On the fourth day of Christmas my true love gave to me, four huhu grubs – and that's pretty much how the four new water corporations have been characterised.

We continue our 12 questions about Three Waters. Some councils want to consolidate their water networks only as they see fit, contracting a dozen or more regional water companies to deliver services – but does the financing work?

On the fourth day of Christmas my true love gave to me, four huhu grubs. So says Kingi Ihaka’s New Zealand adaptation of the traditional Christmas carol.

And that’s pretty much how the four new water corporations have been characterised by mayors like Wayne Brown, Phil Mauger and Dan Gordon.

Why, they ask, should these four entities forcibly take over management of the water infrastructure owned by 67 separate and distinct territorial authorities, ranging from Auckland to the Chatham Islands.

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’

The Three Mayors of Auckland, Christchurch and Waimakariri want to retain control of their Three Waters assets, and finance upgrades through Crown Infrastructure Partners instead.

Newsroom has gone to ratings agencies S&P, Fitch and Moody’s and to three top independent experts to 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. They are legal expert Josh Cairns; finance advisor Bevan Wallace; and infrastructure consultant Amelia East.

Crown Infrastructure Partners is not set up to provide cost-effective lending, as it only allocates central government funding or arranges more expensive special purpose vehicle funding – most notably, for the groundbreaking Milldale development at Orewa, north of Auckland.

Potentially, it could work from a funding and financing point of view, provided the councils had the discretion to determine arm’s-length fees and charges associated with the provision of associated services. “Crown Infrastructure Partners could be a source of asset finance for which it would levy a charge,” says Bevan Wallace, “likely similar to a lease arrangement that covers both financing costs and a depreciation provision for any assets that it holds directly on behalf of councils.”

But there are several complications.

First, says Amelia East from HKA, in setting up a special purpose vehicle, councils would theoretically have to vest ring-fenced water assets and revenues to that company – which means they effectively give up ownership.

Second, it creates few incentives to move to a utility model, which is where we desperately need operational change in New Zealand, she says. “Too much of the focus is on funding assets in our opinion, and too little on what are the optimal arrangements to deliver new assets, maintain the assets we already have, and meet the diverse needs of consumers and communities.

“For example, I can’t see how using the special purpose vehicle model is going to incentivise water procurement reform.”

“I suspect there will be an implicit assumption that in the event of failure the Crown will intervene as per Kāinga Ora and the Christchurch earthquakes.”
– Bevan Wallace, Morgan Wallace Ltd

There’s one other question. The Three Mayors have published only a skeletal description of their plan; they say they’re just trying to “prompt constructive conversation”. It’s not clear, but it rather looks like what the mayors are seeking is not financing, but grants that they don’t have to repay – similar to roading through Waka Kotahi or the Housing Acceleration Fund. Free money, in other words.

And that might suit the councils – but from the point of view of the public, it serves only to shift the debt liability from their rates bill to their tax bill.

If it’s not a grant, then there’s at least an expectation the Government would underwrite the council debt – and why would the Crown agree to underwrite a model over which it would have no control?

“I suspect there will be an implicit assumption that in the event of failure the Crown will intervene as per Kāinga Ora and the Christchurch earthquakes,” Bevan Wallace says. “The Crown does however have control options through regulation and setting the terms of any intervention.”

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

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