Frank Newman: Three Waters – Many Lies

The expression, “An orchestrated litany of lies” was made famous by Justice Peter Mahon (when describing the evidence given by Air NZ executives in the Royal Commission of Enquiry into the Mount Erebus disaster). It could equally describe the Government’s case for its Three Waters reform. 

Local Government Minister, Nanaia Mahuta, says the case for reform is proven. It’s not. The need to expropriate local authority water assets is far from proven and has the hallmarks of being contrived to suit other political purposes.

What we have seen is false advertising and orchestrated ‘news’ items on mainstream media to promote a perception that there is a need for reform. We have been given false assurances that the councils will retain ‘ownership’ of their water assets despite councils having no benefits of ownership and a report prepared by the Internal Affairs Department for Standard & Poors admitting water entities will have “limited Local Authority oversight”.

The government says, “The Government is not confiscating, buying or selling assets…Councils will collectively own the water services entities providing services for their district, on behalf of their communities.”

That claim is plainly absurd when Section 166 of the Water Services Entities Bill, specifically states, “(1) A territorial authority owner (in its capacity as a holder of shares in a water services entity, or any other capacity)… (a) has no right, title, or interest (legal or equitable) in the assets, security, debts, or liabilities of a water services entity (and the constitution cannot confer any such right, title, or interest…); and (b) must not receive any equity return, directly or indirectly, from a water services entity;…”

Clearly in Labour’s Orwellian world, the meaning of ‘ownership’ has been redefined.

The least understood ‘lie’ however, is with respect to the claimed financial benefits.

Nanaia Mahuta says, “The data shows the case for change is compelling. Without these changes DIA modelling shows that even at the more conservative end of estimates, the average household bill for water services could be as high as $1900 to $9000 by 2051, which would be unaffordable for many communities… Under our proposal for four providers those figures range from $800 to $1640, saving households thousands of dollars.” 

To explain how the government has made the figures look compelling one needs to understand what a ‘Ponzi’ scheme is. In essence, it is a deception that generates returns for earlier investors with money taken from later investors.

This is essentially what the government model does. It is shifting the water rating burden from current ratepayers to future ratepayers by accumulating debt that it assumes does not need to be repaid.

Currently, councils are limited to a debt cap of 2.5 times revenue. There is a good reason for that: it reduces the risk of councils accumulating debt recklessly and putting community assets at risk. The effect is that once the debt ceiling is reached the easy money dries up and the financing burden falls on ratepayers as they become the only source of funding. It’s a reality check for local councils.

However, the new water Entities will not be constrained by a 2.5 times revenue debt cap. They are assumed to have a debt capacity of 6.25 times revenue. This tilts the figures in favour of the government’s amalgamation proposal because the entities can borrow substantially more without having to fund that spending from water users!

It’s a fake reality. Borrowing to fill the shortfall can only go on for so long – there will eventually be a day of reckoning – as there is with every Ponzi scheme.

According to the government’s modelling over the next 30 years the four Entities will collectively borrow an additional $51 billion. Of this only $3 billion is to be repaid ($100 million a year). The interest on that debt (using the model’s 3.5% interest rate – which already seems unrealistic) rises from $386 million (14% of revenue) to $2 billion (23% of revenue) over the 30 years.

What is not factored into the modelling is repayment of the $51 billion they have borrowed – there is an assumption that the debt does not have to be repaid. How many homeowners get that sort of mortgage deal from their bank?

Then there is the unanswered question of what happens when the credit lines hit the 6.25 times revenue ceiling, as is projected shortly after the 30-year modelling. What happens when there is no more debt capacity to draw down?

Make no mistake about it – the government’s modelling shows the water Entities will be become highly geared enterprises and extremely susceptible to changes in interest rates.

We are also told that these water Entities will be more efficient than local authorities, simply because of their scale. This ignores the fact that local councils gain efficiencies by spreading their administrative cost overheads over a range of council functions. The effect on local council rating as a result of losing what for most councils is a significant income stream has not been factored into the modelling.

Their modelling also has no regard for the additional administrative costs the water Entities will incur to meet enhanced obligations to Maori.

The government says, “The reform provides a step change for iwi/Māori to participate in the delivery of three water services.  These include a range of new legislative protections, joint oversight arrangements and mechanisms to enable local expression of Te Mana o Te Wai.”

The question is why iwi/Maori need or should be involved in the delivery of three water services? How much will the ongoing active engagement with 180 iwi cost the water Entities? It’s a cost that the government’s modelling ignores.

The real problem

There is no denying some councils have neglected their responsibilities to maintain core service infrastructure, like water supplies. That is the inevitable consequence of Helen Clark’s amendments to the  Local Government Act 2002 which expanded the role of local councils from a restrictive core-services mandate to a limitless mandate to meet the four community well-beings: economic, social, cultural and environmental. That opened the gates wide for woke activists to gain influence and divert spending to projects that advanced their own interests. Stadiums, parks, cultural activities , were and still are the ‘in things’; water infrastructure was not.

Some councils did maintain and improve infrastructure (Whangarei is such an example, albeit it at a cost of significant rate increases and debt); others didn’t. Three Waters will bail out those councils who neglected their water infrastructure – and penalise those that didn’t.

The real answer

The solution is better access to infrastructure finance for local councils, with regional co-operation between councils where economies of scale can be achieved. Dr Eric Crampton, chief economist at The New Zealand Initiative, has suggested “Revenue bonds” and explains it is how American cities generally cover infrastructure costs:

“This form of debt is backed only by the revenues generated by the project they’ve funded – whether a water pipe, or a subway system, or a highway. General obligation bonds (like standard New Zealand council debt), backed by a council’s main balance sheet, are only a third of investment-grade US municipal debt, according to Charles Schwab. Two-thirds of municipal bonds are revenue bonds.

“Instead of forcing the amalgamation of council water assets into messy structures, central government could pass a very short piece of legislation authorising councils, and council-controlled entities like water providers, to issue long-duration revenue bonds. Councils would be forbidden from using general revenues to pay off the bonds.”

Another option is for central government to co-fund water projects, as they do roading projects that meet a Benefit:Cost (BC) threshold. That funding mechanism could also undertake a dual monitoring role to not only ensure councils are adequately maintaining their core infrastructure, but to impose that discipline on those that aren’t.

These are simply two of many alternative possible reform approaches. The problem though, is they do not include Maori participation within their management structures. And isn’t that the real purpose of Three Waters?

That question resonates louder when the solutions to better delivery of water services can be found in much simpler approaches that address the financing limitations of councils without disrupting the ownership of local assets and community accountability.

It is clear that the Minister’s bottom line requirement to treat the interests of Maori as separate from the community at large and give those interests priority has predetermined the outcome of the feasibility analysis. It has also underscored what at best could be described as a misinformation campaign by Minister Mahuta on behalf of the Labour government to create a perception of a problem that does not exist to the extent that it is being portrayed – and present financial benefits that almost certainly will never materialise.

Frank Newman, a writer and investment analyst, is a former local body councillor.