I refrained from commenting on the latest iteration on 3 Waters until I had reflected quietly on what changes the Government were proposing. I was also interested in what commentator’s thoughts were on the restructured 3 Waters plan. From what was written on many sites it’s easy to jump to the assumption that most journalists are financial pygmies, and their comments are largely useless. Which is what the government has relied on.
What are the changes?
The Government intends establishing 10 water agencies instead of the previously proposed 4. This is an improvement. Here are the proposed regions:
Here’s what the Minister announced:
To meet the extra costs of establishing ten entities and make sure the new entities do not begin with high levels of debt, the Government has decided not to go ahead with the $1.5 billion second phase of ‘better off ’ funding for councils.” McAnulty.
The rest of this change is just rearranging the deck chairs on the Titanic.
A pool of funding was promised to Local Government when the changes were originally proposed. However, that promise is not now being honoured. That demonstrates more precisely than anything else just how duplicitous this governmental exercise really has been. In Christchurch City Council’s case the Council has $6.9b worth of assets and $1.1b worth of debt, that’s net assets worth $5.8b. For this the Council has been handed $30m full and final payment for these assets.
That seems a good deal for the government and a complete rip off for us the residents who, over generations, have paid for them in the first place. Effectively the assets will be taken off us. We will have token influence in their management and future investment plans. All in the interests of yet another neo-liberal experiment which eventually will be abandoned at huge cost to ratepayers and taxpayers. But “consultants” and “advisors” will be generously paid for their supposed services over the next few years. Society (us) will pick up the tab.
However, in response to the Government’s announcement, our thoughtful Mayor was reported in the Press as saying:
“Although he was unhappy with the reforms, it was time to “get on with what we’ve got”.
Asked why he was not going to just keep opposing them, he said the reforms would not change now, so “jumping up and down in the corner” would not make a difference.”
Would somebody kindly tell Phil that rolling over and saying “tickle here” to the Government isn’t the role of a Mayor of a City which is having a reasonable portion of its Balance Sheet stolen by Central Government.
Proposed New Management Structure
The new Management structure has also been released. We, the ratepayers, are the bottom rung.
Aside from our “enlightened” Mayor what have others said about these changes?
Josie Pagani, a former Labour Party candidate wrote in the Press in this article:
The advice to the Government actually states “a likely range for future investment requirements… in the order of $120b to $185b.”
Notice the tell-tale 50% uncertainty in the cost forecast. I might try telling the bank that I will earn somewhere between zero and $65b in the next 30 years, with exactly as much accuracy. The Government uses the mid-range figures to make projects like the light rail and Lake Onslow follies seem more affordable, so why does it use the extreme figure to promote water reform?
The Government is likely overstating the problem, but it is still true that some councils can’t afford the upgrade costs.
“In modern democracies ‘majoritarianism’ is not fully democratic because a full democracy protects the rights of minorities.”
Rather than forcing councils to combine, government could achieve greater reductions in finance costs by creating one entity to borrow at government interest rates. That would keep local control, and minimise the cost of borrowing.
No matter what it promises, any government is going to have to find a way to help councils that can’t afford their water upgrades, just as they will have to involve Māori.
Stop worrying about Māori involvement. Keep your eye on your wallet. That’s where the real water is flowing.
Bernard Hickey in his column in Kaka wrote:
Three Waters was always a fudge to avoid fiscal conflict with voters and extend the magical thinking. Having 10 entities instead of four is just as magical and pointless.
The ratings agencies wanted the assurance that politicians would not get involved in pricing, debt or investment decisions, but also wanted reassurance that the Crown and Councils would ultimately step in to guarantee the debt if something went wrong. In the end, ‘balance sheet separation’ delivers neither the separation or the savings from such entities being able to borrow directly off those assets.
The councils themselves and the Government can already borrow off those assets, and at very favourable interest rates because the Crown and the Local Government Funding Agency (which is controlled and governed by the Crown) have AA+ and AA credit ratings respectively. Councils and the Government simply say it is not possible, when it clearly is, albeit with higher borrowing costs for everyone (including home buyers) than would otherwise be the case with higher public debt and potentially lower credit ratings. The new entities will be able to borrow, but with slightly lower credit ratings than the Crown, and therefore a slightly higher cost.
In essence, the honest and realistic way to deal with the need for $185 billion is for politicians and voters to accept that the population growth we have accidentally on purpose agreed to and want will have to be paid for through higher taxes/charges/debt and, ultimately, higher interest rates and lower land prices. There is no magic water infrastructure fairy, or some outside player willing to pay for it and take on the delivery and financial risks without a capital return in the form of interest charges. Either the infrastructure is not built, or the Crown will have to pay for it directly or implicitly by guaranteeing the debt and hoping voters don’t notice it.
That idea relied on the fiction that somehow the borrowing would be cheaper than if the Crown or Councils did it in their own right.
Just quietly, Kāinga Ora, which had been using a similar ‘balance sheet separated’ structure from 2018 to 2022, announced in November last year it was moving back to having the Crown borrow directly against the entire Crown balance sheet for on-lending to Kāinga Ora, in order to reduce borrowing costs.
The 10 entities will be ‘10 dead waters walking’ if National wins. If Labour wins, they may go ahead, but eventually someone will work out they are a pointless and expensive fudge to avoid a proper conversation and real approval from voters at large for massive infrastructure spending to catch up with and maybe even get ahead of a likely 10 million increase in our population over the next 80 years.
The irony is the 10 entities could just as easily be wound back in-house with a quiet announcement in a few years time by Labour about how balance sheet separation was an expensive fiction, just as Labour did with Kāinga Ora five months ago.
The government’s ad agency has done its job by proposing a new name which they hope will appeal to the public. These reforms are now affordable. That may or may not be the case but hopefully this moniker will encourage greater scrutiny of the proposed debt financing that will fund the upgrade.
I have written on the topic at some length last year but in summary the debt is high octane. The government’s own documents which it has shared with the global ratings agency Standard & Poor’s, described the financial risk profile of the debt as ‘aggressive’. That assessment reflects both the amount of debt being raised and also the debt service requirements. Although the debt is interest-only, the interest expense is so significant that there is barely any free cashflow remaining after payment of operating costs and interest expense.
As a result, there is very little margin for error and any significant cost overruns, delays or labour disputes can very quickly create issues with the financing which in turn can cause chaos with the reforms. It’s no coincidence that Scotland, who the government has consulted with on these reforms, does not use leveraged finance to fund its water infrastructure.
We are, therefore, left with the same problems as existed last year – only multiplied. The complicated and untested governance structure, including the Te Mana o te Wai statements, together with a very aggressive leveraged financing package is unquestionably too risky a proposition for our national water infrastructure.
Finally, a courageous Mayor and Council in Waimate:
Congratulation to Waimate the only council to turn down funding in New Zealand. Mayor Craig Rowley said:
“overall, he believes Waimate’s water infrastructure is in pretty good shape; and ratepayers have been happy to pay for it. Losing the assets to a new Canterbury-West Coast water corporation means losing about a third of the council’s operating income, he says. “So that affects staffing and affects our ratepayers.”
Of course, it also means they don’t have to pay the cost of upgrading and maintaining the pipes and plants. But he reckons they could have achieved many of the same efficiencies of scale just by partnering with their neighbours Mackenzie District, Timaru and Ashburton on more modest regional solution. “We went to Department of Internal Affairs and said, we’d like to do some work on this. We just got told, we weren’t thinking big enough.”
Garry: What did I think?
I have worked in Local Government as an elected rep and within the Māori community as both an advisor and a friend. It would sadden me if our community approach to water creates a divide between Māori and those who are not.
I read a marvellous book written by Vivian Hutchinson called “How communities awaken”. In it Vivian quotes a Māori kuia who coined the term “tu Tangata whenua”. She used this term to describe in te Reo the concept of active citizenship.
For Aunty Marj (and I quote from the book) “Tangata whenua was not an identity but a job description. It was a job description that included the responsibilities of honouring and taking care of what was not just a place, but a living being”.
In politics I observed those who were often completely undemocratic behaving as if they were honouring the concept of accountability. Many politicians operate in this manner. Our responsibility as Tu Tangata whenua is to ensure that the key decisions which are being made are correct and will survive the test of time and to remind our elected reps of their responsibilities.
The way the government has handled the water reforms has not been democratic. They were captured by a small powerful group within Infrastructure NZ and Water NZ. Dumb public servants have accepted lobbyist’s arguments and eased the ideas through the political process. LGNZ has been a pawn in the game and been largely compliant. Consultants have seen this as a great, deep, trough in which to sup.
Supposedly independent reports by consultants have reinforced the fictitious numbers supposedly needed which are bloated to hell. As an accountant I am deeply suspicious of numbers which state the challenge will cost between $120b and $185b. Allowing a 50% error margin raise doubts about either number.
I have spoken to the National Party spokesperson on water and left feeling that he doesn’t understand the complexity of the issue. He was just against it. That’s idiotic politics.
What is now needed is to test the proposed structure against others, an example would be how the Dutch have managed their water systems since around 1650. The test is “have we got it right”?
It is time to ensure that we have sound water systems throughout this country. The proposed structure has been driven by vested interests (infrastructure companies, money lenders, bureaucrats, rating agencies, politically powerful individuals) and will line pockets from North Cape to Bluff and across the seas with vast amounts of our borrowed money. It simply is wrong.
It’s not too late to stop and have a cup of tea. The issue of water is too important to rush in a headstrong manner into a model designed by vested interests whose motives are camouflaged in words which supposedly demonstrate that they care about us at the end drinking our glass of water.
The original proposal was flawed. All that has happened is that the chairs around tables have been rearranged. The fundamental flaws remain. It’s up to us to continue to resist the current model.
The new structure still does not address:
- systemic under funding of Local Government
- The broken relationship between central and local government
- That stormwater in Christchurch is not just about pipes but land and water retention basins
- Te Mana o Te Wai – caring for water is more than pipes, from the mountains to the sea it is about healthy rivers, and protecting our catchments