Auckland, Wellington and some middling councils like Whangārei are the biggest winners from the Government's $2.5b support package; by contrast, Kaikoura with fewer than 4000 residents gets only $6m. Graphic: Jonathan Milne

Analysis: The Government is offering big money to the biggest opponents of its water reforms, to relinquish control of their water networks – but the process is characterised more by cock-up than conspiracy

Some see a sleight-of-hand, some see a slip-up.

The Government is promising New Zealand’s 67 councils it can whip the tablecloth out from under the country’s drinking water, wastewater and stormwater infrastructure without breaking a thing. It says it will magically take billions of dollars of their water assets, and billions of dollars of the revenues they earn from them – and leave the councils collectively $6 billion better off.

Are you amazed? Confounded? Perplexed and bedazzled? Sail the Seven Seas, and you may never find a magical mystery as perplexing as the allocation of the Three Waters support funds.

Newsroom has spent the past week seeking to look behind the magician’s curtain to see how it’s done – but in speaking to the country’s mayors, some have expressed serious concerns about the reliability of the information that government officials are working from. In short, they think it’s little more than a clumsy conjuring trick.

Minister Nanaia Mahuta is pulling their own coin out from behind their ear and presenting it back to them – voila! So which councils, then, are the winners who get to keep the coin? And which are the losers?

In short, most councils are able to borrow more heavily against their water infrastructure than against their other infrastructure. For instance, by the time the Government is asking for the assets to be handed over in 2024, Aucklanders will be liable for $4.2b of debt on the Watercare assets, borrowed against just $1.1b in revenues. That’s a debt-to-revenue ratio of nearly 370 percent.

In Christchurch, ratepayers will be liable for a debt-to-revenue ratio of nearly 500 percent on their $1.1b in Three Waters infrastructure.

Many councils are sitting just beneath their debt caps – the maximum percentage they are allowed to borrow.

If (or when) the councils relinquish controls of their water networks to the four big new semi-autonomous regional water authorities that the Government is establishing, then the overall debt-to-revenue ratios for those councils will drop significantly. Because their remaining roads and buildings and other infrastructure will be less heavily leveraged, the councils will be freed up to borrow again to build new, critical infrastructure, like parks and libraries and public transport networks. They won’t have to raise rates so much.

But what this doesn’t factor in is that the revenue councils earn is valuable not just in defining their indebtedness; it helps with the operational costs of running a big public service organisation. For a few councils like Wellington, Hutt City and Whangārei, they carry relatively little debt on their water infrastructure. (Sometimes, and this is certainly the case in Wellington, that’s because they haven’t been paying to maintain their pipes).

For those councils, their annual revenues equal or surpass the size of the debt. In 2024, Wellington is forecast to earn $156m from water services that will carry only $190m in debt; Hutt City will earn $71m with liability for a debt of only $109m; Dunedin will earn $77m that year and the city’s ratepayers need worry about only $122m debt. 

Better still, Whangārei and Waitaki have no debt on their water networks at all. Everything they earn goes back into their town’s infrastructure; they needn’t worry about the bank manager.

Some of these councils have argued, persuasively, that they have good, functioning water infrastructure that their residents paid for, fair and square. Why should they relinquish control of it?

The Government has five answers to this. 

1 / Ratepayers are not losing ownership. In a series of delightful rhetorical flourishes, the Government has shifted its description of who will ultimately own the assets. Last year, they were to be shifted to "Crown ownership" then, sensing danger, the language changed early this year to "public ownership". At the Local Government NZ conference in Blenheim in July, the Prime Minister changed the language to "local ownership" to reflect the design laid out in a series of Cabinet papers. And finally, the language has now changed to "council ownership".

But this is ownership only in the loosest possible sense. Each of the four new water authorities will be "owned" collectively by anywhere from four to 20 councils, which will not be able to collect a dividend, buy or sell their shares or even hands-on appoint the directors.

In the words of an Internal Affairs spokesperson: "The Three Waters assets will transfer from the councils to the new entities and would sit on the balance sheet of the entities. Councils will collectively own the Water Service Entity providing services for their district, on behalf of their communities."

2 / Ratepayers at the seven least-indebted councils will be reimbursed for their loss of debt headroom. The Government will not accept any liability to pay for the equity in the water assets, because it says they're not transferring ownership; they remain ultimately owned by councils. If the Water Service Entities were to pay for the equity in three waters assets held by local authorities, the spokesperson explains, they would have to recover the cost from revenue and charges paid by communities, "effectively charging them a second time for the same assets".

But in that aforementioned sleight of hand, councils like Wellington, Hutt and Whangārei whose debt headroom is reduced will be reimbursed for that.

So, as Newsroom revealed last week, Wellington will get a $158m financial sustainability allocation – the details are still to be worked through but that's the Department of Internal Affairs indicative number. Whangārei will get $90m, Hutt City will get $28m and South Waikato will get $19m. Manawatū, Waitaki and Dunedin will receive smaller sums. "This is indicative because it would need to be subject to a detailed due diligence process should the reforms proceed as proposed," the spokesperson emphasises.

3 / Ratepayers at the other 60 councils will lose their debt burden. Most water networks are more heavily indebted. When the water assets and revenues are handed over to the four new authorities, they will also take over the debts.

That should free up debt headroom for those councils. Indeed, the Standard & Poors credit rating for 19 of them is forecast to rise a notch or two. (The credit rating of just one council, Whangārei, is forecast to drop).

4 / Government will give councils' money back to them. This is the coin-from-behind-the-ear-trick. In July the Prime Minister announced $2b in no-strings-attached funding for councils to invest in jobs, housing and, yes, water infrastructure.

But most of that money will come from the new water entities – which will get their money from the revenues they earn from the water services handed over to them by the council.

5 / Like it or lump it. If the Government can't get councils agreement to hand over the Three Waters assets, it will expropriate them by force of law. The option to "opt out" will be removed. This is the nuclear option, though, and the Government knows it could explode in its face come election time. 

That's why the Prime Minister and her colleagues are working so hard to win over the biggest and most influential opponents of the reforms. It should be noted that these include Auckland mayor Phil Goff, Christchurch mayor Lianne Dalziel, Whangārei mayor Sheryl Mai. Wellington mayor Andy Foster, too, is said to be dubious about the reforms.

By a magical coincidence, two-fifths of the Government's total $2.5b support package is going just to those four councils. 

The confidence rating

There is, though, a big question about the data on which the Department of Internal Affairs is basing its calculations and forecasts. Most of it was sourced direct from a formal Request for Information, a process by which the 67 councils were required to open their books to the Department of Internal Affairs.

That information was published in online dashboards that recorded how much councils were earning from their water networks, how many people they employed, how much debt they carried, how many unplanned outages there were, and more.

On the basis of that enormous tranche of published data, Prime Minister Jacinda Ardern went all-in.  

"These are once-in-a-generation changes," she told the Local Government NZ conference. "The modelling released two weeks ago confirmed that all communities in the country will be significantly better off under the reforms.

"It included council-specific information for all 67 councils in the form of a local dashboard. These showed the projected average costs of providing these services per household in 2051 with reform and without reform. In every case, all communities will be significantly better off under the reform proposals."

The trouble was, much of the information she relied upon in the dashboard was bunkum. Even a casual observer couldn't miss seeing it was riddled with errors. Like the fact that Horowhenua was reported to have 10 times more stormwater connections than it had residents. Or that there were no households in Wellington affected by unplanned water outages in the past year (apparently the data wasn't reported because of the low confidence rating!)

Just this week, Internal Affairs admits that four councils listed as debt-free in the June dashboard – Waikato, Waitomo, Ōpōtiki and Westland – will in fact carry debt into the 2024 transition.

"The model shows that all four councils have debt relating to three waters assets transferring across," the spokesperson acknowledges. "The actual reason for the difference is that these councils had inconsistencies in their Request For Information submissions and the local dashboard was pulling the line that has zero values. This was corrected for the financial impact tool which results in the inconsistency."

Internal Affairs is anxious to claim that most of the errors were made by councils inputting the wrong information. But these councils say the mistake was at the Wellington end. And Internal Affairs proceeded to publish the information without checking, and then allow critical commitments to be made by the Prime Minister and the decision-makers below her.

At Ōpōtiki, mayor Lyn Riesterer emails a screenshot of their submission to show that her council correctly disclosed its debt, despite Internal Affairs' attempts to sheet home blame for the errors to the councils. "Internal Affairs have assumed a certain financial structure was in place (as in “one size fits all”) and based all their assumptions on that financial structure," she fumes. "In fact, our financial structure is different to the one they have based their assumptions on. It has taken a lot of delving and sorting through to find where Internal Affairs have gone so wrong."

It's one of a range of errors in the data Internal Affairs has published about Ōpōtiki. Westland District Council chips in too: "I can confirm that the error was at the Wellington end," a spokesperson emails.

Mayors have been infuriated by all these errors. Gary Kircher, from Waitaki, is trying to get his head around whether his council will really be entitled to $10m financial sustainability report as indicate – or whether the number is based on shonky data. 

"As with many other Councils, our dashboard was based on assumptions which did not reflect our true situation – population numbers, average resident numbers per household, no account taken of the many holiday homes in Waitaki, no recognition of the multiple units of water connected to many of our farms, and lower population growth figures over the next 30 years than we believe we will have," he says.

"Add to that other assumptions on future standards of service which appear to include all households connected to sewage schemes, compared with the many currently on septic tanks ... and you end up with numbers that do not make sense. In our case, it is predicted by 2051 that an average household in Waitaki will be paying over $13,000 in today’s dollars if we do not join into the new entity."

John Robertson from Waitomo agrees, slating Internal Affairs' "sloppy practice".

"The dashboard that DIA published included a major error in Waitomo’s case. They recorded us as having no water debt, when we believe we have $26m of water related debt. DIA’s performance on Three Waters is, in my view, dismal.

"The first rule before putting out figures onto a dashboard like they did should be to check, before publishing, with each Council as to the accuracy.  They did not do that which is totally unacceptable.

Then, to add insult to injury: "When asked to correct the dashboard figures by my Council, Internal Affairs declined to do so because they say the figures just reflect 'a point in time'. This too is nonsense."

Internal Affairs is refusing to budge. Day after day, week after week, it's continuing to publish incorrect data about dozens of councils' Three Waters infrastructure. It's not correcting it. It's not deleting it. It's not apologising. The question continues to be the extent to which Ministers and their officials are relying on it.

The accuracy issues raised so far by councils have "no material effect" on the overall conclusions, an Internal Affairs spokesperson insists. Which is what? "That we face very significant funding challenges in renewing and maintaining our three waters infrastructure and delivering these essential services under current arrangements, and that households are better off – in terms of average household costs – with reform than without."

He says extensive modelling provides for a range of scenarios for future investment and average household costs. "Councils have been supplied with models and Council-specific analysis – far more detailed than that shown on the dashboard – that shows communities will face lower average household costs with reform, and that this conclusion is robust to significant variation in the amount of investment."

Councils have been provided with an indication of the ‘no worse off’ payments, and Newsroom has separately been supplied a copy of this spreadsheet. It uses updated Long Term Plan information and also allows councils to enter their own data to explore the effect of the proposed reforms on their financial position, Internal Affairs' spokesperson explains. "As should be obvious, the indicative allocations of ‘no worse off’ funding are subject to changes in assets, liabilities and revenues between now and 1 July 2024, and need to be confirmed through a due diligence process."

Jason Smith, mayor of Kaipara, also highlights errors in his district dashboard – and he's had enough. His neighbouring councils Whangārei and Far North have already voted to "opt out" of the reforms, and his council has passed a strongly-worded criticism of the proposals.

The number of connections for Kaipara is stated as 25 percent, he says. "This is for drinking water only. The number connected to wastewater is about 56 percent, but this fact is not included."

The dashboard doesn’t state it only shows drinking water – these are, after all, Three Waters Reforms. "The figure which shows in the dashboard is misleading. We’ve suggested to Internal Affairs they correct or clarify this but they haven’t done so.

"Taken as a whole it is basically unreliable as an evidence base for decision-making," Dr Smith says. "It does not reflect our reality."

Newsroom Pro managing editor Jonathan Milne covers business, politics and the economy.

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