Watercare deal to hike debt costs

Monday, 8 July 2024

Auckland Council and Government reach agreement to deliver Local Water Done Well for Auckland.

Auckland Council and Watercare remain confident that debt costs can be managed as the two entities are separated, despite advice suggesting a doubling in Watercare’s debt costs.

Confidential advice provided by Auckland Council officials and rating agency S&P, made public by the council in May, showed possible financial implications of the Watercare deal struck by Auckland Council, including Watercare’s debt costs rising to $45 million per annum and a hiking of the council and Watercare’s combined debt-to-revenue ratio.

But both Auckland Council and Watercare say the scenario detailed in the papers is both hypothetical and manageable. Auckland’s long-term plan, passed by the council more than a week ago, has accounted for the financial impacts of the deal.

“The rates increases and water price increases forecast in the council’s long-term plan incorporate the full expected impacts of the proposed water reform legislation,” said Auckland Council group treasurer John Bishop.

The Government agreed with Auckland Council in May to financially separate council-controlled Watercare from the council, in order to allow it to raise further debt without weighing down the council’s credit rating and increase its borrowing costs.

Watercare’s state of the art water treatment plant in Red Hill.Newslink 643211164Three waters, water services

Local Government Minister Simeon Brown heralded the deal, the first outcome of the Government’s new water reform plans after scrapping Labour’s Three Waters, as the most cost effective solution to an expensive problem.

The deal meant a projected 25% increase in water rates Aucklanders were facing could be avoided. However certain details, such as how debt costs might increase for Watercare, and how a default of the water entity might be managed, were not immediately answered.

The advice published by Auckland Council showed that Watercare was expected to receive a lower credit rating than the council once separated and, based on its debt projections, additional finance costs would grow from $8m - $20m per annum, to $20m - $45m per annum by 2034.

Also, according to S&P, Auckland Council’s debt burden will be higher because the loss of revenue from water rates will outweigh the reduction of debt when financial separation with Watercare occurs.

The council was advised that total tax-supported debt for the Auckland Council group - both the council and Watercare - would become 320.6% of operating revenue in 2026 due to the split, as opposed to 230.2% under the status quo.

Inside the Watercare Central Interceptor tunnel in Mangere, Auckland. It is the largest ever infrastructure project in NZ and will enable 360,000 new houses.

Auckland Council’s existing policy limited the debt-to-revenue ratio at 290%, which according to a March update to investors it expected to near by 2030.

However, given under the arrangement Watercare is financially separated, council treasurer Bishop said the debt-to-revenue ratio would reduce to 270% under the long-term plan.

“It is not expected that debt for the council group excluding Watercare will exceed this limit,” he said, in a statement.

“The debt to revenue ratio referred to full Auckland Council group debt, under a hypothetical scenario provided to test the boundaries of our credit ratings.”

He said Watercare was expected to receive a lower credit rating than the council, which would mean higher interest costs for its debt. The water agency was also expected to repay its existing debt to Auckland Council.

“All options for the council and Watercare would have increased debt costs, due to the borrowing required for investment into key services.

“Financial independence for Watercare enables the council to continue delivering sustainable water services to Auckland, in an affordable way.”

Watercare deputy chief executive Jamie Sinclair said the water agency had priced in financial independence in its 10-year price path, which would achieve its affordability target until 2034 - when it will exceed it.

“Our target is for households with median incomes to spend less than 1.5% of their earnings on water and wastewater services. This is based on a median residential water bill.

“For example, for the financial year that starts on 1 July 2024, the median household water bill is forecast to be $1023 and the median household income is forecast to be $114,972.

“This means the bill represents 0.89% of the annual income – comfortably under our target. By 2034, it will have risen to 1.57% - slightly above the target.”

Brown, the local government minister, said ultimately the increased cost faced by Aucklanders under Labour’s Three Waters scheme would have been “far, far higher than the deal that we've done”.

Until Brown introduced the Local Government (Water Services Preliminary Arrangements) Bill into the House on May 30, the same day the Government published the Budget, it was not clear how a water entity going into default might be managed.

According to the bill, even if Watercare was to default on a loan secured by its ability to charge for water services, an appointed receiver would not be able to create or receive an interest or security in the entity’s infrastructure - meaning the public water assets would be preserved from privatisation.

But the receiver could set and collect charges from Aucklanders to meet the loan commitments.