Local councils can have their cake and drink it too, as credit ratings agency agrees to council and iwi approving strategic direction of water services entities
Analysis: Credit ratings agency Standard & Poor's has handed the Government and its local supporters mixed news before the council elections.
The analysts at S&P Global in Melbourne are the faceless powerbrokers in New Zealand’s vexed Three Waters debate - their evaluations are critical in the decision to separate the water assets from local councils and their balance sheets.
Local Government Minister Nanaia Mahuta is expecting to introduce the Water Services Bill to Parliament in the next four weeks - just in time to make it a hot-button issue in council elections from Kaikohe to Invercargill. She has written to all political parties seeking their support to entrench legislative provisions protecting against privatisation of water services infrastructure.
Last night, S&P revealed it had been asked to assess new governance scenarios for just two councils: Auckland and Wellington. These are an outcome of the recommendations of the governance working group, whereby the councils will continue to own the water assets through public shares. In addition, Auckland Council and iwi would hold a majority of seats on the northernmost water corporation’s representative body.
After Newsroom Pro reported the S&P assessments in this morning's 8 Things newsletter, officials published their correspondence with the ratings agency, and a Cabinet paper discussing those assessments. "An important factor for further consideration will be the testing of the proposed arrangements with Standard & Poor’s," Mahuta tells ministers.
Ministers had refused to accept a recommendation from the working group that the Government would provide ongoing financial support for the water corporations, as necessary. But nonetheless, S&P analysts Anthony Walker and Martin Foo conclude there is an "extremely high" likelihood that the New Zealand sovereign will provide timely support to the water entities if they are in financial distress.
Essentially, they will be too big to fail - and moreover, the implications of the failure of the drinking water and wastewater providers would be too grim to contemplate.
S&P notes the new entities would still be structurally separated from local councils and from the New Zealand Government, would have financial and operational autonomy, and would borrow in their own right.
On the basis of the new governance arrangements, it says it would raise Auckland Council’s long-term credit ratings from 'AA' to 'AA+'.
That’s because the new water corporation would take over the council’s water infrastructure spending and debt, which would be “substantially higher” than the water rates the council would forgo.
That’s good news for Labour-leaning Auckland mayoral candidate Efeso Collins, who told Newsroom’s The Detail podcast that he was “absolutely supportive” of the reforms.
Now, he can rightly argue that retaining Watercare would mean water rates doubling; relinquishing control of the assets would free up Auckland to borrow more for parks and libraries. Conservative candidate Leo Molloy, in contrast, may find his “daylight robbery” rhetoric no longer holds water.
S&P says there is no change to Wellington’s rating or outlook. And in fact, the reforms would adversely affect the council's total tax-supported debt relative to operating revenues.
That will be bad news for Labour MP Paul Eagle, who is expected to confirm plans to contest the Wellington mayoralty next month.
Despite wastewater geysers in the streets of Wellington, incumbent mayor Andy Foster has kept his powder dry on Three Waters. That frees him to read the public mood closer to election day.
Critically, S&P offers analysis that will apply to all 67 councils. The impact on councils’ ratings and outlooks will depend on how much the new water corporations can rely on public bail-out at times of financial stress, councils’ degree of influence, and the new prohibition on councils providing financial support to the water entities.
Overall, S&P supports the elimination of an independent selection panel, so that the regional representative groups (made up of council and iwi reps) will be directly responsible for appointing the water corporations' boards.
S&P says the new governance model will strengthen the link between water services entities and their regional representative groups, because the regional groups will approve or reject the water corporation's strategic directions, in their statements of intent.
That is critical: Mahuta had said the regional groups' oversight of the water entities' strategic directions was contingent on S&P sign-off. She wanted the ratings agency to test the new governance model, to ensure it preserved balance sheet separation and maintained an appropriate balance between board accountability and independence. If the answer was no, then oversight of the strategic directions would have been a no-go.
Overall, the changes to the Three Waters governance model will provide explicit assurance that the assets remain in local ownership – but with new safeguards to ensure councils’ balance sheets are not jeopardised.
The Cabinet has agreed that a Crown liquidity facility will be available to water services entities on similar terms to that provided to the Local Government Funding Agency, as would the existing Civil Defence and Emergency Management provisions that are afforded to councils.
Mahuta, in her Cabinet paper, says during government officials' engagement with Standard & Poor’s Global Rating Agency, the provision of this type of Crown support was identified as a factor in a material credit rating uplift for the water services entities.
"Officials are continuing to work with external legal and financial advisers and Treasury to develop the structure of this facility, to support the water services entities to achieve the expected credit rating, and support flexible and cost-effective financing," she says.
