The Government's water reforms will work better in cities like Wellington than in provincial towns officials warn. Photo / NZME
The Government's water reforms will work better in cities like Wellington than in provincial towns officials warn. Photo / NZME
Officials have warned that provincial water entities, created by the new Government’s water reforms, may have to hike fees on households to help service their debt.
That would mean higher costs for households in those provinces, which would be levied either by higher water rates or water charges. It comesas councillors from across the country gather in Wellington for Local Government NZ’s annual conference.
Both this Government and the last have been trying to solve a nationwide water crisis created thanks to generations of underfunding from councils. Labour’s Three Waters reforms (later renamed Affordable Water Reforms) planned to merge councils’ water assets into four (later 10) large council-owned but independently run water entities which would borrow billions of dollars for investment into water infrastructure.
The new Government scrapped that scheme, replacing it with Local Water Done Well, which will set minimum water quality and investment standards and allow councils to decide how to meet them.
The revenue for those companies might come in the form of water rates, as currently levied by many councils, or metered water charges.
A regulatory impact statement on those proposals modelled how those companies would operate in large metropolitan councils, provincial councils, and rural councils.
Officials were particularly concerned with the impact of the policy on provincial groupings, which comprise all territorial and unitary authorities with populations between 20,000 and 90,000.
Using draft long-term plan data from four real councils with 74,000 ratings units between them, the Department of Internal Affairs (DIA) noted that the hypothetical new CCO or water trust’s debt-to-revenue ratio could at times narrowly exceed the 500% cap imposed by LGFA, although the entity could take measures to ensure this did not happen.
Officials also warned there was precious little debt headroom factored into this model’s operations. They warned that “debt headroom is constrained” in the provincial grouping, making the water entity “vulnerable to external shocks and unexpected costs”.
“That entity could however use its revenue collection levers to both reduce debt and to service the debt they are expected to have,” the officials said.
They said the councils could decide to initially place less debt into the water organisation to ensure it had sufficient headroom to begin with.
Modelling by DIA on a hypothetical multi-council water entity. Graph / DIA
Minister of Local Government Simeon Brown told the Herald that councils, under soon-to-be-passed legislation “will need to develop Water Services Delivery Plans which demonstrate the financial sustainability of their proposed approach to future delivery of water services”.
He said the plan would allow councils to borrow more than under Labour’s scheme, with the LGFA agreeing to lend five times their operating revenues.
“This is a higher level than the previous Government’s plan, which would have likely only allowed borrowing of up to 350% for most entities,” Brown said.
“The Government promised that we would repeal Labour’s expensive and divisive Three Waters and work with communities to restore local control of water assets. We have done that and replaced Three Waters with Local Water Done Well, our plan for financially sustainable water services that remain under local control.”
Labour’s local government spokesman Kieran McAnulty was concerned that the figures used to create the model were undercooked, noting that many councils had not fully included the cost of their water infrastructure deficits in their long-term plans, which only stretch ten years into the future.
“Councils that I’ve spoken to did not include work that would come beyond the long-term plan period because they weren’t required to,” McAnulty said.
The officials warned that this could be a problem for the provincial water company, because it ends the 10-year long-term plan period right up against its debt-to-revenue limit meaning it cannot borrow more without growing its revenue base. That means no significant borrowing for water investment after that 10-year period unless additional revenue is found.
“If additional capital works are required beyond those included in current LTPs, the revenue pathway needs to be increased,” officials said.
McAnulty said the Government’s water policy “satisfies the political solution that the National Party has been searching for,” rather than the needs of councils.
“They are trying to paper over the cracks. When that becomes evident they will wash their hands and say that’s because council haven’t managed their assets properly,” McAnulty said.
Metropolitan and smaller rural water organisations were modelled to perform well, although rural water organisations had less headroom than might be desirable. A significant shock could send some sailing above their 500% debt-to-revenue cap.
A provincial council would perform well without its water debt, despite that council's water company struggling. Graph / DIA
Councils in metropolitan, provincial, and rural settings were better-off having had their water debts placed into the new entities, with all councils managing to stay under their debt-to-revenue caps.
The officials noted that once councils’ water debts had been moved to different entities they would be smaller entities, and would face reduced rate pressures. This would not mean rates reductions, but mean rates going up less quickly than they otherwise would have done.
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.
