Papakura District Council's franchising of its water, waste water and regulatory services has been watched with interest by local authorities, water companies and engineering firms. Franchising is seen as offering many of the advantages of private capital investment and management expertise in a political environment where loss of public ownership of assets is still unacceptable to many voters. The Office of the Auditor-General has published a report on Papakura's water and sewerage franchise. It contains valuable analysis and guidance on the design and implementation of franchise agreements. This column puts some of the issues raised in the future of franchising. Consultation is an important issue. A franchise process is likely to be most accepted by the public where the objectives of the exercise are clearly set out and the effects on customers are explained intelligibly.

Obligations to spend

The detail of the franchise should clearly define measures, obligations and sanctions in relation to price, quality, quantity, asset maintenance and risk management. This process is likely to require careful negotiation and drafting.

The Council also needs to maintain (in-house or otherwise) the capacity to monitor what is happening and advise on appropriate action. Earlier Audit reports emphasise the fact that some councils tend to underestimate the extent of the investment necessary to carry out this task. Independent advice may also be useful at the stage when franchisees are being selected.

Price limits are a particularly complex component of franchise agreements. Any limit should be clearly defined and should be constructed so that the franchisee has an incentive to keep costs and prices down. Elements in pricing formulas that allow inefficient practices to flow through into prices should as far as possible be eliminated. In Papakura's case the use of an "Auckland average" in the price cap may allow inefficiencies in other territorial authority operations to feed indirectly into the Papakura price.

In the future the question of pricing powers may well get more attention. It is likely that sewerage will be charged for partly in proportion to the amount of water supplied. The use of such a proxy needs to be modified (as it is in Papakura) to deal with cases where it fails to give a good indication of use.

Pricing

The possibility of some form of franchisee access to tax (as opposed to pure pricing) powers may need to be explored. The difficulty in excluding use of sewerage systems and, most significantly, stormwater systems mean that some element of tax funding may be needed. In some overseas jurisdictions franchisees can have limited access to taxing powers through the local authority.

The franchising of regulatory services doesn't involve the asset definition issues that occur in infrastructure franchises. However, the design of pricing, measurement and monitoring are probably even harder. There are also issues of accountability and effective delegation of necessary legal powers. These will be increasingly addressed since a number of local authorities are also considering franchising or contracting out their regulatory services (especially building control). Other councils are considering turning their building control units into LATEs which can compete for work in other districts. Consultation -