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August 15, 2024 20 mins

Local Government Minister Simeon Brown has unveiled changes to allow new council-owned water companies to be able to access more cheap borrowing from the Local Government Funding Agency. 

To discuss what these changes mean, in the wake of years of public debate over the previous Government's 'Three Waters' proposal, this week Georgina is joined by the Minister to get the explanation on how this will work. 

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Episode Transcript

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Speaker 1 (00:04):
Yalder and welcome to On the Tiles, the Herald's politics podcast.
I'm your host Georgina Campbell and this is a local
edition episode. Today we are joined by Local Government Minister
Simeon Brown to dive deep into the latest on three
Waters or Local Water Done Well. The Government has unveiled

(00:26):
changes to allow new council owned water companies to be
able to access more cheap borrowing from the Local Government
Funding Agency. Thanks so much for joining us on the podcast. Minister,
good morning. Can you start with a quick summary of
what the government has announced last week regarding these new

(00:47):
water service delivery models.

Speaker 2 (00:50):
So last week's announcement was an announcement on the enduring
components of water service delivery in New Zealand under our
Local Water Done Well Plan. It's about the structures that
councils will have available to them, but also really importantly,
it's about ensuring that councils have the financing that's needed
so they can have low cost financing to make those

(01:13):
long term investments into their water infrastructure. And so the
great part about the announcement is that councils will be
able to set up council controlled organizations and through those
CEOs be able to access financing through the Local Government
Funding Agency and buy up to five hundred percent against
revenues for the water infrastructure to be able to invest

(01:33):
in what's needed, improving water quality, going for growth in
terms of housing, and making sure that councils are investing
to meet their regulatory requirements.

Speaker 1 (01:46):
Now I want to talk about balance sheet separation because
national's water policy, you know, on the campaign trail, was
that these CEOs that would manage water would be able
to achieve balance sheet separation, and it now sort of
appears that that doesn't matter anymore, or or that sort
of not the case. I'm just interested in understanding the

(02:10):
change in your thinking here around balance sheet separation, Like
what has changed.

Speaker 2 (02:16):
Well, what's changed is the work we've done with the
Local Government Funding Agency and those conversations have or started
basically immediately after I became the Minister of Local Government.
We work really closely with the LGFA, who put a
proposal on the table which was that they could look
to fund CEOs. It wouldn't require a full balance sheet separation.

(02:40):
In fact, it can be done through councils providing guarantees
to those entities that requires counsels providing those guarantees. But
what effectively it means is the LGFA will effectively look
at that entity and lend against it to a higher
ratio than it would to the council based upon prudent

(03:05):
financial criteria. And what that means is it means the
council is able to shift its water infrastructure and its
water debt into that entity borrow to a higher percentage,
but it doesn't actually require formal balance sheet separation. And
the beauty of that means that the council or that
entity is able to borrow through the LGFA, which means

(03:27):
they can get the lowest cost financing available to local government.
So if we'd gone down a balance sheet separated route,
those councils wouldn't be able to be financed through the
old GFA, although CEOs wouldn't be able to be financed
through the old GFA, and typically they'd have to pay
higher interest rates because they'd have to go through the
normal debt markets and that could be quite a considerably

(03:50):
considerable increase in their debt financing costs. And so this
is a win win that uses the current structure the
OLDGFA has it means that councils no CEOs can access
the low cost financing that's available through that, and it's
also easier to be able to be structured as councils
can already under legislation set up CEOs, and we're passing

(04:11):
legislation which makes it easier for counsels to now put
up set up joint CEOs.

Speaker 1 (04:15):
So is it that the Local Government Funding Agency has
changed its mind or changed its position on balance sheet separation.

Speaker 2 (04:24):
No, They've always been able to lend to council controlled organizations,
but we've obviously worked really closely with them on the
design of this policy and they obviously they obviously have
to manage their risk, but they've worked really closely. I've said,
their board has approved approved this policy that they're taking

(04:46):
and effectively know the beauty of it means that councils
can access those CEOs, can access the low cost financing
that comes from OLGFA and it's and it's very high
credit rating, whilst all also being able to separate that
debt and that infrastructure has been into a separate entity

(05:06):
and achieve a higher amount of borrowing against against those revenues.
So it's a win win. And I think this is
where you know, all of the under the previous government,
everything was about trying to achieve balance sheet separation rather
than looking what are all of the funding and financing
models that could be used. That's the work we've done.
We've taken an open mind, We've worked with the OLDGFA,

(05:29):
and I think we've come to a solution which is
a lot better and will mean that councils have access
to the lowest cost financing which is available for this
water infrastructure and that's good news for ratepayers and people
who'll be paying their water bills.

Speaker 1 (05:42):
So was it a case of maybe labor and even
national on the campaign trail just assuming that balance sheet
separation would be required, Like, was it that nobody actually
asked that out?

Speaker 2 (05:55):
I think well, I think I mean under the previous
government they had the last government hadn't in auged with
the LGFA. Our policy obviously was looking at how we
can allow councils to have different options. So we took
that principle, we had different options put on the table.
We worked really hard over a short at a time
to explore it, work it through and now we've delivered it.

Speaker 1 (06:18):
And as you say, the organizations will be able to
borrow up to five times their revenue. I'm interested in
the word revenue, like what revenue are we talking about
water meters because not every council in the country has
water water meters at the moment, and they're obviously quite controversial.

Speaker 2 (06:35):
Yeah, So ultimately it's the revenue that is charged for
the use of water. So some councils obviously use water meters,
A lot of councils do, not every council. Some councils
put a bill on the aura or a rate or

(06:55):
what a charge should I say on the rates bill
for water. So ultimately it's five hundred percent against what
the revenues are that are attributed to water. Our legislation
we're putting through parliament moment is going to require councils
put forward to water service delivery plan. They'll have to
identify what the revenues are ring fencing those revenues as

(07:16):
a critical part to it. So we don't those revenues
will no longer be able to be used to supplement
you know, building hotels or you know, convention centers, which
what you know, some councilors like to spend a lot
of money on that money that's raised for water will
have to be speed back on water infrastructure. Ultimately, in
terms of the question of water meters, you know, be

(07:38):
up to the it'll be that'll be a question which
we work through as part of the water service delivery plans.
But I'm a very strong advocate for water meters. They
help identify leaks, they reduce I mean, people take more
notice of how much what are they using. And also
it means that there's a user pays approach, which is
critically important for utilities. Exactly how we use for electricity,

(07:58):
it's exactly how you know it's used for telecommunications, these
are networks and being able to measure usage as a
critical component for that. Every single Lauklander has a meter
and and it's just part of how we how we operate.
And that's that is something which I advocate for. Obviously
we're not mandating it, but I'm a very strong advocate
for it.

Speaker 1 (08:17):
So would you like to see councils, you know, seriously consider.

Speaker 2 (08:21):
Water Absolutely, And I think certainly you know council you
know those you know councils which have you know, large
population centers should definitely be going down that track with
as smaller population centers, you know, maybe other considerations, but
you know, I've been having conversations with a lot of
meals around the country and I've been making my views clear.
I think it's a practical way to help ensure that

(08:43):
those who use pay it means you can measure it,
but also it helps to reduce leakage and waste. And
I think it's a really important tool in terms of
what's required when it comes to our water infrastructure. So
you know when Auckland was having its what shortage when
a few years ago, you know, there was all of

(09:04):
these complaints being made about how we were losing thirteen
or fourteen percent of our water to leaks. Well, Wellington's
losing forty to fifty percent so and they don't have meters.
So there's a real need here to you know, just
be practical about it. I'm a big staunch advocate, but
we're not mandating it through this policy.

Speaker 1 (09:34):
Are you worried at all that people might be paying
quite high charges, be it through a water meter or whatever,
instead of the high rates increases so that the entities
actually have enough revenue to borrow against well.

Speaker 2 (09:51):
The question there is around how much revenue is required
to maintain, operate and build the infrastructure that's needed. That's
something that has to be work through as part of
the water service delivery plans. But the reality here is
by having you know, debt to revenue ratios of five
hundred percent, that means those entities are able to look

(10:11):
at the longer term rather than the short term and
ensure that those costing, those costs are spread appropriately rather
than simply being lump dawn users today. And so that's
the that's the that's the great benefit of having that
higher debt to revenue cap is it allows for a
much longer term view to be able to be taken

(10:31):
and those costs to be able to be spread in
a much more proportional way. So we think this is
a balanced approach. I mean clearly, you know, ultimately people
need there is a need for people to pay. That's
certainly been a feature of our plans, also feature of
the last government's plans. But by having that higher debt

(10:54):
to revenue ratio and also having the lower cost of lending,
which is I think one of the the beauty with
the LGFA supporting these arrangements, there's an ability for those
costs to be able to be kept as low as possible.

Speaker 1 (11:10):
What is that number, because you know we've heard it's
one hundred and eighty billion dollars over thirty years, and
I think you disagree with that. You think that's Labour's number.
That's a bit exaggerated if you like. But do you
have any idea what that number is? If it's not
one hundred and eighty billion dollars.

Speaker 2 (11:27):
Well, that's that's what will be developed as part of
the water service delivery plans, and so councils will be
required to take a ten year view, they're able to
take they're able to look another twenty years as well.
But Labor's approach was very much a top down view
based upon modeling from the UK and Scotland. You know,
we are different, we're a different country, We've got different

(11:50):
infrastructure standards, different approaches. Actually, we think councils should be
working through those costings as part of the planning prot
and building up rather than top down. And so you know,
we look at the long term plans as the figures
that come through from the long term plans around what's required,
but what infrastructure is a lot lower than what labor

(12:12):
was projecting. We think that's a sensible place to start.
That's what will be required to be developed through the
water service delivery plans.

Speaker 1 (12:20):
What about council credit ratings, I think there are already
some indications that they could go down.

Speaker 2 (12:28):
Yeah, So the issue here is in terms of the
credit rates of councils, and I think the thing here
that we've been very cognizant of is ensuring that the
LGFA is able to support these entities. And I think
through them having a very high credit rating, they're able
to continue to access low cost finance. And that's the

(12:50):
most critical part here is ensuring that councils are able
to access the lowest possible cost of finance. And so yes,
if there may be some instances where some councils have
a slightly lower credit rating, I think the LGFA made
some commentary comments to the Herald today about that point,

(13:10):
but they made it very clear that they would continue
to be the lowest cost of finance to councils and
that by keeping the by not having the balance sheet separation,
councils are not having to go out onto the open
debt market where they'd be paying potentially more than one
percent more in interest per year, which is a significant
increase in interest if that's and that's what we've been

(13:33):
required under a balance sheet separated model, which was what
the last government was promoting.

Speaker 1 (13:38):
Okay, So even if the credit ratings changed, it's still
a predict good deal for counsels.

Speaker 2 (13:45):
And that's where the beauty of the relationship with the
Local Government Funding Agency plays such a critical role. Because
they have a very high credit rating, they are cross
guaranteed by counsels, their shareholding councils the government as a
twenty percent shareholder. The LGFA has recently made some changes
in relation to how they find in terms of how

(14:08):
they operate, which strengthens their position as well. So there's
work being done to ensure that lgfa's position remains strong
so they can continue to provide that low cost financing,
the lowest cost possible financing to councils and the importance
of that is that puts means that consumers ratepayers are

(14:30):
able to keep their cost down for them.

Speaker 1 (14:32):
What in particular, work is being done to ensure that
that LGFA position remains strong.

Speaker 2 (14:40):
So there's been a number of number of things that
LGFA has been working through. They are looking at their
borrower notes and how they what, you know, what they
do to ensure they maintain the strength of their credit facilities.
They've obviously been working very closely with cp and others

(15:01):
to ensure that they mitigate any risk. So they've been
doing a number of things to manage their own their
own credit position. But regardless, what remains very strong is
the fact that they remain the lowest cost financing entity
for councils in New Zealand, and that's critically important for

(15:24):
local government so they can have an affordable approach to
investing in their water infrastructure.

Speaker 1 (15:29):
Is the government involved in the LGFA in terms of like,
is there any request for government involvement in terms of
making sure that it remains strong.

Speaker 2 (15:40):
Well, what they've agreed to at the moment doesn't require
any changes to the government support for the LGFA, So
we're obviously a shareholder. There's a liquidity facility that's provided
and the government obviously will remain, you know, continue to
be in conversation with the LGFA, but what's been announced

(16:02):
so far doesn't require any changes in terms of the
support that's required. To the LGFA by the Crown.

Speaker 1 (16:08):
Okay, And what about rural councils, I mean, are they
just going to be left out in the cold here
because nobody else wants to join up with them? And
they can ultimately.

Speaker 2 (16:18):
Ultimately, what's been announced here benefits all councils, large or small,
and that they are able to set up council controlled
organizations and work with the LGFA in order to make
those long term investments. The policy approach that we're taking though,

(16:38):
does look to see counsels working together to create shared
CEOs and there's a real benefit for them to do so.
In doing so, they get to have greater economies of scale.
That means they're able to lower some of their operational costs,
and together they're able to then make those investments that

(16:59):
are need in order infrastructure. And so we expect councilors
across the country to be doing that from the conversations
I've been having already doing that, which is really great
to see. And the legislation doesn't obviously doesn't mandate it,
but the legislation is there designed to make it a
lot simpler to set up a council controlled organization that's

(17:22):
no longer going to be a requirement for each council
to individually consult with their community on it. They can
do across council single consultation. We're making it simpler, needing
to set up these CEOs so that councilors can get
on quickly and then's achieved the benefits that this policy provides.

Speaker 1 (17:41):
But what if there's a council who really wants to
join up with other councils, that say, those bigger councils
or whatever, has no interest in joining up with the
smaller council What do they do if nobody wants to
form a CECO with them.

Speaker 2 (17:55):
Well, the legislation does have some backstop provisions for the
Minister of Local Government to step in, but I see
that as a backstop. The first point of all is
for councils to work together. They are already having conversations
across the country around how they intend to work together.
Those conversations are happening at pace. The water service delivery

(18:17):
plans that they will be required to do shortly will
mean those conversations become more formalized, and my expectation is
that councils will see the benefit that was provided through
this policy and will work together to deliver that for
their local communities.

Speaker 1 (18:34):
So as an absolute last resort you could make.

Speaker 2 (18:40):
There are backstock provisions, but our policy approach has always
been that we expect counsels to work together and put
forward their solutions. But there are backstock provisions in place.
If there is any issues that do need to be addressed.

Speaker 1 (18:55):
Can you just elaborate on what those backstock provisions are.

Speaker 2 (18:59):
Well, there's an ability for me to appoint a crown facilitator,
someone who can step in and actually facilitate those conversations
and help determine a solution where there are isn't one
that's been able to be negotiated. But as I say,
those are backstock provisions, those are not the first port
of a call. My expectation is that councils will work

(19:19):
very closely together. They already are having those conversations. They
will become more formalized over the next twelve months as
councils are required for their water service delivery plans.

Speaker 1 (19:29):
Okay, we'll leave it there, Thanks so much for joining
us on the podcast. Minister, Thank you very much. Thanks
for listening to this episode of On the Tiles Local edition.
For more local politics, news and opinion, head to nzdherold
dot co dot nz. You can follow this podcast on
iHeartRadio or wherever you get your podcast thanks to my

(19:50):
producer Ethan Sells. This episode was edited by n zebme
sound engineers and you can catch us again next Friday
for more on the Tiles, SAT
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