The Three Waters reform would shift the delivery of water services from 67 local councils now to four new, multi-regional entities. Photo / 123RF
The Three Waters reform would shift the delivery of water services from 67 local councils now to four new, multi-regional entities. Photo / 123RF
Ratings agency S&P Global says there will be winners and losers under New Zealand’s “Three Waters” reforms that cover stormwater, drinking water and wastewater services.
The reforms will shift the delivery of water services from 67 local councils now to four new, multi-regional entities that can borrow enough to fundNew Zealand’s water infrastructure upgrades, which are expected to cost hundreds of billions of dollars over the next few decades.
Last year, Parliament passed the Water Services Entities Bill, which created the four big water entities that will run water services for the country.
The National Party has said it would repeal the legislation if it became the next government.
S&P, in a report titled “Pipedream or Panacea” said that for some local councils, not having to manage and pay for drinking water, stormwater, and wastewater infrastructure would lighten their debt load.
“For others, handing control to four publicly-owned ‘water service entities’ may crimp operating margins and increase debt-to-operating ratios,” it said.
Three Waters reform covers drinking water, wastewater and stormwater.
Only three credit ratings would likely change under the reforms, Anthony Walker, a credit analyst at S&P Global Ratings, said.
“Our two-part scenario analysis finds that up to 18 credit ratings could change between now and 2027,” said Anthony Walker, a credit analyst at S&P Global Ratings.
“The key driver of this trend is not the reforms but rather financial forecasts in the long-term plans. Only three credit ratings will likely change under the reforms.”
The agency said New Zealand’s water infrastructure isn’t up to scratch.
“On that, the country’s political parties agree, even if they haggle over the way to fix the situation,” Walker said.
“The debt transfer mechanism, for example, will be central.”
The Winners
S&P said its “scenario analysis” showed that the Three Waters reforms were likely to improve financial outcomes relative to the status quo.
S&P looked at local councils’ published 2021-2031 long-term plans.
These long-term plans indicated that councils were already planning to rein in their deficits and pay down debt over 2026-2031.
The structural improvement was particularly apparent in New Zealand’s two largest councils - Auckland Council and Christchurch City Council, S&P said.
Of the three ratings likely to change, just one credit rating could weaken.
“All of this could see the average credit rating for New Zealand councils to improve to “AA plus” from “AA” today.”
S&P rates about one-third of New Zealand’s councils, which account for 83 per cent of the loan book of the central financing body, the New Zealand Local Government Funding Agency (LGFA).
The Government has pegged the cost of investment needed to fix the country’s water systems and to build and maintain the infrastructure at between $120 billion and $185b over the next three decades.
S&P said the creditworthiness of the LGFA is what really matters to the sector.
Three Waters reform has prompted protests.
“Someone must pay, and it will always be residents.
The losers
“While general property rates and council targeted charges are likely to be lower under the reforms, overall costs for New Zealanders will be much higher given the perceived scope of investment required.”
Amalgamation debates could reignite as some councils will forgo many of their responsibilities, S&P said.
All councils with material levels of debt borrow through the LGFA.
Many borrow solely via the LGFA with the main exceptions of Auckland and Dunedin.
The LGFA credit rating is related to the underlying creditworthiness of the councils.
A weakening of the average council rating could have consequences for the LGFA.
“While our analysis didn’t envisage this across the sector, there remains substantial uncertainties, including the transfer mechanism,” S&P said.
Investment in transport and water assets are the largest items in a territorial authority’s capital expenditure programme.
Water assets alone represent about 40 per cent of the average council’s planned capex between 2025 and 2029. For some councils this is more than 50 per cent.
Therefore, councils are likely to become smaller once the reforms commence, it said.
Councils that are already small face the risk of further contraction or indeed questions over their long-term viability.
“If the local government sector is to leverage scale efficiency, it could cast doubt on the need for 78 local councils, especially at the smaller end,” S&P said.
