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

Dr Rosalie Woodruff MP

Dr Rosalie Woodruff MP  -  Thursday, 18 October 2018

Tags: Legislation, TasWater

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.

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.