The rising cost of water

Delivering water services in New Zealand is becoming materially more expensive, and the gap between water costs and general inflation continues to widen. New analysis from Infometrics shows that the cost to build and deliver water services across New Zealand has more than doubled since 2005, and it has increased at a rate far higher than headline inflation.

With a large pipeline of renewal and compliance work still ahead, elevated construction costs, and constrained sector capacity, upward pressure on water investment pricing and spending looks set to remain a defining feature of the infrastructure landscape.

Infometrics analysis shows that the increasing cost of delivering water services has considerably outstripped headline inflation, with sustained pressure over time for both water operating and capital costs.

Since 2005, Stats NZ’s input Producers Price Index for water and waste has increased by 4.2%pa on average, with capital costs for water systems up 3.6%pa. Both these increases far outstrip headline inflation over the same period, with the consumers price index rising 2.6%pa on average over the last 20 years.

As our Chart of the Month shows, water and waste operating costs have more than doubled over the last 20 years, rising 128% over the period. Water capital costs have doubled too, up 101% since 2005. The consumers price index has only increased 66% over the same period.

The more recent surge in construction inflation during 2021–23 pushed civil construction costs – including water systems – up at double-digit annual rates at their peak. That escalation left many long-term council plans outdated almost as soon as they were finalised, with considerably higher costs than originally expected.

The pressure on New Zealand’s water sector is not just about higher prices, but also around the volume of work to do. The sector is grappling with a continued pipeline of renewal, upgrade, and compliance work at the same time as labour and materials costs have risen sharply. Decades of underinvestment in three waters assets mean there is now a backlog of pipes, treatment plants, and networks requiring replacement or expansion. Add population growth and tighter environmental and drinking water standards, and the workload intensifies further.

This combination has created a persistent imbalance in supply and demand. There is more work needing to be done than there is capacity in the civil construction and water engineering market to deliver it efficiently. When demand consistently outstrips supply, prices rise. Simply adding more funding would do little to resolve this fundamental imbalance. In fact, without coordination, additional funding could risk further amplifying cost pressures by bidding up scarce resources.

There’s a large amount of work expected to be done across the water sector, with all different areas trying to ensure that their vital work gets done first. With substantial demand, and not enough supply to meet all these work requirements immediately, prices are likely to continue to rise at a high rate over the next few years as capacity is stretched.

One potential solution lies in better coordination and funding design. There seems to be potential for National Water Fund model, similar in concept to the National Land Transport Fund. Such a policy would see a centrally coordinated co-funding mechanism, where local councils, or now water entities, undertake water investment plans that are submitted to a water regulator and can receive a level of grant funding to support investment. In doing so, the regulator (and more generally, central government) would provide an incentive to water entities to invest. At the same time, by holding some of the purse strings, central government could help sequence projects more strategically, reducing the boom-bust cycle that exacerbates costs, through more methodically coordinating demand for water infrastructure investment and improving market capacity planning.

As an aside, it’s worth mentioning the difficulty in comparing the operating and capital costs of building and delivering water services in New Zealand, with the price charged for those services. Charging consumers for water is inconsistent across the country – some areas have specific water charges and volumetric metering, while others have no specific water charge, with the cost of water implicit in general rates charged. To provide an idea of the scale of charging, Infometrics analysis of detailed Household Expenditure Survey (HES) data shows that the proportion of households reporting they paid a specific water supply charge was just under half the proportion of households that reported paying local government rates.

Over the last 20 years, specific water charges have increased 4.6%pa on average (on a quality-adjusted basis), up 144% cumulatively. Although these specific figures are higher than direct water operating and capital cost increases, we expect some of the difference is captured in non-water charge prices, measured through general rates.

Originally, I pulled together some limited analysis as part of a LinkedIn reply, with data since 2015 used in that post. Subsequently, we extended the analysis to looking at trends over the last 20 years, and when preparing this longer period of analysis, the question was asked about the drop in water capital prices in 2013.

The "Systems for Water & Sewerage" index fell 12% in the March 2013 quarter, under the current structure of the Capital Goods Price Index. Under the older CGPI regimen, the then-“Pipelines” Index fell 6.9% in the March 2013 quarter, which Stats NZ noted was “influenced by lower prices for concrete pipes in pipeline construction.”

The change in water capital prices over time is therefore likely understated, if there was a small number of cheaper pricing for concrete pipes at the start of 2013 that dragged overall water capital price observations lower at the times.