Credit ratings agency S&P Global Ratings has run its eye over New Zealand’s Three Waters reforms and says rated councils could see their debt drop 30%.
The Three Waters reforms will transfer responsibility for water from councils to four centralised new entities, which includes shifting water assets and liabilities from council balance sheets.
S&P said in a new report the reforms are likely to improve financial outcomes and reduce debt burdens for most, but not all, rated councils. The Government has estimated the investment needed to fix water systems and build and maintain infrastructure could cost up to $185 billion over the next 30 years.
There would be financial winners and losers - with the biggest balance sheet winner Palmerston North City Council because it could likely shift the cost of a yet to be built wastewater plant off its books, saving it several hundred million dollars.
In contrast, Whangarei and Horowhenua councils could see their deficits increase due to losing profits from water services, S&P Global said.
“For some local councils, no longer having to manage and pay for drinking water, stormwater, and wastewater infrastructure will lighten the debt load. For others, handing control to four publicly owned "water service entities" or WSEs may crimp operating margins and increase debt-to-operating ratios,” it said.
S&P says only three council credit ratings would change purely because of the water reforms, with one of those “weakening”.
Overall, the ratings agency says the average credit rating for New Zealand councils could improve to 'AA+' from 'AA' because of strengthened financial results.
S&P has public credit ratings on about one-third of New Zealand's 78 local councils, which account for about 78% of the country’s water-related debt and about 80% of the loans given out by the New Zealand Local Government Funding Agency.
But still too much debt?
The ratings agency said debt levels in the New Zealand local government sector remain high despite the increase in headroom coming from the reforms.
S&P analysed councils' published 2021-2031 long-term plans. It said these long-term plans indicated councils were planning to rein in deficits and pay down debt between 2026-2031.
“The structural improvement is particularly apparent in New Zealand's two largest councils, Auckland Council and Christchurch City Council.”
S&P’s report also highlighted how profitable water services are for councils.
For nearly 90% of the councils' rated by the agency, water activities generated higher operating margins than other activities.
“Across our rated portfolio, water-related activities account for 21% of operating revenues and only 17% of total operating expenditure.”
But it said a lack of quality information "muddies" analysis of the water infrastructure reforms, including what mechanism will be used to transfer debt from councils.
The water reforms could also be used to push for council amalgamations, it said.
But the bottom line is New Zealanders face higher costs to fund water infrastructure - no matter who delivers it, S&P said.
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"The ratings agency said debt levels in the New Zealand local government sector remain high despite the increase in headroom coming from the reforms.
S&P analysed councils' published 2021-2031 long-term plans. It said these long-term plans indicated councils were planning to rein in deficits and pay down debt between 2026-2031"
Not necessarily
Economies of scale do, which are afforded by having 4 centralised entities doing the purchasing, instead of 78 (mostly small) ones. That applies to both buying capital in bulk, such as pipes, and also purchasing the services of experts. Similarly having a pool of experts that can address the needs of various localities should result in better outcomes over time, as they will be able to more easily share ideas and solutions for the different problems they've encountered.
Economics 101 really.
Bluntly, theoretically yes, and the Government would LOVE you to believe this, realistically not a chance. A loser not mentioned is the users of the water. In all the blurb I have read about three Waters there is absolutely NO mention of the users, especially of reticulated water but make no mistake we will all be receiving water bills, and these will not be cheap. The first bills will not come before the election, because they would be certain to guarantee Labours loss. where else would Three Waters be funded from?
In Christchurch there is a component of rates that goes to funding water. I presume it's the same elsewhere.
If the water assets and responsibilities are removed from council, then it's reasonable to expect that the water component of the rates bill will be removed. So yes, "rates" would go down in the case.
Obviously the funding for the water infrastructure has to come from somewhere (and this is the point that National are tripping themselves up over, realising that someone has to pay for work to happen), and that seems likely to be a separate bill - but for administrative purposes I would not be surprised if, at least to start with, the funding model was that the money was still collected by councils as part of rates and then it would be sent on to the water entities.
None of which says anything about whether the total charges paid will increase, decrease, or stay the same.
How quickly do you think councils can eliminate the proportion of overhead costs that go towards their 3 waters at the moment?
You talk about efficiencies that will come with a centralised model for 3 waters. But counter to that, there will be a loss of efficiencies that might already exist within a council that supports more than just 3 waters across multiple services?
Same in Whanganui, but there is no guarantee that rates will reduce. As indicated many councils are highly burdened by debt and will likely try to maintain the level of rates to address the debt burden. I don't believe the government is, or even can, mandate that councils reduce their rates charges for water with the creation of Three Waters. My recent rates bill as not gone down!
I personally believe National's policy is closest to what should occur. As to funding, I believe that there should be a legislated requirement of the basics that local government must provide, including standards. I don't know if this is already the case or not, but it is clear that some local councils have failed their communities dismally. In the end though, the national Government may need to explore options for some specific funding.
But which is the better of the two. Ratepayers paying means all tax payers will pay (via the home they own or rent), so it is essentially a tax increase anyway in the form of higher living costs. The big benefit of it being centralised is accountability and the smaller councils being able to get essential upgrades. IMO it is a bit like EQC where everyone pays no matter what the risk
There’s no point council debt dropping. This will just increase the spend on vanity projects.
Central govt needs to force local govt to spend on infrastructure ahead of other projects or remove the powers of general competence.
if we are going for efficiency then 1 zero profit water organisation across NZ is enough, we don’t need 4 for a population of 5m.
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