Ministers confirm they’re accepting council and iwi changes to make water providers more locally accountable - and pushing ahead with the contentious reforms next month
Analysis: At the half-built new Elsdon Park Wetland in Porirua today, Local Government Minister Nanaia Mahuta will be joined by Grant Robertson and the mayors and iwi leaders who hammered out a compromise solution on the governance of the new water corporations. But at least one protagonist will be missing.
Jason Smith, the mayor of Kaipara who served on the governance group, will be back home in Dargaville opening his little council's new $9 million offices. It’s unfortunate, he says, that 30 percent of the council staff who work in those new offices, and indeed the very water in-pipes and wastewater outlets that service the building, will soon be transferred out of the control of the locals whose rates paid for them.
"There is a great irony in this," he says. "The timing is extraordinary."
Smith served on the governance group but, in the end, refuses to back its compromise solution. "I think the whole thing is terribly wrong," he says. "Terribly, terribly wrong." Auckland Mayor Phil Goff, too, walked away from the group's final report last month because it didn't retain sufficient control for his council.
Now, in choosing the new wetlands in Porirua to announce the Government's embrace of the divided working group's recommendations, the ministers are inadvertently highlighting just how vexed these decisions are. Indeed, the wetlands are part of the city's new stormwater network – but so too are the adjacent hockey turf, and the gutters down the sides of arterial road that abut them, and indeed the Porirua Harbour into which they drain.
Which of these should be transferred into the management of a big new water corporation, and which of these should remain under ratepayer control? That's "incredibly complex," says Local Government NZ president Stuart Crosby. And it's one of the decisions that remains in the Government's too hard basket today.
In what is intended as a signal of the Government's strength and resolve, Mahuta and Robertson will announce they will adopt almost all the working group's 47 recommended improvements to the Three Waters reforms. Robertson's presence is intended to show the Government is committed to these reforms at the highest levels; it will not be swayed by a local election year mutiny by 32 of the country's 67 city and district councils.
"Even with the changes recommended by the working group, the model does not deliver the democratic accountability to Aucklanders through their elected representatives that Mayor Goff has repeatedly called for." – Auckland Mayor's office
Robertson's presence as infrastructure minister is also intended to remind the public that this is not about parochial questions of who owns and controls their water services; it's about how the country finances the estimated $185 billion cost of getting our water and waste infrastructure up to first world standards.
The Government wants to seize back the narrative; to move from an esoteric constitutional discussion to a very concrete one about a construction pipeline that is far bigger than Transmission Gully and Auckland light rail and the Waitematā Harbour tunnel combined.
Yet that is precisely where the Government must answer one of the last and most difficult questions concerning governance of the Three Waters assets. It's a question the governance working group asked and did not answer, and it's critical to both the questions of democratic accountability and of financing the massive borrowing necessary for all the country's new pipes and plants.
Will the Government guarantee the debt for the big new water corporations?
It's a proposal akin to the one Auckland's Phil Goff has been championing since day one of the water reform programme: maintain clear ratepayer accountability for the water services provider, but provide it with separation from the council's balance books so both can independently borrow to finance their infrastructure.
Goff welcomes the Government taking up the working group's recommendations, which he says represent material improvements to the original proposal – but it's not enough. "Even with the changes recommended by the working group, the model does not deliver the democratic accountability to Aucklanders through their elected representatives that Mayor Goff has repeatedly called for," a spokesperson says.
For Goff, that accountability would mean Auckland Council retained Watercare as a council-controlled organisation. For Smith, it means Kaipara and the other council shareholders being in 90 percent agreement on key votes. For the 32 councils in the Communities 4 Local Democracy grouping, it means retaining meaningful community property rights in the Three Waters assets.
For the governance working group and the Government, that agreed accountability would make councils shareholders in the water assets managed by the new water corporations, rather than just holding some vague collective ownership of them.
Yet most agree with the principle of achieving balance sheet separation, so councils and water corporations don't constrain each other's ability to finance new infrastructure. "That's an investment that most current councils cannot afford," says Crosby.
And the judge of that balance sheet separation is neither the taxpayer nor the ratepayer, but the faceless officials of the credit agency S&P.
If the water corporations are to be pulled in the direction of greater accountability to councils and ratepayers, there is the danger that S&P and other credit agencies will consider them to be essentially arms of the councils, so to avoid that, there needs to be some mechanism to pull away their debt ledgers.
The half-spoken proposal from the governance working group is that the government more clearly guarantee the water corporations' debts.
According to the groups' internal briefing papers from February, archived on the Department of Internal Affairs website, the Crown is already placing itself in the position of guarantor to a degree, but it must be more explicit. "The question around who is ultimately liable if the entities fail is partially answered by the Crown liquidity facility, effectively credit wrapping the entities up from S&P BBB- in order to facilitate access to debt at a lower cost," the briefing says.
Officials claim there's already an implicit guarantee. It would be inconceivable that the Government could allow New Zealand's water infrastructure to go under; it's too big to fail.
"The Crown has previously agreed to provide a number of support mechanisms to the Water Services Entities which serve to enhance the rating of the entities," an Internal Affairs spokesperson tells Newsroom. "Specifically, Cabinet has agreed to provide a liquidity facility, similar to what it currently provides to the Local Government Funding Agency, as well as extension of the Civil Defence and Emergency Management Act 2002 arrangements, commonly known as the 60/40 split.
"Standard & Poors’ ratings evaluation service noted that the provision of such support elevated the issuer credit rating from A- to AA+ when compared to scenarios without such Crown support."
However, that's only half the story – because the working group did get a briefing from the credit agency. S&P warned the group that if it achieved its community accountability ultimatum – that the council and iwi Regional Representation Groups have the power to approve the water corporations' strategic outcomes outlined in their annual statements of intent – then the credit agency might dig in its heels. That S&P might refuse to separate the balance sheet of the new water corporations from those of their heavily indebted council shareholders.
When the group published its 47 recommendations, the following month, its language was indirect:
"Recommendation 43: The Crown confirms that it will provide sufficient financial support to the WSEs to ensure ‘balance sheet separation’ from councils, that the WSEs have sufficient borrowing capacity to invest in the required infrastructure and can borrow funds at a cost similar to councils."
But in the body of the report, the groups adds: "We note the requirement by the credit rating agencies for backstop support and recommend the Crown confirms back to iwi and councils the provision of this support, along with how it will ensure this support is sufficient to ensure the financial strength, and consequent borrowing capacity, of these entities."
Hutt City mayor Campbell Barry, a champion of the reform and member of the governance working group, says the government needs to look hard at who would play that guarantor role – and councils are clearly not in a position to do that.
"I think that's really important that if government is choosing to go through this reform programme and set up new entities, that ultimately that should not fall back on councils if things were to fail in their operation," he told RNZ. "We're also saying maybe there is a place for government to step into the fold there, given their proposals and the reform that they're wanting to take."
That's why Grant Robertson needs to be there today, not just wearing his Infrastructure Minister hard hat, but also his Finance Minister hardheadedness. He must commit to a mechanism such as an explicit Crown debt guarantee, or face the risk that these bitterly negotiated reforms fail to achieve the financing they need.
So when the Government purports to have wholly embraced the working group's recommendations, that's not quite right. Not all of them. And after two years of argument, the questions still outstanding go to the very heart of whether the Three Waters reforms will actually work.
