Water entity debt

This really doesn't seem like a good idea.

Central Government provided sweeteners for local councils to encourage them to participate in the Three Waters Reforms. Two rounds of contestable funding for local projects. 

The first round is funded by central government. The Waikato Times reported that it's being used for all kinds of projects far removed from water infrastructure: passenger rail business cases, improving the local pool, walkways, contemporary art and more. 

That part seems silly but perhaps less harmful. Far better if the funding were being used to get the local waterworks up to spec for whatever might come in water reform.

But the second tranche seems a really really bad idea.

The Waikato Times writes:

“As we already have project ideas worth more than the $16.46m in available funding, community feedback to help council make the final project decisions will be vital," he said.

Ideas that aren't included as part of the Tranche 1 application may be carried over to Tranche 2 or form part of the new long-term plan next year.

The council says Tranche 1 funding is expected to have no direct impact on rates, as it is a grant from central government.

Tranche 2 funding will be debt-funded, with the debt transferred to the new Water Services Entities.

“As such, this will be repaid by water users of the respective entities,” the council says in its consultation document.

“How the entity decides to recover this debt and any subsequent impact on rates is unknown at this time.”

So. Local councils pitch for Tranche 2 projects that could be every bit as water-related as community art projects. They get funded by debt that's loaded into new amalgamated water service entities. 

Local councils have a complicated relationship with those proposed amalgamated entities. But if a council winds up bearing something like 1/N of the cost of whatever projects they pitch, they'll have pretty strong incentive to make sure that every dollar that their council can get through the thing goes to their council - regardless of how weak the case for it might be. 

S&P had already found the water entities are going to be aggressively leveraged, and that the Crown's backstop guarantee really matters in getting a reasonable credit rating for the things. They might be even more leveraged than S&P had figured, if they're also going to be loaded up with piles of council pork-barrel projects in addition to having to fund necessary water infrastructure. 

It might not be crazy to have Tranche 2 funding available for water infrastructure upgrades in advance of amalgamation. It still seems a worse idea than having the new entities make whatever decisions make sense across their areas as a whole. But encouraging councils to run a pile of pork barrel projects that load into the debt burden of amalgamated water entities - I don't know what the heck they're thinking here. 

The background documents have the main difference between Tranche 1 & 2 being expectations around the extent of co-design and co-implementation of projects, not whether they have anything to do with water services. 

And they also confirm that the water service entities are taking on a billion and a half in debt out of this, while claiming that it's okay because water users will benefit from it, and because the value of the Crown backstop is bigger than the debt loading. 

Who will provide the funding?

The support package will be met by both the Crown and the new water services entities.

The Crown will provide $1 billion of funding towards the better off component of the package, as an investment into the future of local government and community wellbeing.

The Water Services entities will provide $1.5 billion of funding, comprising:

• An estimated $500 million towards the no worse off component of the package

• $1 billion towards the better off component of the package.

It is appropriate for water services entities to bear some of the costs associated with the support package given that future water customers stand to benefit most from reform. From the perspective of future water customers, the size of this benefit is significantly greater than the cost associated with providing some of the funding for the support package.

Moreover, given most future water customers are also ratepayers, they stand to benefit from the additional investment into community well-being. 

We also note that the proposed support arrangements provided by the Crown to the water service entities (such as a liquidity support), are expected to reduce the borrowing costs. The net present value of the reduced borrowing capacity is expected to be greater than the $1.5 billion of funding provided by water service entities through the support package.

It seems mad.