The Three Waters legislation was back before Parliament yesterday in the form of an amendment bill which is intended to implement changes to the reforms announced by Prime Minister Hipkins and Local Government Minister, Kieran McAnulty in April.
Those changes came about as a result of the new Prime Minister’s “policy refresh” which asked McAnulty to consider options for reform of the Three Waters proposal, including timing and sequencing, the number of entities and boundaries and alternative approaches for Māori representation and involvement.
Ultimately McAnulty decided to leave the issue of Māori representation within the structure unchanged, telling Q+A that it was “the right thing” that there was 50/50 representation of mana whenua and councils on each RRG. Indeed the minister went so far as to claim that the highly divisive co-governance component had been retained partly due to the Crown’s Treaty obligations.
Primarily the bill increases the model from four mega-entities to ten water services entities that are more closely based on existing regions, and also introduces a new mechanism called community priority statements.
Community Priority Statements
At the end of last year, as the Water Services Entities Bill was being rushed through Parliament under urgency, there was a growing sense of concern amongst the public and some in the media about the power and scope of Te Mana o te Wai statements. Described at the time by Minister Mahuta in the House as a “robust mechanism”, the intention of Te Mana o te Wai statements was to give iwi and hapū direct involvement in the management of water by the water services entities.
When Hipkins and McAnulty announced the new changes to the reforms in April, the Prime Minister acknowledged Te Mana o te Wai statements and added, “we’ve introduced an equivalent for other significant interested parties in water use to also have a say in that”.
In his speech to the House yesterday, National’s Chris Bishop captured the concerns about Te Mana o te Wai statements when he stated:
This has flown under the radar. The co-governance stuff gets much of the attention, but, actually, it's Te Mana o te Wai statements in the Act, now, that I think many people are waking up to. Only mana whenua can issue them—only mana whenua can issue them—and the water services entities must reply to them. So that actually creates an interesting situation. Only one group can issue them. They're not mandatory. But I just went and looked it up before: the Act says they can issue them for mana whenua of particular rohe. But the water services entities must respond. The scope of those statements is quite breathtaking, or at least potentially quite breathtaking in its enormity. I think many people are waking up to what that does, and I think people think it is wrong, and we agree.
The key point about Te Mana o te Wai statements is that pursuant to section 144(2) of the Act, a response from the relevant water services entity must include a plan that sets out how the water services entity intends to give effect to Te Mana o te Wai, to the extent that it applies to the entity’s duties, functions, and powers.
By contrast, the new community priority statements are provided to the relevant RRG which is required to simply forward them to a new consumer forum that will be established under the Act. Beyond that, the only obligation of the RRGs is that they may consider these statements when they prepare their statement of strategic intentions. This is what Hipkins had described in April as “an equivalent” to Te Mana o te Wai statements.
In reality this new mechanism is little more than a sop to the public. It will cost time and money but add nothing to ensuring the smooth running of a nationwide infrastructure upgrade.
The new Funding Agency
One of the major consequences of increasing the number of RRGs to ten is the need to introduce shared service arrangements as a means of achieving scale and efficiency gains under the enlarged model. This includes debt funding and management through a new Funding Agency.
Under the old model, each of the four mega-entities would borrow debt for their region, and each entity would cross-guarantee the borrowings of the other three entities so that each entity was liable for the full amount of borrowings under the Three Waters reforms.
Under the new model, some of the entities will not be borrowing amounts large enough to directly access the international debt markets. As a fix, the new bill introduces a Funding Agency which will be a financing subsidiary owned by the 10 water service entities. The Funding Agency will borrow the full amount of the Three Waters debt financing. Each WSE will guarantee the full amount of the Three Waters debt, and the Funding Agency will on-lend the relevant amounts that it borrows to each WSE in the necessary proportions.
The new funding model has the same effect, in so far as borrowing and guarantee liabilities, as the old structure however it does introduce more risk. Previously, there were four mega-entities that needed to be managed properly. Now there is ten, and if one of those entities suffers cost overruns, labour disputes or upgrade delays that negatively impacts its debt financing, it will also affect the debt financing of the other entities. In other words, under the old model a problem in one of the four WSEs could trigger a financial restructuring of the entire debt package. Under the new model, one of the ten WSEs could be the trigger.
The bill also sets out the parameters of Crown financial support in more detail. There is now an express provision that the Crown can lend money to the Funding Agency if it is in the public interest to do so.
There is also an express statement that the Funding Agency debt will not be guaranteed by the Crown. As an aside, in the explanatory notes to the bill, the government incorrectly states, “The Crown may also guarantee debts of the Funding Agency”. No-one tell Grant! Luckily the position in the bill itself is correct.
In general terms this is the same position as prior to Christmas, ie there is no legal guarantee from the Crown but there remains an expectation that there is an implicit Crown guarantee given the importance of these water assets to the country. The fact that the bill also includes a very clear mechanism by which the Crown can lend money to the Funding Agency also illustrates that it is within the contemplation of the government that it may, under some circumstances, inject additional funds into the structure.
It will be interesting to see how Standard & Poor’s views these amendments, and whether they consider that the likelihood of Crown support in the event of financial distress has decreased.
The increase in the number of water service entities undoubtedly increases the structural risk, and S&P has already commented on the political opposition to the reforms. It’s likely therefore that the ratings agency and potential institutional investors will, like the New Zealand public, remain unconvinced about the overall reform package. That will be reflected in higher pricing of the debt to reflect the risk profile (ie a higher interest rate paid by the water services entities/Funding Agency) if these reforms were ever to be implemented.
As I have detailed in previous articles, the high levels of leverage makes the proposed debt financing very risky and entirely unsuitable for such a critical infrastructure upgrade that also incorporates a complex and novel management structure.
As Chris Bishop concluded his speech yesterday, “So do we need water reform? Yes, we do. Do we need confiscation? No, we don't. Do we need mandatory co-governance? No, we don't. Do we need Te Mana o te Wai statements in the way they are formed? No, we don't. Do we need balance sheet separation? Yes. Do we need economic regulation? Yes. Do we need water-quality regulation? Yes. Do we need more regionalised solutions that we let local communities come up with? Absolutely, yes we do.”
Thomas Cranmer, Lawyer with over 25 years experience in some of the world's biggest law firms. This article was first published HERE