Councils placed on negative credit watch due to three waters repeal

Analysis: Horowhenua District was one of the group of 30 councils that strongly opposed the previous government’s Three Waters reforms. And mayor Bernie Wanden still reckons that reform model was flawed – but he’s now worrying that the return to the status quo may be more costly still.

Moving councils’ water assets into 10 big regional water entities would have cost ratepayers direct control of their assets. But Wanden says in the long-term, retaining those assets will cost Horowhenua locals far more in water charges.

He’s responding to the news that international credit rating agency S&P Global has placed 15 New Zealand councils on negative credit watch, in response to last week’s repeal of the water reforms.

They join six councils already on negative watch – essentially, a shot across the bow that, if things continue as they are, the councils’ credit ratings will be downgraded a notch.

S&P says policy uncertainty is elevated given the weakening of financial outcomes and a shift in political support for key reforms, particularly related to water services and infrastructure, designed to alleviate financial pressures.

For those 21 councils – bigger cities like Dunedin, Wellington and Hamilton, as well as provincial centres including Nelson, Palmerston North, Taupō and Horowhenua – a credit downgrade means paying an extra 0.05 percent in interest.

That may not sound much, but for a council like Wellington or Hamilton that owes a billion dollars, that’s an additional $500,000 a year in debt servicing.

Councils say they are constrained from borrowing more to invest in critical infrastructure, because of higher interest rates, combined with looming debt ceilings. The Local Government Funding Agency bars them from borrowing more than a 280 percent debt-to-revenue ratio; for some that limit is lower.

Mark Butcher, chief executive of the Local Government Funding Agency, says the credit ratings for the local government sector are still generally pretty high, from a historical perspective and by comparison with other councils in comparable countries.

“If S&P do downgrade them in the future, by one notch, then they will be paying an additional five basis points. Not all might go down, though. There are differences among those 21 councils,” he says.

He says councils had been criticised for underinvesting in infrastructure, so they had upped their game, especially since the Covid pandemic hit.

But that increased investment had come at a cost of more debt, and now they face paying more for water services renewals as well – a liability they had previously expected would be taken off their balance sheets.

“Debt levels have been increasing, as S&P point out, but also the fact is that the revenue has not been rising as fast, because councils are predominantly reliant upon rates,” Butcher says.

“And there is uncertainty in the transition to the new government’s Local Water Done Well programme. Ratings agencies are naturally conservative and they fear the worst.”

Councils that have maintained a “stable” credit outlook include Auckland, Tauranga and Christchurch – but that doesn’t mean they’re not struggling with servicing their big debts. 

Auckland published its longterm plan this week; it includes council-controlled Watercare’s 10-year pricing plan to execute $3.9 billion of essential capex over the next three years.

This means an average 25.8 percent increase in water and wastewater charges this year – about $29 a month for the average household.

When I ask Watercare chief executive Dave Chambers how much the organisation needs to borrow, he reframes my question.

“The real question is how much do we need to spend, and where does that money come from? In addition to our operational spend, it’s vital for us to invest $13.9b in infrastructure over the next 10 years – which equates to a daily spend of around $3.44 million.”

Chambers says the cost of running the business is paid for by revenue from water and wastewater service charges and infrastructure growth charges, as well as borrowings. “When borrowings are restricted, our only option is to increase prices.”

Mayor Wayne Brown says this projected price path is “unacceptable” and he is working hard with the Government on resolving the problem. Watercare is seeking a Crown guarantee that would free it from the council’s debt ceiling.  

If Watercare could somehow be separated from the balance sheet of Auckland Council (a key objective of both Labour’s and National’s policies) then Aucklanders would face much lower price increases.

The mayor and the Minister of Local Government, Simeon Brown, both say they’re working together to achieve a “financially sustainable water model” for Auckland, in line with the new Government’s Local Water Done Well policy.

Back in Horowhenua, that new policy means it has to slash $10m from its capex this year, and defer major work on its biggest water treatment and wastewater treatment plants, in Levin. 

(Just a reminder: Councils’ inability or unwillingness to invest in water infrastructure was, of course, a cause of Hastings’ fatal campylobacteriosis outbreak in 2016, and a major driver for the three waters reforms that would have placed management of assets in the hands of professionally-run, council-owned water corporations).

In Horowhenua, the council is already shifting residents onto water metering, but Wanden says it’s not enough. “Longer term, there definitely needs to be some sort of consolidation so that we can continue to deliver those services.”

Local government is no longer a place for well-intentioned amateurs, he muses. “I think the days are over of running for council just because you’ve got an interest in seeing your community do okay.

“It does need some skill and some knowledge to be able to have these discussions around what should happen in your district. Over the past three years it’s become a heck of a lot more complex than it ever used to be.”