Local Government New Zealand says Labour is scaremongering over Government moves to extend the time councils can contract local water services to private companies.
The Local Government Amendment Bill would more than double that length of time, from 15 to 35 years.
Labour says the Government is trying to privatise water services, which will do nothing for quality or pricing.
However, LGNZ president Lawrence Yule disagrees. He says many companies do not currently invest in water services because a term of 15 years is not long enough.
Mr Yule also says only a number of councils in unique circumstances would enter into 35-year partnerships.
The Local Government Amendment Bill passed its first vote in Parliament on Tuesday night, by 64 votes to 58.
Local Government Minister Rodney Hide says the bill removes various impediments to local councils using the private sector to provide services.
It would allow them to contract out water services for up to 35 years, instead of the current 15 years.
Labour also says the legislation would remove a requirement for councils to consult ratepayers over significant moves, such as contracting out water services.
However, Mr Hide is downplaying concerns that water services could be privatised.
He told Morning Report councils already have powers to enter into contracts with private providers to build new infrastructure, but the current 15-year period doesn't reflect the economic life of the assets.
The bill, which is also aimed at ensuring councils focus on core services and long term financial planning, will be considered by a select committee.
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Protections will be removed, group claims
Anti-privatisation lobby group Right to Water says the Government is being dishonest by denying that the changes amount to privatisation.
A spokesperson for the group, Maria McMillan, says the bill removes protections requiring local government to retain control of water management.
While councils are supposed to set pricing and policy, overseas experience suggests commercial interests will dominate in practice.
However, the director of the Local Government Centre at the Auckland University of Technology, Peter McKinlay, says private companies will be reluctant to enter long-term agreements if councils control the prices they can charge.
Mr McKinlay says the bill will probably whip up unnecessary fears over privatisation, while failing to encourage any private investment.