to jointly approve the draft corporate plan and to participate in the 
process to resolve any dispute regarding the adoption or amendment of the 
corporate plan; its seat on the board selection committee; and its right 
to be consulted in relation to the appointment of the CEO. These rights 
will be reinstated on receipt of the overdue equity injections. Any 
decisions made by the board selection committee, the owners' 
representatives or the board during such a period will continue to be 
valid and remain effective. 

The state government's commitment to contribute equity will be formalised 
through a share subscription and implementation agreement between TasWater 
and the state government. This agreement will also reinforce the 
particular state government rights referenced above and the loss of those 
rights if contributions are not made. TasWater's obligation to maintain 
price increases within the cap and/or accelerate the capital program may 
be suspended in the event that unforeseen events arise - for example, 
significant interest rate and/or inflation increases beyond that 
reasonably projected, or if the government does not meet its commitment to 
maintain equity injections.

Commenting on that MOU in an information memorandum to the 29 owner 
councils, TasWater chairman Miles Hampton advised that:

Like all compromises, there had to be some concessions on all sides, but 
on balance I am confident it represented both a fair-minded and sensible 
way forward. After 10 years the state Government will have contributed 
equity of $200 million and owner councils contributed equity will be 
unchanged at $1.528 million. The MOU scenario will not have a negative 
impact on TasWater's ongoing financial sustainability. The policy to pay 
distributions to owner councils remains unchanged, albeit under the MOU 
scenario this will be solely in the form of dividends. Most importantly, 
TasWater and councils will be working with the state Government to ensure 
that water and sewerage services across the state are affordable, reliable 
and enhance economic development opportunities. [TBC]

The TasWater board endorsed the signing of the MOU and authorised a 
release of that MOU to all owner councils. An initial concern was flagged 
by at least one council, some councillors and other councils that the MOU 
was signed without an opportunity for full scrutiny of the conditions of 
the MOU. That has left a space for some councils to, in retrospect, do 
due diligence on some of those conditions. Although, as the Treasurer has 
noted, there is overwhelming support for this move it is not unanimous. 

Some important concerns were raised by one large council. In relation to 
the analysis of the two scenarios that were provided within the memorandum 
of understanding - a business as usual case and the future scenario that 
was presented under the MOU proposal - analysis of the two scenarios shows 
that at the end of the 20-year period TasWater's revenue is $237 million 
lower, borrowings are $95 million higher and net profit before tax is $
318 million lower under the memorandum of understanding than under a 
business as usual approach.

The state government will contribute $200 million in new equity over 10 
years under the MOU proposal. In return for that 10 per cent buy-in they 
receive a 33 per cent say in strategy, operations and dividends in 
relation to the TasWater annual corporate plan. That corporate plan will 
be jointly agreed to by the board, the owner councils and the state 
government. In other words, a third party is being introduced, which 
substantially reduces the proportional contribution of owner councils to 
that corporate plan. This disproportionate say of the state government is 
exacerbated once the state government pays the first instalment of $20 
million, that is, their 1 per cent of equity, when they are entitled to a 
33 per cent say. By virtue of making the initial contribution they have 
as much equity, 33 per cent, as they do at the end of the period when they 
have made their final contribution.

The MOU proposal does represent a good deal for the consumer in that it 
provides a price freeze in the second year, 2019-20, and provides that 
annual price increases will not exceed 3.5 per cent from financial year 
2021 through to 2024-25. The MOU proposal also represents a good deal for 
the state government because it helps the Treasurer to deliver on that pre-
election commitment and we would expect to lead to lower water prices and 
an accelerated program of work.

The TasWater Board has unanimously backed the MOU proposal because it ends 
the so-called ownership debate with the state government. It guarantees 
the future of the board and it provides a glimmer of optimism that federal 
government funding could be achieved with a now-supportive state 
government. This is a point worthy of strengthening. With all the effort 
the Treasurer has made in focusing on, bullying and attacking and a state 
takeover of TasWater, he has fully missed the opportunity to look at 
working cooperatively - so-called 'developing cooperative models', in his 
own words - with the TasWater Board two years ago to investigate 
partnering with the federal government for very much needed water and 
sewerage infrastructure investment funds. That is a two-year missed 
opportunity that is all on the Treasurer's head. He could have been 
taking leadership instead of running a retrograde attack on the board. 

The risks for council are small but worth reporting. The main concern 
about a risk appears to be the impact on TasWater's interest cover ratio 
due to the increased borrowings required to accelerate the capital works 
program over the next 10 years. The chairman, Miles Hampton, has 
consistently said the financial sustainability of TasWater requires an 
interest cover ratio above 2 per cent. I understand from my conversations 
with the staff, and I thank them very much for making themselves available 
for an early morning briefing on this bill with me this morning, that the 
2 per cent interest cover ratio is a level at which many boards and 
corporations seek to be at or above in order to minimise risk and maintain 
security. 

The financial modelling provided by TasWater shows that for the 20-year 
period, financial years 2017 to 2036, the interest cover ration never 
drops below 2 per cent under the business as usual approach. During that 
20-year period, under the business as usual approach, the lowest interest 
cover ratio is 2.57 per cent. This shows quite a deal of fluctuation in 
the first 10 years under the business as usual scenario with the interest 
cover ratio going up as high as 3.35 per cent and in the second part of 
the period never dropping below 2.57 per cent, which is the lowest point 
that it would drop across the whole period. Under the MOU proposal being 
adopted and that this bill seeks to make law the interest cover ratio 
drops below 2 per cent in a number of financial years, financial years 
2026 through to 2032 and financial year 2034. In his words, the chairman, 
Miles Hampton, would argue this leaves the organisation more vulnerable 
than it would otherwise have been should the interest rates rise during 
those years, albeit by a small amount. Compared to the business as usual 
case it is a fairly large difference. It is a full 0.5 percentage points 
lower than the business as usual scenario in the worst year. 

Some councils are concerned it is not a better deal in that regard. It is 
only one measure but it is an important one. It is a measure of risk and 
it does relate to interest rates in particular. The interest rates would 
want to be low. On balance, this bill we have before us is certainly 
better than the proposed takeover the Premier was proposing the state 
Government undertake this time last year. It is not an intrinsically 
better deal for councils. There is the concern the MOU significantly 
impacts on the interest cover rate ratio in the increased borrowings that 
would be required to accelerate the capital works program. That has to be 
balanced, and has been, by councils and found that, on balance, councils 
are happy to wear that risk in preference to the alternative, which is not 
to be able to accelerate the capital works program and bring forward 
better water and sewerage infrastructure for all Tasmanians.

We all want to live in a state where we have excellent water and sewerage 
infrastructure. I asked during the briefing whether we were somehow 
reducing our capacity as a state - perhaps the Treasurer can answer this - 
given the now certain climate volatility we have in our climate system and 
the potential for extreme events, particularly extreme water events, and 
the possibility -

Mr Brooks - Climate change.

Dr WOODRUFF - Yes, climate change; that is right, Mr Brooks, thank you - 
the possibility of that having an impact on water and sewerage systems 
requiring infrastructure work. What confidence does the Treasurer have 
that this MOU and this proposal, given it is bringing forward a 
substantial amount of capital works, will enable us to respond if we need 
to in addition have a large amount of infrastructure repair or building as 
a result of unforeseen events?

On behalf of the councils that overwhelmingly decided that this was a 
better deal for Tasmanians and a good enough deal for councils, the Greens 
are happy to support this bill. We are glad the Treasurer got there in 
the end in his negotiations with councils on this important matter.