Three Waters Reform Package grants are recognition of funding constraints faced by councils, and a vote of confidence in the future of local government, Local Government New Zealand (LGNZ) says.
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Councils have been invited to submit projects for their share of $500m.
A further $1.5b will become available in mid-2024.
LGNZ president Stuart Crosbie said the money can be used for a broad range of projects and initiatives to benefit the community - from parks and gardens to swimming pools, libraries or community centres.
"Anything from community facilities through to what they might see as essential infrastructure that they may have had to put off due to financial constraints, so a very broad range."
Councils have until the end of September to apply.