Controller and Auditor-General John Ryan has warned Water Services Entities set up under the government's three waters reforms should be regularly audited.
He also called for a series of other fixes, arguing public trust and confidence would be critical to the reforms' success. Opposition parties have leapt on the submission, saying it shows the government should go back to the drawing board.
The three waters reforms would shift management of water services from 67 councils to four large Water Services Entities (WSEs), aiming for better economies of scale and borrowing power to repair ageing assets and prepare for future challenges like climate change and population growth.
The Water Services Entities Bill is the first of at least two related pieces of legislation, and is before the Finance and Expenditure Committee after submissions closed on 22 July.
In a submission published today, Ryan said the bill amounted to a "serious diminution in accountability" and urged the government to add a requirement for the entities to submit 10-year plans for auditing as is done with councils' Long-Term Plans.
"WSEs cannot be held to account by ratepayers like local authorities are, nor can they be held accountable by Parliament because they are not Crown entities," he wrote.
Ryan said auditing provided Parliament and the public with assurances, and while the WSEs were variously accountable - through annual reporting to a Regional Representative Group (RRG), oversight by the minister, and engagement practices with communities - there was no equivalent requirement for auditing of planning documents.
He noted that only the annual financial statements and the statement of service delivery performance in the WSEs' annual report were subject to audits.
"For WSEs to be genuinely accountable to local communities, engagement must be coherent, consistent, and integrated with the WSEs' planning and reporting requirements.
"The bill does not currently clearly link the findings from the consumer engagement stocktake with corresponding reporting requirements, such as the statement of intent. There are also some limitations in the accessibility of the mechanisms proposed for public reporting."
He recommended adding a requirement for the WSEs to publish a 10-year-plan, equivalent to councils' long-term plans, that his office would audit.
Along with minor wording changes, other concerns included a loss of the ability for the Internal Affairs' local government secretary to set water service performance measures, Ryan saying this would limit the quality of publicly available information.
The roles of the RRGs and boards of the entities may also overlap and should be more clearly defined, and some reporting arrangements could be simplified, as could the WSEs role within the wider infrastructure system.
National has pledged to repeal the reforms, and its local government spokesperson Simon Watts said the auditor-general's submission was a "scathing indictment" of Labour's model.
"The government arrogantly ignored the criticism of local communities and National when it was told these reforms were unaccountable and not transparent, and now they are being confronted with the reality," he said.
"Labour must accept they've got it wrong. Three Waters is not only unpopular, it is broken. The government cannot now continue to ignore the critics of their reforms, and the public ... it's time for the government to admit it was wrong and start again."
ACT has also pledged repeal, and its own spokesperson - Simon Court - said the submission should be "the final nail in the coffin".
"This adds to the mountain of negative feedback Labour has received on this policy. Councils and ratepayers have rejected Three Waters because central government is barging in and taking control of their assets. Labour is bulldozing through all opposition though," he said.
"The worst aspect of the reforms is divisive co-governance. It's totally inappropriate to give iwi a seat at the table just because of who their ancestors were. All New Zealanders want clean and safe water, not just iwi. This issue isn't solved by separating stormwater," he said.
Minister of Infrastructure Grant Robertson said he had not yet read the auditor-general's submission, but the structural changes would mean significant change in the type of accountability arrangements for water services.
He maintained the government's goal was to ensure the entities were accountable to their communities.
"We'll look at a way of doing that but the overall premise that this is taking away from communities, we obviously disagree with that because they still are the ultimate owners of these assets," he said.
"We will have [accountability] via the representative groups that appoint members of their board, that also set their performance expectations documents, and no doubt all of those local authorities involved in that will have some considerable say and influence."
Ryan said his comments were intended to help ensure the reforms were supported by well functioning governance and accountability arrangements, but the bill as drafted could have "an adverse effect on public accountability, transparency, and organisational performance".
"I recognise that further legislation is to come, and have recorded my concerns here ahead of that."
Some 88,324 written submissions on the bill were lodged. Submitters will also present in person, in a series of hearings around the country - in Hawke's Bay, Nelson, Hamilton, Christchurch, Auckland and Dunedin - between 15 and 18 August.
The bill is expected to pass through the Parliamentary process by the end of the year, but not before the local body elections in October.
A second bill is expected to be introduced this year and passed next year ahead of the general election, with the new entities slated to take over water management from July 2024.