The Government has landed on an alternative to Labour’s water reform programme in Auckland, with a plan to financially separate Watercare from Auckland Council.
Prime Minister Christopher Luxon announced the new arrangement alongside Mayor Wayne Brown and Local Government Minister Simeon Brown on Sunday afternoon.
The Government will pass a law which prohibits the city council from providing any financial support to the water entity and requires it to tell lenders it doesn’t have a Crown guarantee.
Auckland Council would retain control of the entity, in that it can still appoint its leaders and set the remit, but it would not be able to contribute to its costs.
This means the council would be unable to intervene if the entity became financially distressed. Central Government would be under no legal obligation to rescue the entity but would be able to do so if it chose.
Investors often interpret these quasi-independent entities as having an implicit Crown guarantee, as it is highly unlikely that a Government would be willing to allow such an essential service collapse.
Separating Watercare’s assets and liabilities from Auckland Council gives both entities more headroom under their respective debt limits and allows lower rates to be charged today.
The downside is that Watercare will now face higher borrowing costs similar to other unsecured utilities, such as Chorus, and any extra costs will be paid by water users.
Kieran McAnulty, Labour’s local government spokesperson, said the deal with Auckland will mean higher water charges than would’ve happened under the Affordable Water plan.
“The Auckland/Northland entity would’ve had a credit rating of AA, while Watercare will be BBB at best, so the cost of borrowing will be larger”.
Even so, this plan wouldn’t work anywhere else in the country, he said.
Low hanging fruit
Striking a deal with Auckland should be the easy part for Local Water Done Well as the city has a large population and was already doing a good job of investing in its water infrastructure.
The challenge for Simeon Brown and his officials will be finding equally satisfying arrangements for those that lack the financial heft to fund upgrades.
Labour’s water reform was intended to rescue weaker councils by bundling them into larger regional entities that were better able to cope with infrastructure costs.
Auckland would have been buddied up with Northland councils, some of which have significant problems to be dealt with.
Mayor Wayne Brown was very clear that New Zealand’s largest city was not willing to rescue its weaker neighbor.
“Wellington didn’t need to create complicated new structures that diluted the democratic accountability for water services and they didn’t need to merge us with other councils, whether we wanted to or not.”
“Aucklanders didn’t need to pay for someone else’s bad planning,” he said.
Under the deal, Watercare will be able to borrow an extra $190m next year and $1.9b over ten years, which will help ratepayers from being hit with an upfront water rate hike as the cost will be spread out.
Simeon Brown said Auckland needed a bespoke solution as it was so much larger than other councils and couldn’t achieve balance sheet separation by forming a regional entity.
The minister said other solutions for other councils were being developed and would be announced soon.
Smaller councils are likely to have to form regional groups, similar to what was proposed in Labour’s water reform bill, although they get to lead the decision.
Sam Broughton, president of Local Government NZ, said Auckland’s arrangement balanced democratic control with financial sustainability but wouldn’t work for everyone.
“We hope there will be an openness to finding solutions outside of Auckland for all New Zealanders. Water infrastructure is a key priority for councils,” he said.
An earlier version of this story incorrectly reported the Crown would be unable to financially support Watercare. While the Government won't guarantee intervention in a crisis, it would be able to do so if required.
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