We continue our 12 questions about Three Waters. Consultants Castalia, Phil Goff and other mayors have asked for the Government to guarantee Three Waters debt. Realistically, is water infrastructure too critical to be allowed to fail?
Tasmania Water has no government guarantee, and the New Zealand Government is similarly averse to providing guarantees.
Minister of Finance Grant Robertson has, however, agreed to provide a liquidity facility of at least $500 million, that the water entities can call upon in extreme and strictly limited circumstances.
That's the official position. Unofficially, or course, as lifeline services, water networks are too big and too critical to fail.
This Government is bailing out a skifield operator; of course it's not going to allow a major utility providing the public with safe drinking water and wastewater services to go under.
WHO PAYS FOR THREE WATERS? 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’
Investors believe such government backing to be pretty much a certainty; ratings agencies certainly think it highly likely.
Paul Norris from Fitch Ratings: "Fitch does often look at the likelihood of government support for public sector entities and may create a credit-linkage between an entity and a government sponsor even in the case of no explicit guarantee, although this is dependent on a number of particular factors rather than just the type of asset or service."
"There will always be an unknowable line that the Crown is not willing to cross, so making assumptions as to the level of implicit support is ultimately a fool's game." – Josh Cairns
And that likelihood is why the new water corporations can be leveraged to a larger extent – the security over something people depend on to live is adamantine.
But it's also why the entities will be heavily regulated, both by Taumata Arowai for water quality, and by the Commerce Commission for how they operate as businesses and the charges they impose on consumers.
Josh Cairns from Simpson Grierson has a warning: "In practice the Government might not allow the entities to fail – but that is a very dangerous assumption for rating agencies or financiers to make now, in the absence of an explicit guarantee or support.
"There have been situations in the past where financiers have lent on the basis of implicit Crown support which did not turn out as financiers had assumed, Solid Energy being a case in point.
"The situation might be different for water, but there will always be an unknowable line that the Crown is not willing to cross, so making assumptions as to the level of implicit support is ultimately a fool's game."
Investment advisor Bevan Wallace says the Crown intervention to support Kāinga Ora strengthens a "tacit assumption" that the Crown would underwrite the debt obligations.
"The provision of an explicit guarantee should result in a reduction of any premium to the government borrowing rate paid by the Three Waters Agency but due to the lower liquidity compared to Crown debt, the [entity] would likely incur debt costs that were above government rates despite any guarantee – be it implicit or explicit."
