Three waters: Government yet to test financial viability of reforms

It is unacceptable the government has pushed ahead with its three waters reforms before checking if the numbers stack up on debt financing, opposition parties say.

National says it means the reforms will not be fit for purpose, and ACT says if they fail to solve the funding problem they solve nothing.

The government last week confirmed it was accepting the vast majority of 47 changes recommended by its working group to address governance, accountability and ownership concerns.

The reforms would see management of drinking, waste and storm water infrastructure across New Zealand shifted from councils and consolidated into four large independent entities, with strategic direction provided by regional representative groups (RRG) combining equal council and mana whenua representation.

The entities themselves would have operational independence, led by a board appointed to meet competency requirements by a subgroup of the RRG.

Questions remain, however, about whether the reforms will be able to achieve their main goal: raising enough capital to fund the infrastructure improvements needed to meet new drinking water quality standards, and prepare for growth and climate change.

The Department of Internal Affairs (DIA) estimated the entities would be able to raise between six and eight times their revenue in debt for infrastructure investment, compared to just two to three times for councils.

Other models have been rejected by the government for failing to achieve the kind of borrowing required to do this, and it has kept "balance sheet separation" - a financial term for the separation of ownership and control over assets being borrowed against - as a core requirement for the reforms.

This put the working group in a difficult position however, after draft legislation included changes which would appear to put the government's prized balance sheet separation at risk.

The working group's solution was a combination of asking the government to help guarantee the debt, and seeking further confirmation from global ratings agency Standard & Poor's (S&P) that balance sheet separation would be maintained.

The government on Friday confirmed it would provide a Crown liquidity facility to help support entities' creditworthiness and balance sheet separation, but the details on this are as yet unclear.

While it confirmed in March its new model would be subject to further analysis by S&P before the Bill was introduced in the middle of this year, its response to the working group also shows that analysis has not yet been completed.

National's Local Government Spokesperson Simon Watts said it was not acceptable for the government to be pushing ahead.

"Absolutely not ... what we're seeing here is a masterclass of how reforms should not be undertaken, and this government at every corner failing to take on board feedback, consider alternative options and actually listen to the people that understand this best.

"Failing to listen to Standard and Poors' advice means that the entity structure is not going to be fit for purpose for what it needs to achieve in terms of outcomes, and that's why National have been opposed to this reform model right from the start and continue to be so."

He said National did believe reform was needed but its approach would be to work with local councils on area-specific solutions.

"We don't believe a one-size-fits-all model will achieve the outcomes required. We don't believe that a four-entities structure will allow local voice to be maintained."

ACT leader David Seymour suggested if the financials did not stack up, the reforms would be pointless.

"The whole premise of this reform is that it will allow councils to have enough room on their balance sheets, having removed their requirement to fund three waters.

"If they can't solve the funding problem, with these reforms, they've solved no problem at all - except, sadly, one will suspect they've managed to get through a de facto Treaty settlement masquerading as an infrastructure policy that doesn't actually work."

Regardless, the government has been pushing ahead with the reform programme, having appointed a transition unit to oversee the change and ensure the new entities are ready to begin operations in July 2024.

Finance Minister Grant Robertson was confident, however, that the entities would be able to raise the capital required.

"One of the reasons we worked so hard to make sure that balance sheet separation continued is because that's what enables the entities to borrow and be able to achieve a much greater level of debt financing than any individual council could," he said.

"The whole point of this is to aggregate up the assets that are there. We believe once we do that they'll certainly have the working capital they need to get on with the job of improving water infrastructure, that's the very point of the exercise."

He said the working group had been in contact with S&P throughout the process.

"Throughout this process actually the working group have been talking to Standard & Poor's around what arrangements we might have and how that might affect the ability to do the debt financing. I'm very confident that we will be in a position to be in that ballpark. Whether it's exactly that number or not will obviously depend as we do the final analysis."

It raises the question however of how much the government will be on the hook for, and whether financial failure of the entities would see taxpayers forking out.

While the agency's formal analysis had not yet been returned, DIA's response to the working group shows the Ministers of Finance and Local Government, and the Prime Minister, will consider the findings and confirm the final design of the entities.

Points of contention remain

While the government said it was agreeing with 44 of the working group's 47 recommendations, not all of those were agreed to in full, and some were expanded upon:

• Recommendation 1: While the working group urged the government to "undertake a positive communications campaign with the nation to explain the universally agreed 'need for change' to serve the needs of the communities", the DIA response did not commit to such a campaign. It merely said it was "committed to ensuring that the public is well informed about the case for change".
• Recommendation 18: The working group called for bi-annual board performance reviews to be included in the legislation. The government agrees it is important to provide for that, but instead of putting it in the Bill would leave requirements up to individual entities' constitutions.
• Recommendation 20: The government prefers requirements for a mix of urban, provincial and rural representatives on the RRG to be set down in the entities' constitutions, rather than the legislation.
• Recommendation 21: Instead of the legislation setting out a mix of RRG iwi representatives appointed on a tikanga basis through waka groupings and Entity D (the South Island apart from Marlborough) through hapū groupings, the government would instead define 'mana whenua' in the bill. Tikanga-based appointments through waka groupings and - for Entity D - hapū groupings, would be set out in entity constitutions.
• Recommendation 23: Instead of the Crown providing funding to enable councils (and mana whenua) to fulfil their RRG roles, this would be provided for by the water service entities. This also aligns with Recommendation 9 which calls for administrative costs to be funded by the entities.
• Recommendation 27: The Local Government minister will consult with councils and mana whenua on drafting the individual constitutions of the entities, rather than with the working group. However, the minister will consider options for this engagement, which could include the working group or new groups for each entity.
• Recommendation 30: While the government agrees with the need for a consumer-protection framework, Cabinet has not yet decided whether this will be in the form of a Water Services Ombudsman with a tikanga-based resolution process. The Minister of Commerce and Consumer Affairs will present options to Cabinet before the Bill is introduced.
• Recommendation 33: Instead of a provision in legislation confirming that "nothing in legislation creates or transfers a proprietary interest in water or limits, extinguishes, or otherwise adversely affects or constrains iwi or hapū authority over, or rights and interests in, water", the government simply notes nothing in the Bill creates or transfers ownership rights in water. Clauses will be added, however, preserving the "status quo iwi and hapū customary rights and interests in water", and "the status quo for ownership in, and iwi and hapū customary rights relating to, water". The wording of these clauses is yet to be finalised by ministers.
• Recommendation 35: The government has not yet confirmed how resourcing for iwi and hapū to engage with the three waters regime will be supported, but announcements are expected "shortly". The government also agrees the entities themselves - not the taxpayer - should be required to adequately resource the RRGs.
• Recommendation 40: Government Policy Statements on water services will rely on consultation processes to avoid the national perspective conflicting with local priorities, rather than stronger provisions being included in the legislation.
• Recommendation 42: Provision for a non-voting Crown liaison to the RRG will not be included in legislation, although the government notes the legislation would not prevent it, and would also allow a Crown Observer.
• Recommendation 44: The government has rejected this recommendation for further confirmation of the size of investment required, saying equipping the entities to address all future investment requirements is a fundamental part of the rationale for the reforms.
• Recommendation 45: The recommendation that the Crown maintain an going role in support and investment in water services was rejected, although it will have ongoing oversight, stewardship and regulatory roles in the new system, and will continue to review any need for Crown support for water services infrastructure, including monitoring the effectiveness of the reforms.
• Recommendation 46: In addition to an interim review of the system after five years, a more comprehensive review will be undertaken within 10 years of the entities' establishment.