The innovative approach to water that ended a stand-off

Wednesday, 8 May 2024

OPINION: It was the classic Mexican stand-off.

Mayor Wayne Brown armed with a 25.8% water bill increase for every household and business in Auckland due to be signed off in June.

Local Government Minister and Minister for Auckland Simeon Brown turned up armed with the government’s massive balance sheet and the ability to legislate policy.

Mayor Brown demanded a Government guarantee to separate Watercare from Auckland Council’s balance sheet, allowing the water company to borrow more money for longer at a better credit rate and therefore delivering services at a lower cost.

Minister Brown refused to provide a government guarantee to either Watercare or the Local Government Funding Authority which arranges finance for councils and their subsidiaries.

Aucklanders were bracing for impact as the two Brown’s squared off, with neither prepared to move.

Then out of the blue, whether you call it an innovative legislative solution or a bit of financial witchcraft, a joint announcement the government is going to write a piece of legislation which forbids Auckland Council from financially guaranteeing Watercare.

Minister Brown spent $350,000 on advice from Standard and Poor’s (S&P). The global credit rating agency’s advice is that a law preventing Auckland Council from guaranteeing Watercare would go some way to achieving balance sheet separation.

Add in the fast-tracking of some elements of economic regulation and a crown monitor for Watercare and S&P seems to be green lighting a new model for water services entities that should work for everyone.

The generally accepted view was that with no government or council guarantee Watercare would be rated at BBB as a standalone regulated infrastructure company.

The problem for both Browns with a BBB rating is it would cost Aucklanders more in their water charges to service the higher interest costs.

And here’s where the innovative bit comes in. While S&P’s advice is yet to be published, it appears it has indicated a credit lift for Watercare above its BBB but below Auckland’s AA.

Just what factors contribute to this higher credit rating are not yet clear.

Government is refusing to underwrite Watercare, but it appears S&P have attributed value to Watercare’s proximity to Government, recognition that as the water and wastewater supplier to 1.7 million Aucklanders, no government could ever allow the entity to fail.

Whatever the reason for the credit rating uplift, the two Browns both managed to walk away from the stand-off with their heads held high. Mayor Brown has his balance sheet separation and Watercare can now borrow more money for longer, allowing him to slash the proposed water rate rise to just 7.2%.

Minister Brown walks away with kudos as well, having stuck to his guns on the Crown guarantee, tried something innovative and ensured Aucklanders avoid a huge increase in their water bills next year.

So of course the next question is: what about everyone else?

Minister Brown indicated the proposed legislation that will result in Watercare’s balance sheet separation and credit lift will likely extend to other Council Controlled Organisations (CCOs).

That will be welcome news to councils around the country who have been wondering how the credit problem was going to be addressed.

Legislation preventing all councils from underwriting their water services CCOs would be welcome news with many councils operating right on their self-imposed credit limits due to the weight of future water infrastructure spending in upcoming long-term plans.

Water, wastewater and stormwater expenditure across New Zealand is likely to exceed $30 billion over the next 10 years.

Councils have traditionally maintained strong balance sheets, however one of the key elements of all water reform proposals has been unlocking balance sheets allowing water CCOs to borrow more to fund capital expenditure over much longer periods of time.

To get a clear picture of the financial impact of leverage, look no further than Watercare’s proposed 2024/25 charges dropping from a 25.8% increase as part of Auckland Council’s balance sheet to a far more palatable 7.2% as a standalone regulated water company prepared to take on more debt.

For those paying attention this is where the incentive comes in for councils to get their acts together and develop these CCOs quickly.

Once established, assuming smaller CCOs can access the same credit ratings they will be able to similarly take pressure off sky-rocketing rates bills across the country as we grapple with a cost of living crisis.

Many councils are desperate to facilitate the changes as soon as possible and with the route ahead now far clearer, there will be a lot of activity in the sector to determine who different councils partner with to form their new CCOs.

It has to go down as a win for both Browns and potentially the country as we gain more certainty around the shape and detail of Local Water Done Well.

While questions remain around small councils with huge costs on the horizon and small rating bases, for many other councils the reform path looks relatively straightforward:

Develop a CCO. Add in a few neighbours to get some scale. Government will legislate to shift them off council balance sheets and then economically regulate them to drive improvements in asset management maturity.

While the devil is always in the detail, the deal between the Government and Auckland looks likely to lay a solid foundation for one of the most important reforms our Government will take on this term.

Neil Holdom is the mayor of New Plymouth