A universal charge for water – a political minefield

The announcement by Jacinda Ardern that Labour would charge for all water use through some sort of universal charge if elected, took her into what has traditionally been a political minefield. Labour took the approach of leaving the details for a major consultation after the election – something that could backfire badly as it provides scope for too much speculation in the short term and raises what could turn out to be unreasonable expectations in the medium term.

This is not new territory. The idea of charging for water has been around for a long time and there have been several attempts to get key people around the table to sort it out, but with no success. In a sense Labour have set themselves up to fail, but if against the odds they succeeded in getting an approach that all parties agreed to, it would be a major coup.

The idea of charging for water (or I guess more simply charging a royalty for all water use) has been proposed in various forms and much discussed. The notion of a royalty also needs to be separated from charging for the cost of supply. The latter is now quite common and follows the logic of any business in recouping costs. Many Councils now change for water supply and farmers pay a cost for access to irrigation schemes.

However, we are now talking about charging for the resource itself, i.e. reflecting its intrinsic value if you like, independently or in addition to the cost of supply.

On the face of it charging a royalty for a basic resource like water seems logical. There is no doubt that it would encourage efficient use and would ensure a return to New Zealand for water based ventures aimed at overseas markets.

However, the list of practical problems that it raises is long and formidable.

It would most fundamentally raise the issues of ownership, between the Crown and Maori – memories of the Seashore and Seabed debate come to mind here. Possibly a solution could be found but it would be unlikely to satisfy all those involved and could be political dynamite for the Government.

At a more practical level, there are three big issues – dealing with large variations in the quantity of water involved, dealing with the cost impact on activities like farming and in fact all activities involving the use of water, and dealing with disparate uses.  The practical problems are compounded by the fact that water is a component in almost everything.

The first problem is that of dealing with variations in quantities. The quantities used producing bottled water, or soft drinks etc might seem large but are very small compared with uses like irrigation or electricity generation. In the case of farmers using irrigation the cost per litre would have to be very small to avoid the total cost virtually putting them out of business – and conversely, a charge that was small enough to avoid that would have little or no impact on uses like bottled water.

A response to that is to have differentiated charge so that large users pay less per litre than small users. At the other extreme, you might impose a significant unit charge on exporters of bottled water and a very small charge for irrigation. One of the problems with this is fairness – deciding where the cut-off point is between large and small users. Another problem is that of defining the cut off points in terms of types of use– very easy if you are comparing irrigation with exports of bottled water but not at all easy in other cases, eg bottled water v drinks like wine and beer and foods containing liquid (which will be largely water). This is the “GST problem” and is why NZ has very successfully gone for a single rate for GST rather than trying to differentiate. Differentiation is difficult and inevitably leads down the path of actually not having a universal change at all – but just a charge for some defined uses – as well as being extremely difficult to implement.

I think a single universal charge would be great – even if there was some sort of graduated scale involved rather than a single rate of charge. In practice, the easy solution is to simply deal with the immediate problem which seems to be exports of bottled water, and forget about other uses for the time being. However, even this raises problems of differentiation and might well prove to be too hard in practice.

If Labour gets into government it will be interesting to see how the implementation of their water policy progresses.

By Bas Walker

This is another of Bas Walker’s posts on GrownUps.  Please look out for his articles, containing his Beachside Ponderings.