Government's 'Affordable Water Reform' gives councils more control but could reduce the efficiencies of scale

The revised Three Waters policy gives councils more control but dilutes the rationale for reform and could increase the cost of colossal infrastructure upgrades.   

On Thursday the Government announced it had listened to feedback from councils and would rearrange its troubled Three Waters policy to give local government more control. 

Ten regionally owned public water entities will be created, instead of four, to manage water assets on behalf of district councils. They will be run by a professional board overseen by a representative of every local council and Māori iwi. 

This is intended to prevent a blowout in rates while still building infrastructure required to ensure drinking water is safe, wastewater is cleanly disposed of, and storm drains can cope with extreme weather. 

Local Government Minister Kieran McAnulty’s revised ‘Affordable Water Reform’ attempts some sort of magic trick, or perspective illusion, to achieve this. 

It should look to councils as though they retain some level of control over water, while simultaneously appearing to credit rating agencies that the entities are independent enough to justify balance sheet separation.

It’s a balancing act which has tipped towards councils in an attempt to rescue the policy that had increasingly begun to be a political liability in an election year. 

McAnulty said he’d spoken with mayors—including some who were members of the opposition group Communities 4 Local Democracy—that were now in favour of the proposal. 

He also said credit rating agencies and investors would be comfortable that the entities would be sufficiently independent from councils to attract funding. 

“We wouldn’t have proposed this today if we hadn’t received advice that it was going to stack up and achieve the balance sheet separation,” he told reporters on Thursday. 

Governance conundrum 

The revised reform would see local water assets divided between 10 management entities, drawn primarily from regional council boundaries. 

Waikato, Bay of Plenty, Taranaki, and Manawatu/Whanganui regions would each get their own entity. While others pair off with a neighbouring region: Northland and Auckland, Gisborne and Hawke's Bay, Wellington and Wairarapa, Nelson and Marlborough, Canterbury and West Coast, and Otago and Southland. 

These entities would be governed by a professional board, which would be appointed and monitored by a Regional Representative Group, which itself would be appointed by local councils and local Iwi in partnership.

New Zealand courts have ruled the Treaty of Waitangi gives Māori the right to participate in decisions that relate to water services.

The professional board would be selected based on “competency and skills” and would not have a co-governance requirement. 

Once established, these 10 water entities would take over all water-related activities including fees and charges, operating and capital costs, and all assets and debts. 

All about that debt 

Councils would like to maintain direct control of water assets, which are reliable revenue generators, but will struggle to fund upgrades without imposing high costs on their ratepayers.

Minister McAnulty said there had been a lot of “mischievous” talk about “asset theft” but the fact was that these assets were funded by debts councils could no longer service. 

Many councils are nearing, or have reached, their debt caps and risk credit rating downgrades if they take on any more. A lower credit rating would increase borrowing costs which ratepayers would ultimately have to cover. 

Alternatively, councils could impose hefty water charges that could also anger voters and get them turfed out of office in the next election. 

The Government estimates that an investment of between $120 billion and $185 billion is required to build and maintain water infrastructure over the next three decades. 

S&P Global Ratings, an international credit rating agency, said Three Waters reform had been devised as a potential solution to this “colossal investment,” both politically and financially. 

“One key benefit from the Crown's perspective is that the reforms should relieve councils of water responsibilities and reduce pressure to increase annual general property rates — a hot topic long before the reforms were envisaged,” it said in a report earlier this year. 

But the ratings agency also said there had been too little scrutiny of the affordability of the $180 billion investment required, with attention instead focused on ownership and co-governance. 

Minster McAnulty told reporters that opponents to reform preferred to focus on these issues because their alternatives didn’t stack up financially. 

Saving for some 

The Government has repositioned the revised Affordable Water Reform as something that will save ratepayers’ money. A factsheet released to the media said households would save between $2,770 and $5,400 on rates each year by 2054. 

However, S&P Global was not convinced in February there would be any meaningful savings for households, as someone still has to pay for the required infrastructure.

“If councils fund the investment, general property and targeted rates will likely soar to record levels. If water services entities fund the investment, water charges will likely soar instead.” 

The Government argues that water services entities will benefit from efficiencies of scale and expertise that would help to prioritise the required investment. Opponents think this could be achieved in other ways, such as 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,” the S&P Global report said. 

“Someone must pay, and it will always be residents. 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.”

Now with 10 entities instead of four, the efficiencies of scale will surely be lessened and councils will have more influence over their decisions, plausibly throwing doubt on independence. 

Unproven funding model 

Raf Manji, leader of The Opportunities Party and a former investment banker, said the funding structure was highly risky and unnecessary. 

Water infrastructure should instead be funded directly from the Government’s balance sheet, like housing agency Kāinga Ora has recently decided to do.

New Zealand’s strong sovereign credit ratings and relatively low debt levels means it has a lower cost of borrowing than standalone entities that issue their own bonds. 

Manji said bond investors will want the Crown to underwrite these water entities, but would still demand a premium over regular government bonds. 

The Government should create a Ministry of Water Works to oversee the upgrades and issue 30-year water infrastructure bonds to fund them, he said.