The Government has agreed to weaken new water quality regulation to reduce some costs for councils that would struggle to meet the new, high standards. Photo / 123rf
The Government has agreed to weaken new water quality regulation to reduce some costs for councils that would struggle to meet the new, high standards. Photo / 123rf
Councils have more freedom to amalgamate water services than under the prior policy, which forced amalgamations.
The Local Government Funding Agency will allow new water entities access to its borrowing.
Thomas Coughlan is deputy political editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.
1) Will the alternative be able to spend up to $185 billion over the next three decades on water infrastructure (most of it borrowed)?
2) Can the alternative achieve “balance sheet separation” from councils so this additional borrowing doesn’t tank council credit ratings, forcing up borrowing costs and rates?
Rates – yes, rates. Before sewerage pipes became an unlikely vehicle for a national conversation about race relations, Three Waters was about rates. Councils are struggling to fund investment in pipes, which meant poor quality water services and higher rates for households.
On Thursday, the coalition released its most detailed policy work on Three Waters to date (which it calls Local Water Done Well). The details answered Labour’s questions with a “probably not” and “probably not”.
This should not be too shocking. On the campaign, National cast doubt on the $185 billion figure, which came from an analysis by the Scottish water provider Wics (Water Industry Commission for Scotland). National, and some economists, argued it was inflated and unrealistic. The party’s water policy did, however, say that its model of allowing the formation of regional amalgamated Council Controlled Organisations (CCO) to manage water would “achieve balance sheet separation”.
It now appears that in many cases, this will no longer be the case. Councils can form CCOs, but these will in most instances be connected to their shareholding councils’ balance sheets.
The question naturally moves to whether this is actually a problem. The Government’s Local Government Minister Simeon Brown and Commerce Minister Andrew Bayly presented a strong case to the contrary, and that connection to councils might be a feature of the new regime, rather than a bug.
There are a handful of changes to the policy National campaigned on, some of which were unexpected.
The Government has agreed to weaken new water-quality regulation to reduce some costs for councils that would struggle to meet the new, high standards. Water-quality regulation sits with the Labour-created Water Services Authority | Taumata Arowai. From now on, the regulator will need to take a “proportionate, cost-effective and efficient approach in its functions and duties”.
The regulator can now proactively issue exemptions from certain regulatory requirements where compliance is, in the words of the Government, “impractical, inefficient, unduly costly or burdensome”. That sounds sensible now – but it really depends on whether this can be achieved without compromising on water quality. Labour’s regulation might have been gold-plated and unaffordable, but the Government needs to prove it has not shifted the dial too far in the other direction.
On the organisation side of things, the Government has set out a plan to make it easier for councils to form CCOs to deliver water, just as it promised. It also set out a plan to allow those CCOs to access cheaper borrowing, again, as it promised.
The key detail comes in a fix the Government did not tease on the campaign, which is that most of the CCO models proposed will be able to borrow at very cheap rates via the Local Government Funding Agency (LGFA). The LGFA is jointly owned by 30 councils and the Government, which has a minority 20% shareholding. It issues bonds in its own name to raise funds which are accessed by councils. This scale and central government backing allow it to borrow at a lower cost than were the councils to go it alone.
Adding the water CCOs to the mix means they too will likely be able to access cheaper funding than were they to access capital markets on their own. Weirdly, this is accomplished by rolling back one of things National said it would achieve, which is balance sheet separation. Instead, under most of the proposed models they will have some connection to their parent councils.
The new entities will, however, be able to borrow in their own name and to a level of up to five times their revenue (likely to come from water charges). There is a sweetener for councils. Councils are currently constrained by debt covenants of 2.8 times their revenue.
Labour local government spokesman Kieran McAnulty says the Government's plan will lead to higher rates. Photo / File
Not only can they shift their water borrowing to the new water entities, freeing some debt headroom to borrow for other non-water essentials.
Some high-growth councils will also now be able to borrow up to 3.5 times their revenue. For cash-strapped councils, this is something of a lifeline. As Infometrics chief executive Brad Olsen noted in the Herald last week, “local government gets around 10% of total government revenue. They have to service a quarter of the infrastructure”. Councils are desperate for this headroom.
There are serious questions to be asked about whether the new entities will be able to borrow enough.
The LGFA’s forecast bond issuance for the 2025-2027 financial years is $5.4b, $5.5b, and $5.9b. This is based on councils’ long-term plans, including their current water spending tracks (and everything else councils pay for). It’s a lot of money, but not quite $185b on water alone.
The Government and several economists questioned the $185b figure at the time, and Brown continued to question it on Thursday, telling the Herald it was based on a “top-down” British model ill-suited to New Zealand.
“This UK modelling estimated that between $120 billion and $185 billion would be required at a national level to maintain and improve water infrastructure. Those estimates are far in excess of current long-term plan estimates, which are approximately $41 billion,” he said.
Brown added that $100b of the $185b figure was “based on enhancement and growth assumptions that contained significant uncertainties”.
So the new model probably won’t provide $185b of investment – but the Government has plenty of grounds on which to question whether that level of investment was needed in the first place.
The model sketched out on Thursday charted a path for most of the country’s councils to amalgamate their water services into affordable CCOs. If it works, it will mean most communities’ fears about Three Waters are resolved: they’ll get more affordable rates, more local control, and no co-governance.
What remains unanswered is the solution for small, rural councils that could be left out in the cold, with no large councils wanting to amalgamate with them. They’ll struggle to meet water-quality standards and struggle to raise funds to invest in the infrastructure needed. Many of these communities are already looking at declining ratepayer bases.
The Three Waters fiasco has been embodied by Wellington, whose weeping streets – a nightmarish amalgamation of Rotorua and Venice – and clinking bureaucracy symbolise both the problem and a structural inability to solve it. But Three Waters started after the scandal in Havelock North where poor governance and underinvestment led to 5500 people falling ill, 45 of whom were hospitalised. Four people’s deaths were possibly caused by the water contamination.
Nearly a decade later, Wellington … and Auckland, most large councils, and, to be fair, Havelock North, have solutions to the crisis. Other small councils, the next Havelock North, have only slightly more clarity than they did in 2016.
