S&P Global Ratings sees debt drop for councils after Three Waters reforms

Credit ratings agency S&P Global Ratings has run its eye over New Zealand’s Three Waters reforms and says rated councils could see their debt drop 30%.

The Three Waters reforms will transfer responsibility for water from councils to four centralised new entities, which includes shifting water assets and liabilities from council balance sheets.

S&P said in a new report the reforms are likely to improve financial outcomes and reduce debt burdens for most, but not all, rated councils. The Government has estimated the investment needed to fix water systems and build and maintain infrastructure could cost up to $185 billion over the next 30 years.

There would be financial winners and losers - with the biggest balance sheet winner Palmerston North City Council because it could likely shift the cost of a yet to be built wastewater plant off its books, saving it several hundred million dollars.

In contrast, Whangarei and Horowhenua councils could see their deficits increase due to losing profits from water services, S&P Global said.

“For some local councils, no longer having to manage and pay for drinking water, stormwater, and wastewater infrastructure will lighten the debt load. For others, handing control to four publicly owned "water service entities" or WSEs may crimp operating margins and increase debt-to-operating ratios,” it said.

S&P says only three council credit ratings would change purely because of the water reforms, with one of those “weakening”.

Overall, the ratings agency says the average credit rating for New Zealand councils could improve to 'AA+' from 'AA' because of strengthened financial results.

S&P has public credit ratings on about one-third of New Zealand's 78 local councils, which account for about 78% of the country’s water-related debt and about 80% of the loans given out by the New Zealand Local Government Funding Agency.

But still too much debt?

The ratings agency said debt levels in the New Zealand local government sector remain high despite the increase in headroom coming from the reforms.

S&P analysed councils' published 2021-2031 long-term plans. It said these long-term plans indicated councils were  planning to rein in deficits and pay down debt between 2026-2031. 

“The structural improvement is particularly apparent in New Zealand's two largest councils, Auckland Council and Christchurch City Council.”

S&P’s report also highlighted how profitable water services are for councils.

For nearly 90% of the councils' rated by the agency, water activities generated higher operating margins than other activities.

“Across our rated portfolio, water-related activities account for 21% of operating revenues and only 17% of total operating expenditure.”

But it said a lack of quality information "muddies" analysis of the water infrastructure reforms, including what mechanism will be used to transfer debt from councils.

The water reforms could also be used to push for council amalgamations, it said.

But the bottom line is New Zealanders face higher costs to fund water infrastructure - no matter who delivers it, S&P said.