S&P: Axing Three Waters may hit council ratings
Move could make borrowing more costly, writes Jenée Tibshraeny
S&P Global Ratings warns local councils’ credit ratings risk being downgraded under National’s plan to ditch Three Waters, which could make it even more expensive for them to borrow.
National wants to restore councils’ ownership and control of stormwater, wastewater and drinking water assets, leaving the debt required to upgrade these assets on, or closely linked to, their balance sheets.
However, S&P warns that lumping councils, which are already highly leveraged by international standards, with more debt could make them less creditworthy.
This would label councils as higher risk, which could make it more expensive for them to borrow.
S&P analyst Martin Foo fired the warning shot at National during a webinar on Wednesday.
“The former Labour Government’s affordable water reforms were unpopular — let’s face it,” Foo said.
“But the reforms could’ve been an escape valve for some of this high debt. Now that National has threatened to repeal the reforms, the question is, what’s next?
“If councils are saddled with massive investment needs to meet these new water standards, without access to new grants or new funding tools, then we are likely to see further downward pressure on our council credit ratings.”
The Labour-led Government earlier this year passed legislation to establish 10 entities to take care of the water infrastructure that local councils currently own and operate.
A downside of the reforms was that councils would have to give up control of their assets.
An upside was that the change would take the billions of dollars of debt required to upgrade water infrastructure off councils’ balance sheets.
Councils are already up against their debt limits, as their ability to generate more revenue by lifting rates is limited. Indeed, rates rose by an average of 9.8 per cent in the year to the September quarter, according to Stats NZ.
This week, Christchurch ratepayers were warned they could be staring down the barrel of an 18 per cent increase in rates if their council does not make major cost savings. It is currently in the process of working on its Long Term Plan from 2024 to 2034. Cutbacks in pool and library operating hours could be on the cards, as well as the council potentially selling assets.
In June, Wellington’s city council announced plans to hike rates by 12.3 per cent, while Aucklanders are facing a financial horror show with sky-high rates and water bills pencilled in for next year.
Heading into a new 10-year budget next year, the starting point for Auckland rates is 13 per cent and a senior council source has said water bills could rise by more than 20 per cent.
The gloomy outlook comes hard on the heels of a 7.7 per cent rate rise and a 9.5 per cent hike in water bills for Auckland residents this year, which took the combined cost for the average household to $4900 during a cost of living crisis.
While Labour’s water reforms create winners and losers, Foo believed taking water assets off councils’ balance sheets would generally improve their creditworthiness.
He explained to the Weekend Herald that given the Crown (which has a very strong AA+ credit rating) is underwriting the 10 water entities, S&P was satisfied they would be sufficiently separate from local councils.
He was unconvinced that National’s suggestion that three or more councils could team up to create council-controlled organisations (CCOs) to issue debt to pay for infrastructure would create enough “balance sheet separation”.
In other words, Foo said, S&P would still link the debt taken out by CCOs to local councils.
“It’s still one step short of what Labour’s reforms would’ve achieved,” he said.
Foo acknowledged National could try to enhance “balance sheet separation” by stipulating that CCOs couldn’t be supported by councils.
However, this would make CCOs riskier in the eyes of investors, which would demand a higher return for buying CCOs’ debt.
Taking a step back, in a note published in February, S&P made the point that regardless of who delivers the required infrastructure, the cost will be “astronomical”.
It feared the affordability of the required investment hadn’t been scrutinised enough, with much of the public debate centring on the cogovernance element of Three Waters.
“If councils fund the investment, general property and targeted rates will likely soar to record levels,” S&P said. “If WSEs [water services entities] fund the investment, water charges will likely soar instead.
“The Crown argues that WSEs will benefit from efficiencies of scale and will better prioritise the required investment than councillors with shortterm horizons governed by elections.
“Opponents [including National] argue the benefits of efficiencies of scale are overstated and could occur in other ways (eg, through smaller regional council-controlled organisations).
“In either scenario, there is no free lunch, and New Zealanders face much higher costs to fund this investment no matter who delivers it.”
National’s local government spokesperson Simon Watts declined to comment on the matter, saying, “National first has to form a government and appoint ministers.
“Following that, appointed ministers will meet with government department heads and start the process of putting our policies and plans in place.”