On the second day of Christmas, we continue our Three Waters financing series by asking, should the Treasury, water corporations, the Local Government Funding Agency or councils manage the borrowing to pay a forecast $185 billion works bill?
Perhaps the country’s biggest financing question is how New Zealand can afford to pay the projected $185 billion price (if overseas consultants are to be believed) to fix and maintain its run-down water infrastructure over the next 30 years.
To use the metaphor of the season, on the second day of Christmas my true love gave to me, two kūmara – and vexed questions about paying for the water to grow, clean and prepare them.
Newsroom has gone to the experts on the big questions about financing the reforms. 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.
WHO PAYS FOR THREE WATERS?
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’
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.
So who would actually manage the borrowing for water infrastructure, under the Government’s new reform proposal?
It really doesn’t much matter. Most likely, there will be transition arrangements where the new water entities use Treasury’s Debt Management Office team, or the Local Government Funding Agency – indeed, there may be advantages to doing that for the long term.
In the long run, the water services entities should be big enough and ugly enough to run their own treasury operations at a similar capacity to any major corporate.
“This isn’t publicly known yet, but the Three Waters National Transition Unit will be working through it now,” Josh Cairns says. “Given the scale of the water services entities, I’d expect them to each be able to establish and manage their own debt capital programmes.”
At present, only councils like Auckland and Dunedin go directly to the debt markets – most find it more cost-effective to do all their borrowing through the Local Government Funding Agency. But Hamiora Bowkett reveals work is indeed underway to ensure the four water services entities have a range of debt options, including their own treasury functions.
Internal Affairs says initial feedback from capital markets participants indicates the credit profile of the water services entities would make them an attractive proposition to capital markets investors.
The water authorities would join a suite of large, highly-rated New Zealand borrowers like the Debt Management Office, Kāinga Ora, Auckland Council and the Local Government Funding Agency, who access the capital markets in volume, the department says. The four new water entities would increase New Zealand’s presence in international capital markets, providing a wider benefit to New Zealand borrowers.
“The Local Government Funding Agency has been a hugely successful borrowing programme for local authorities. It has consistently delivered access to credit at favourable margins to the local authority sector, so I’m sure the possibility of the water services entities also joining in some way will be being looked at closely.”
– Josh Cairns, Simpson Grierson
The Local Government Funding Agency is a key player, here. It is 20 percent owned by central government and 80 percent by councils. With Southland Regional Council joining up last month, it now has 77 out of 78 councils as members. The only exception is Chatham Islands Council, which is not a big player in international debt markets.
The agency already has an interest in Three Waters financially through approximately $6 billion of water-related loans to councils, and is one of the options being considered for financing the water service entities.
Josh Cairns says the agency could have an ongoing role as a provider of debt capital. “The Local Government Funding Agency has been a hugely successful borrowing programme for local authorities. It has consistently delivered access to credit at favourable margins to the local authority sector, so I’m sure the possibility of the water services entities also joining in some way will be being looked at closely.”
If the water corporations join, the key questions would be whether the Local Government Funding Agency can maintain its credit strength, to continue to deliver the same borrowing benefits to the local authority sector, and whether it be structured in a way that does not cause a foot fault on the required balance sheet separation between water entities and local authorities.
But the Kāinga Ora example is more vexed. Because not long after Internal Affairs lauded it as a member of that suite of large, highly rated NZ borrowers, the Government announced Treasury would take over the housing agency’s borrowing.
Kāinga Ora is the country’s largest residential landlord in New Zealand, housing more than 186,000 people in 69,000 properties. Under its funding and financing model, the full capital cost to build new social housing and retrofit existing homes is borrowed, against future rental revenue. Since 2018, Kāinga Ora had issued debt in private markets as the primary source of borrowing in the name of its subsidiary, Housing NZ Ltd. The maximum level of private borrowing, which had increased over time, was approved jointly by the ministers of finance and housing.
But Kāinga Ora was paying a premium for its borrowing, because of its smaller investor pool and lower liquidity. So the ministers decided that instead, the Debt Management Office would do the borrowing centrally, and “on-lend” to Kāinga Ora. At the same time, they agreed to increase the housing agency’s borrowing capacity to $2.75 billion.
“In the Kāinga Ora case, the Crown, through the Treasury’s Debt Management Office, has recently assumed responsibility for meeting the organisation’s debt obligations and provide ongoing financial support,” Bevan Wallace says.
“As we have seen recently, when Kāinga Ora has failed to execute on its financial plan the risk ultimately resides with the Crown.”