“The former Labour Government’s affordable water reforms were unpopular, let’s face it,” Foo said.
“But the reforms could’ve been an escape valve for some of this high debt. Now that National has threatened to repeal the reforms, the question is, what’s next?
“If councils are saddled with massive investment needs to meet these new water standards, without access to new grants or new funding tools, then we are likely to see further downward pressure on our council credit ratings.”
The Labour-led Government earlier this year passed legislation to establish 10 entities to take care of the water infrastructure that local councils currently own and operate.
A downside of the reforms is that councils will have to give up control of their assets.
An upside is that the change will take the billions of dollars of debt required to upgrade water infrastructure off councils’ balance sheets.
Councils are already up against their debt limits, as their abilities to generate more revenue by lifting rates is limited. Indeed, rates rose by an average of 9.8 per cent in the year to the September quarter, according to Stats NZ.
While Labour’s water reforms create winners and losers, Foo believed taking water assets off councils’ balance sheets would generally improve their creditworthiness.
He explained to the Herald that given the Crown (which has a very strong AA+ credit rating) is underwriting the 10 water entities, S&P was satisfied they would be sufficiently separate from local councils.
He was unconvinced that National’s suggestion that three or more councils could team up to create council-controlled organisations (CCO) to issue debt to pay for infrastructure would create enough “balance sheet separation”.
In other words, Foo said S&P would still link the debt taken out by CCOs to local councils.
“It’s still one step short of what Labour’s reforms would’ve achieved,” he said.
Foo acknowledged National could try to enhance “balance sheet separation” by stipulating that CCOs couldn’t be supported by councils.
However, this would make CCOs riskier in the eyes of investors, which would demand a higher return for buying CCOs’ debt.
Taking a step back, S&P, in a note published in February, made the point that regardless of who delivers the required infrastructure, the cost will be “astronomical”.
It feared the affordability of the required investment hadn’t been scrutinised enough, with much of the public debate centring on the co-governance element of Three Waters.
“If councils fund the investment, general property and targeted rates will likely soar to record levels,” S&P said.
“If WSEs [water services entities] fund the investment, water charges will likely soar instead.
“The Crown argues that WSEs will benefit from efficiencies of scale and will better prioritise the required investment than councillors with short-term horizons governed by elections.
“Opponents [including National] argue the benefits of efficiencies of scale are overstated and could occur in other ways (eg, through smaller regional council-controlled organisations).
“In either scenario, there is no free lunch, and New Zealanders face much higher costs to fund this investment no matter who delivers it.”
National’s local government spokesperson Simon Watts declined to comment on the matter, saying: “National first has to form a government and appoint ministers. Following that, appointed ministers will meet with government department heads and start the process of putting our policies and plans in place.”
Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
