Govt must guarantee debt or users will pay the price, says Watercare

Watercare had already doubled down on user charges; now it’s tripling down. With the Government’s promise to repeal Labour’s Three Waters reform in its first 100 days, the big drinking water and wastewater services provider tells Newsroom it’s now unable to finance Auckland’s infrastructure needs.

Chief executive Dave Chambers has written to new local government minister Simeon Brown asking that the Government provide a backstop to the water utility’s borrowing – and he says it needs answers urgently.

If it doesn’t get that guarantee, it will have to accelerate an already rapid programme to raise Aucklander’s water user charges. He acknowledges it will be a “massive shock” to Aucklanders’ household and business budgets

Late on Friday night, Auckland Mayor Wayne Brown added his voice. In his longterm plan proposal, he noted the Government’s plans to repeal the Three Waters legislation, and says this means water charges must increase – and growth charges on developers even more so.

“I will continue to advocate to Government and alternative model that enables balance sheet separation, so Watercare can make necessary investment without big price increases,” he says.

“Watercare’s capital expenditure programme will need to take into account a need to keep the water charges affordable but recover as much as possible from developers the costs of growth infrastructure.”

The increased price charges go hand-in-hand with borrowing for capital expenditure – but at present, Watercare is constrained because the council is nearly at its debt limit. This means it’s forced to load on today’s water users the costs of infrastructure that will serve their grandchildren and great-grandchildren.

The council is allowed to borrow up to 280% of its revenues, over the next 10 years, and is close to that mark already. Mayor Wayne Brown intends to let Watercare borrow up to 340 percent, but Chambers wants to be able to borrow up to 500 percent of gross revenues. That’s $5 debt for every dollar the council-controlled company earns.

Internationally, 500 percent is considered a reasonable level of indebtedness for water utilities, which are a critical service with an expectation that they’re too big to be allowed to fail. But Watercare is constrained from doing that, because its debts are considered by international ratings agencies like S&P Global to be part of the council debts.

And as far as lenders are concerned, councils (which borrow against future rates income rather than against their assets) aren’t considered such a sure bet.

New Watercare draft price track

Without access to the borrowing the water utility needs, Chambers says it will have no choice but to resort to a steeper track of price increases on residential and business water and wastewater users.

“That is a massive shock for all Aucklanders and not what we want to have,” he says.

“Those numbers are pretty solid. By the middle of next week, we’ll really have to land on exactly what that means. We need to have certainty. I’ve got big contracts already signed and being executed and delivered across Auckland, that will affect the pricing plan.”

Two years ago, it embarked on a 10-year plan that is steadily increasing water charges by 9.5 percent most years. That would have doubled the average annual water bill from $1069 in the 2020/21 year, to $2460 in the 2030/31 year.

But now, in its draft plan for the next 10 years, it would add more big increases on top of that – starting with an additional 20 percent hike next year. That, on top of the 9.5 percent already planned, would constitute an increase of nearly 30 percent next year.

And with more additional increases in subsequent years, Newsroom calculates the average water bill in 2030/31 will now be tracking towards $3127.

Chambers says says the most likely scenario in which the Government might need to deliver on its guarantee would not be a Watercare financial failure, but a natural disaster.

And indeed, this isn’t unprecedented. The taxpayer paid much of the cost of Christchurch’s new water and wastewater infrastructure after the earthquakes.

“I mean large scale natural disasters, and New Zealand’s had a few. Earthquakes and volcanoes. If we had a government backstop, as opposed to a local government backstop, it’s that type of event that we’re talking about.”

In place of Labour’s Three Waters reforms, National has expressed a preference for councils, perhaps in regional groupings, to move their water assets into the ownership of arms-length council-controlled organisations. It says that should provide the necessary balance sheet separation from councils.

But Chambers says that’s not enough. Watercare already has that structure, but is unable to separate its debt from that of the council.

The previous water reform legislation said councils could not provide funding or bail-outs to the new water entities, sending a message to ratings agencies and lenders that the councils would not act as backstops.

But Chambers says the Government’s changes need to go further, by providing an explicit statutory central government guarantee of the debts.

If Watercare gets that guarantee, he says the increase in user charges should be much lower – even lower than the previous price track of 9.5 percent annual rises.