Up to 74 rural communities will be allowed to take ownership of water supplies owned by councils, in the final tranche of Three Waters legislation introduced to Parliament last night.

The decision will spark further debate: on the one hand, many in provincial New Zealand have been angry at losing control of their local water infrastructure; on the other hand, this solution is effective privatisation of water supplies on a small scale.

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The law change is contained in the final Three Waters bills, introduced to Parliament on Thursday evening. Credit ratings agency Standard and Poor’s has been analysing the proposed model, and its analysts spoke with Newsroom.

Their confidence that no local authority will suffer a credit rating downgrade has now waned, but they say they won’t be able to make a final determination until next year’s election decides the fate of Labour’s water reforms.

Local Government Minister Nanaia Mahuta told Cabinet the provision to transfer ownership of council water supplies to users would “recognise and provide for the diversity of governance arrangements relating to rural drinking water supplies, and the wishes of users”.

She said a key concern for councils had been the impact on community drinking water supplies – mixed use schemes that provide both water for drinking, and for farming purpose like stock and irrigation. These supplies often have unique operating or funding arrangements.

“You’re effectively privatising local water supplies for the benefit of agri-business.”
– Eugenie Sage, Green MP

“There may be a strong sense of community ‘ownership’ that has been in place for many years. In some situations, councils are the legal owners of the schemes, but they are managed and operated by the farming communities who receive the supply.”

But just last week, headlines were dominated by a Green Party attempt to protect the Three Waters infrastructure from privatisation; in response, both National and Labour swore black and blue that they would not privatise water assets.

Handing ownership of these small supplies to rural users is a solution that was recommended by a working group including small council, farming and iwi representatives. It would apply only to supplies that served fewer than 1000 people, and could only be transferred if 75 percent of them agreed in a referendum. 

If it’s transferred to the users, ownership of the water supply would be vested in a representative body from that community, that would be liable for the costs of maintaining it to safe standards.

“You’re effectively privatising local water supplies for the benefit of agri-business,” says Green MP Eugenie Sage.

The proposal has not had detailed scrutiny by officials.

They say their analysis is constrained by the Government’s determination to push through Three Waters laws in time for drinking water, wastewater and stormwater infrastructure to transfer to big regional corporations by July 2024.

“These time constraints have prevented us from investigating distributional impacts of the problem on certain segments of New Zealand consumers, such as vulnerable consumers and traditionally under-served communities,” says one regulatory impact statement. “However, this limitation is partially mitigated by the work Department of Internal Affairs is undertaking on protections for vulnerable consumers.”

Ministers have jammed the foot down on the accelerator even harder, and introduced the final two bills last night – hard on the heels of using its Labour Parliamentary majority to pass the Water Services Entities Bill without support from any other parties.

Mahuta said rural communities reluctance to cede control of their water supplies was generally because of concerns about perceived loss of community voice and local involvement, concerns for future water supply for farming purposes, and uncertainty about the future management of the scheme, including pricing and charging.

The pricing and charging is also addressed in final bills introduced into Parliament: the Water Services Legislation Bill, and the Water Services Economic Efficiency and Consumer Protection Bill.

The economic regulations and consumer protection bill creates a Water Services Commissioner, on the board of the Commerce Commission but modelled on the standalone Telecommunications Commissioner.

The law, if it is passed, will allow the Commerce Commission to regulate the rate of price increases, and even to impose short-term revenue caps, to mitigate the risk of price shocks as the entities are established. The regulation is intended to avoid sharp (and embarrassing) price hikes in the first few years of the reformed system.

Without the reforms, the public do face significant rates increases – for instance, water rates charged by Watercare in Auckland are scheduled to double over the 10 years to 2031.

The economic regulation of the new Three Waters service would lock in price protections for consumers, in line with official assurances water charges will rise more slowly with the creation of the four big new water corporations.

The bill was meant to be introduced in October; instead, the first reading will be next week, in Parliament’s final sitting days before Christmas. It will be referred to the finance and expenditure select committee to hear public submissions early next year.

Impact on councils’ nominal borrowing capacity for non-water investment

S&P Global directors Anthony Walker and Martin Foo say some councils may face credit rating downgrades, because the the water rates revenues they lose will outweigh the debt liability that is shifted over to the new water corporation.

In the past month, Marlborough District Council has been downgraded, and Wellington City Council has been placed on a negative outlook, though those are not yet related to Three Waters. Wellington and other councils could yet be downgraded: "This could occur if the reforms weaken budgetary performance, liquidity coverage, or increase debt levels relative to operating revenues," S&P says.

When ratings go down, interest rates go up – which means increased liability for ratepayers. This will affect the four new water entities even more, because of their size.

But on the most part, transfer of the highly leveraged assets off local authorities' balance sheets should improve their debt to revenue ratio – meaning less pressure for rates rises, or greater ability to build new parks and libraries. Between them, local authorities could be able to borrow an additional $2.5b by 2024, and $4b by 2031, Internal Affairs officials forecast.

Anthony Walker, director of sovereign and international public finance at S&P Global.

"This has been a really difficult issue," Mahuta acknowledges. "And if you look at the issue of water service delivery and reform in any country that has gone towards scale and aggregation, that's always been a challenging issue.

"It's the right thing to do, though, because it will be unaffordable for ratepayers to invest in waters infrastructure, which is so important to deliver health and environmental outcomes. I think in five or 10 years' time, we'll see the benefits of these changes."

If the Three Waters reforms were to cost Labour the election, Mahuta would remain confident the reforms were the right thing to do: "Absolutely, because I know that public health and environmental health are important to New Zealanders," she says. "I want our kids to have the assurance of clean drinking water, to go to their local beach or river and be able to swim in it – and sadly that's not the case around many parts of New Zealand."

'User ownership would not confer rights or interests'

Newsroom asked the minister's office and Department of Internal Affairs whether this law change amounted to privatisation.

The department argued, in response, that mixed use rural water supply schemes were different to urban drinking water networks, in that they may primarily supplied water for farming and horticulture purposes, as well as for drinking. 

Some users would be reluctant to have their schemes transfer to the new water services entities, the Rural Supplies Technical Working Group had heard. While owned by councils, their operation and management often involves support and contributions of the farming communities who receive the supply.

Hamiora Bowkett, executive director of the Three Waters Reform Programme, says initial investigations suggest there are about 74 of these schemes around the country.

The Government had agreed there should be a way for users of council-owned mixed-use schemes to be able to directly seek to own and operate their schemes, he says, independent of a water services entity.

"This is a form of community ownership where the users of the services provided could own the infrastructure and assets of the schemes," he explains. "Access to water resources would continue to be governed under the Resource Management Act including any consent requirements.

"User ownership of a water supply infrastructure would not confer any rights or interests in relation to ownership of water."

Bowkett says Department of Internal Affairs officials are currently working in collaboration with Clutha District Council and farmer representatives to explore the costs, benefits, and risks with user ownership versus entity ownership of Clutha mixed use schemes.

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

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