The proposed four water entities may still be too small to borrow successfully on the international bond market.
An ANZ banker told the InfrastructureNZ conference yesterday the entities would need to club together to get the finance they would need from the international bond markets.
Much of the criticism of the Three Waters proposals has focused on the merger of 67 Council-owned water entities into four super bodies.
The issue recurred throughout yesterday conference with National’s infrastructure spokesperson, Chris Bishop, saying what he called the “mega entities” were too big and would be too unaccountable to local councils.
The Executive Director of the Three Waters National Transition Unit, Heather Shotter, however, said they would bring economies of scale.
“They provide safe, reliable and efficient water services through improved investment and management of those systems and a catchment-wide approach that is simply not possible at present,” she said.
This was supported by Porirua City Council’s CEO, Wendy Walker. Porirua is one of five councils that make up Wellington Water, a multi-Council water entity and something of a model for the future.
“Porirua has been a very outspoken supporter of three waters, and that reflects on our experience.
“We are a city of 60,000 people, probably medium by New Zealand standards but a little Council.
“We had two water engineers when we were doing it ourselves.
“We now have access to something like 70 water engineers.
“It certainly has improved our ability to plan and do things rather better than the more reactive services we might have otherwise done.”
But whether they are big enough to provide real financial savings was a point debated at the conference.
The Department of Internal Affairs has estimated that the country’s three waters services are estimated to need an investment of between $120 billion to $185 billion over the next 30 years.
Scottish Water initially prepared that estimate, and it was then reviewed by the New Zealand engineering consultancy Beca.
As of June 2021, the Local Government Funding Agency reported the entire local government sector had a total debt of $20.4 billion.
In other words, the bill to fix the three waters infrastructure, which has been neglected as Councils have spent water revenue on other things, now represents around nine times local government’s current debt.
Hannah Crosby, the Director of Specialised Finance and Corporate Finance International at the ANZ, told the conference that amount was beyond the council’s balance sheets and beyond ratepayers’ wallets.
So one of the key drivers of the reforms was the intention to get balance sheet separation between the water entities and the councils and thus be able to leverage finance off the water rates being paid by consumers.
“When you look at the amount that they have to raise, these entities are going to be big, big capital markets issuers,” she said.
“They’ll go into the international debt capital markets and ideally take long-term forms of capital from sovereign wealth funds and pension funds and things like that.
“So I think one of the key things to be thinking about is how they’re going to structure that debt program because obviously one of the other key drivers of the reforms is to try and keep things as cheap as possible and get the most efficient funding. “
Crosby suggested that they might consider collaborating when they approached the debt markets.
“I really think there’s an opportunity for these four companies to potentially look at something where they work together and then look at issuing debt,” she said.
“And then I think you end up with a debt program that’s got critical mass because although these entities are all going to be highly rated, some of these big offshore funds will only invest in debt where there is enough secondary market liquidity and that probably will give a much better outcome.”
But the challenge Three Waters faces is how to convince ratepayers of arguments like those of Crosby that bigger will be better.
The former National Minister, Anne Tolley, heads the Government appointed Commission, which runs the Tauranga City Council.
For her, the issue was not so much the size of the new entities but the structure.
She told the conference her ratepayers were concerned about the lines of accountability back from the new entities.
“They feel left behind; they feel that as asset owners,” she said.
“Some people say that they’ve been ratepayers for 40 and 50 years and that these are services they paid for, but they don’t see themselves in the new model.
“There’s no line of sight for them and then, and there’s no accountability back to them as the owners of their assets.”
Tolley said the Commissioners supported the reforms but had asked the Government to consider a model where councils got shareholdings based on their assets and “have a more corporate type model with accountability back to the shareholders who are ratepayers through the councils.”
Hamilton’s Mayor, Paula Southgate, was also concerned not just with the Three Waters reforms but all the reforms facing local government.
“The pace and scale of change that local government is facing is unprecedented,” she said.
“If you look at the reforms coming our way and the reviews, it’s just coming thick and fast.
“The Government is trying to come in and trying to deliver on the community expectations, trying to plan for their future and fund that and deal with the transitional arrangements that we’ve been put under by government at the moment for three waters and then to think about the Resource Management Act and the implications on our business.
“And then, after all that, the local government review itself.
“We’re just really, really stretched, to be quite honest.”
Queenstown Mayor, Glyn Lewers, was also concerned about the scale of changes being imposed on local government.
“The reform package seems to be a disconnect between all three from what we see coming towards us,” he said.
“They don’t seem to have an overarching story about what we’re trying to achieve over those three.
“So if I could wave a magic wand, I wouldn’t have done three waters first.
“I would have done local government reform first, and then obviously, the three waters falls out of that”
But he said the reforms were removing the levers to deliver outcomes from the local community.
“We’ve lost the community. I think that’s what they’re (ratepayers) are saying as well,” he said.
“They are now being removed from decision-making, so they have no influence to actually drive where the community wants to go.
“I think it’s the actual crux of the problem with all of these reforms at the moment; the community has not come along.
“They don’t see a pathway where they can influence the direction of their community.”
National has picked up on that discontent about Three Waters, particularly in the provinces and is promising to repeal the legislation currently before the House.
But as their infrastructure spokesperson Chris Bishop indicated yesterday, they may repeal, but they intend to replace, though how much they simply cut and paste the Labour Government legislation is a moot point.
Bishop said local governance and accountability were key issues for National.
“We are strongly against the governance provisions inside the entity that the government has established,” he said.
“So local ownership and control and accountability to ratepayers and the removal of co-governance are bottom lines for national. “
“The really sad thing, I think, is that there is a middle path through all of this,” he said.
But he also indicated National understood the benefits that would come from scale.
“It’s just that the government’s bottom lines are co-governance and the four big mega entities, and there is a way through where there is a consensus where we achieve those scale benefits, and we achieve the long-term investment that’s required.“
It is possible the Three Waters debate is not about the most efficient way to deliver fresh water and run sewerage and stormwater systems but rather a proxy protest, particularly from provincial New Zealand, against centralisation.
And, as Transport Minister Michael Wood suggested to the conference, there might be an element of racism in some of the protests about co-governance.
But whether the new Three Waters plans will actually become operational in July 2024 would now appear to depend on the results of next year’s election.