Local Water Done How?

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Great news for councils. Today’s announcement by Ministers Brown and Bayly will solve all the problems councils face with developing and maintaining financially sustainable water services for the long-term.

How can we know this? The ministers have told us so. Their statement is clear:

“LGFA has confirmed it can immediately begin lending to water CCOs that are financially supported by their parent council or councils. LGFA will support leverage for water CCOs up to a level equivalent to 500 percent of operating revenues – around twice that of existing councils – subject to water CCOs meeting prudent credit criteria. This will enable councils to better manage debt and make essential infrastructure investments without drastic rate hikes.”

For the moment let’s gloss over what’s involved in setting up water services CCOs. Anyone who’s been talking with councils about the CCO process for water will already know this is going to be a very challenging and difficult process especially for multi-Council CCOs. However let’s assume that’s going to be straightforward and cut to the heart of the issue raised by the Ministers’ announcement; the assumption that the problem facing councils over further investment in waters infrastructure has been access to capital.

It’s certainly the case some councils have been close to LGFA’s debt ceilings but for many, probably most, councils this is not the problem. The critical issue, and potentially a major roadblock for reform, is the question of affordability. This was highlighted by the Mayor of the Far North District Council in a Newsroom article:

Tepania said the region’s water problem was a socio-economic one and that the Far North District Council had debt headroom available, but the locals couldn’t afford it.

“You can tutu through legislation to find us ways to be able to borrow money better, but at the end of the day, our people on the ground have got huge affordability issues, because of the socio-economic profile of our people here in the Far North.”

It’s not just the Far North. The recent Long Term Plan/Enhanced Annual Plan round has resulted in many councils being told by their ratepayers they simply cannot afford the level of increase being demanded. This is only part of the anecdotal evidence suggesting that rates, or other charges by any other name imposed on ratepayers, are close to if not at their limit. What’s missing at the moment is the hard data to support the anecdotal evidence. Funding is currently being sought to undertake an already designed survey which is expected to show a major affordability problem for a significant proportion of ratepayers right across the country.

It would be fascinating to know what the Ministers meant with their statement the CCO option would enable councils to make essential infrastructure investments without drastic rate hikes. Are they assuming that CCO revenue streams will come through a different route? Perhaps volumetric charging? Do they think that somehow CCO revenue requirements won’t affect ratepayers?

Close to 60% of residential properties across the country have water meters. Owners of those properties won’t experience the CCO revenue demand as a rates increase. All that means is that the demand will have a different name and come from a somewhat different entity. Coming as a water charge rather than a rates demand will have no effect on affordability. CCO revenue from the remaining 40% of residential properties will almost certainly come through rates - the CCO will bill the Council for services to its district and the council will recover that through rates.

Perhaps the Ministers are assuming that somehow addressing the problem of unaffordability will get lost in the complexity of the new arrangements. If that’s the case they may be in for a surprise. The recent Court of Appeal decision, Thorndon Quay Collective Incorporated v Wellington City Council [2024] NZCA 316, has major implications for the way in which councils consult, and take decisions. It seems virtually certain this will require councils, in making decisions within the local water done well process, to observe the statutory requirements to consider all reasonably practicable alternatives, and to take account of the impact of their decisions on the four well-beings. Councils which fail to do so could find themselves subject to judicial review in much the same way as the Wellington City Council did in the Thorndon case.

This means that any hope that the true impact on ratepayers will somehow get lost in the complexity of the implementation process is likely to be defeated. Instead it’s much more likely now that councils’ consultation and decision-making processes will not only highlight the impact on ratepayers as a group, but zero in on the impact on those ratepayers for whom the increases will genuinely be unaffordable as part of considering the impact on the four well beings. If this is not done, then the risk of judicial review could be very real.

Councils will also need to manage a major timing issue in relation to the legislation. Currently water service delivery plans are to be completed by 30 September and are to include the council’s proposals for ensuring the long-term financial sustainability of water services. There is an expectation that, as part of the WSDP process, councils will consider the option of adopting a water services CCO either as standalone entity, or in partnership with other councils.

The legislation for water services CCOs is to be introduced in December with the expectation it will be passed in 2025. Either councils will need to defer decisions on the use of CCOs or make a best guess about what might be possible, including accessing enhanced LGFA lending.

Ministers are clearly hoping their approach will get the outcomes they want. Feedback on unaffordability from councils and other sources suggests one of three possibilities to explain ministerial hope. First, Ministers are being unduly optimistic. Second, they’re not particularly concerned about imposing unaffordable burdens on a significant number of ratepayers. Third, they are simply unaware about the extent of the unaffordability problem and the flow on consequences which will come from that.

There is another factor as well; context. At the heart of the water services infrastructure problem is the reality that property rates, or other charges which impact on essentially the same group, ratepayers, are simply not an adequate base to support major infrastructure investment.

Currently, Ministers have a powerful incentive to avoid thinking about the suitability of rates and related charges as a principal underpinning for major infrastructure networks. This government is clearly running an austerity program directed at the twin objectives of keeping taxes as low as possible, especially for their base, and improving the ‘efficiency’ of government expenditure. That’s not a great environment in which to consider whether there is some major supplementation required to sit alongside rates funding.

That is especially the case when the local government context is looked at in more detail. Three waters infrastructure is not the only major local government provided infrastructure which is in serious difficulty. Anyone who has listened to people from rural and provincial councils will be very aware of the stress on local roading, which has been magnified by recent climate events.

Many councils face at least as severe a backlog of maintenance expenditure on roading, especially bridges, as they do on three waters infrastructure. The government’s emphasis on roads of national significance means that, without substantial government top up, NZTA will not be able to assist councils solve their roading problem. This means that much of New Zealand’s agriculture and horticulture sector will not have the quality of roading services needed.

It’s going to take courage for Ministers to start taking the problem of unaffordability and its implications for investment in infrastructure seriously, especially given the very assured certainty ministers have displayed that telling local government to fix the three waters problem means it will be fixed. There is little consolation to be had from the fact that this is basically how successive governments have acted for at least the past 20 or 30 years.

The consequences are finally coming home to roost in ways which will compel the government to take a more realistic approach. Unfortunately, given what is clearly the determination of government not to recognise reality, it is likely that local government, and local water done well (and not to forget rural and provincial roading) is in for a difficult few years.