Should NZ rely on its own water infrastructure model? Should we give future generations a local pūkeko or an imported partridge? Credit agencies are watching like hawks.

Soaring inflation and interest rates are putting new pressure on plans to fix New Zealand’s leaking pipes and unconsented wastewater plants. The wrong model could cost the country billions of dollars in debt servicing. Should we adopt our own indigenous model, or should we import a model from England, Scotland, Wales or Tasmania, like a giant Christmas partridge?

There has been political and social media debate over the merits of the existing and new financing models – so Newsroom has gone to the experts on the big questions about financing the reforms. Twelve questions over the 12 days of the Christmas… and first up, how does the anticipated level of borrowing against water revenues compare with debt on water infrastructure overseas?

1/ Paying for Three Waters: the local pūkeko v the imported partridge
2/ Who would actually manage the borrowing for Three Waters infrastructure?
3/ Three Waters’ magical kete with room to borrow more and more
4/ On the 4th day of Christmas, what’s so good about four water companies?
5/ Achieving the gold standard of balance sheet separation
6/ Driving through water reforms in new special purpose vehicles
7/ Govt sticks to ‘bottom line’ of balance sheet separation – but why?
8/ If councils retain Three Waters, how much will they have to raise rates?
9/ The silly Ministry of Water Works – and its serious side
10/ On the 10th day of Christmas, should Three Waters become two?
11/ Too big to fail – calls for Govt to guarantee Three Waters debts
12/ Paying for Three Waters: ‘It’s always gonna come back to you in the end’

Ratings agencies S&P, Fitch and Moody’s discuss the impact on ratepayers, taxpayers, and on those consumers whose water charges will pay for the highly leveraged borrowing of the four new water corporations.

We’ve also asked three top independent experts to assess the pros and cons of the Government’s financial model, and some of the alternative proposals. 

They are legal expert Josh Cairns, a partner at Simpson Grierson; finance advisor Bevan Wallace, executive director of Morgan Wallace; and former Three Waters transition programme leader Amelia East, Asia-Pacific head of advisory for HKA infrastructure consultancy.

The cost of borrowing to pay for infrastructure is already putting council credit ratings under pressure: Wellington City Council has been placed on a negative outlook, and Marlborough District Council has been downgraded. 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.

The new bills will help answer the questions of how separate the new entities’ balance sheets are from councils, and from central government, which has agreed to a backstop liquidity facility.

That, in turn, will influence the credit ratings for the new entities, and for the 67 councils that nominally own them, and potentially even for the New Zealand Government’s sovereign rating.

“The question is, does the bill give us the information we needed?” asks Anthony Walker, director of sovereign and international public finance at S&P Global. “Or is there more financial and transition unit information coming next year, which may be the information we need to wait for?”

There are big questions about plans to “aggressively” leverage water revenues (S&P’s characterisation) borrowing six to eight times the entities’ annual revenues – and whether councils or the Government will be expected to bail them out if things go wrong.

And there’s a new problem that’s fast emerging: inflation, and the high interest rates being imposed to try to rein it in. The scale of the planned infrastructure works will expose the four new entities, and those who pay their bills, to an extent greater than any infrastructure programme previously seen in New Zealand.

The first question goes to the two versions of the 12 days of Christmas – the traditional British Christmas carol, or our own Aotearoa approach. Are they so far out of line as critics allege? Would the New Zealand model leverage our water revenues at a dangerous level, compared to international benchmarks?

How does the anticipated level of borrowing against water revenues compare with debt on water infrastructure overseas?

Dŵr Cymru Cyfyngedig may be a challenge for many New Zealanders to get our tongues around, but the Welsh water company can help us get our heads around our own water reforms. 

For all the comparisons with utility providers in Scotland, or the Australian states of Victoria and Tasmania, it’s Dŵr Cymru that has most similarities to what the Government proposes for us.

It serves 3 million people – that’s a population just 40 percent bigger than the water entity that would serve Auckland and Northland. 

And it’s been held up as a model of economic, social and environmental sustainability, ever since 2001 when it was purchased from its private owners by a not-for-profit company, using bank and bond finance.

Dŵr Cymru’s scale is similar to the New Zealand entities, and so too would be its debt-to-revenue ratio. According to this year’s financial statements, it has borrowings of £4.2b, derivatives worth £224m, and £697m in deferred tax. That multiplies to 6.4 times its revenue this year, which was £807m.

The big council-owned water corporations proposed for New Zealand would also be not-for-profit, suggesting that official projections for how much they can borrow aren’t out of the ballpark.

As inflation soars and interest rates rise, Cymru’s experience is again educational: Its financing costs leapt from £134m to £277m in interest payments this year, because of its inflation index-linked debt. Its auditors say increasing costs and inflation are the risks most likely to adversely affect the company’s liquidity.

This just highlights the extraordinary cost of a nation’s public infrastructure.

New Zealand’s Government expects the new water incorporations will borrow a multiple of six to eight times their annual revenues, to catch up on decades of work left poorly attended by some councils. 

If capex of $120b to $185b over the next 30 years is required, as the Government has been advised by the Water Industry Commission for Scotland (which it contracted to analyse the infrastructure deficit), then that rate of borrowing will be needed. And that will be significantly higher than what you see in countries like Australia or Scotland.

But it’s not entirely unusual for such standalone water entities – those in some other parts of the world, mostly the US, are leveraged at eight times their revenues. In England, too, water entities tend to be more highly geared as they are owned by private equity operations. USave Articlesing debt allows them to maximise their return on equity.

The Department of Internal Affairs modelling was based on leverage at six times the new water entities’ revenues, which is what was tested with S&P and approved ahead of the co-governance model being developed.

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

Leave a comment