13 Feb 2024

Minister points to 'backstops' if councils refuse Three Waters amalgamations

1:37 pm on 13 February 2024
National MP Simeon Brown

Photo: RNZ / Angus Dreaver

The minister responsible for water reform has declined to say if the government would force councils to amalgamate water services, pointing only to regulations that could let it step in if needed.

Asked repeatedly if the government could force bigger councils to combine their water assets with smaller rural ones that face being left out in the cold, Local Government Minister Simeon Brown referred only to the "regulatory backstops" they planned to bring in.

The government on Monday announced Labour's Three Waters reforms - later renamed as "Affordable Water" - would be repealed by the end of next week.

It would be replaced through two new pieces of legislation which would streamline the process for councils to set up Council Controlled Organisations (CCO), set financial sustainability requirements, and bring in regulatory backstop powers for the government to intervene if needed.

Under this approach, councils could voluntarily enter into arrangements with other councils in their region when setting up CCOs, but some smaller councils have previously expressed concerns they could be left on their own by bigger councils.

Labour's Local Government spokesperson Kieran McAnulty said it was a worry for him.

"There's going to be small councils that are facing massive costs that are left out in the cold because it's voluntary, and councils are required to act in the interest of the ratepayers. So why would a large council voluntarily join with a small rural one and take on that cost?

"I'm not talking about 30 years time, I'm talking about in two or three years time. Because the water regulator is going to stay - that's a good thing - but they require councils to invest in their water services, and it has to happen now to meet the standards."

Local Government Minister Simeon Brown was asked what the goverment would do in that situation.

"We'll be looking at those plans, ultimately there'll be a regulatory backstop, we're going to be working through what that looks like over coming months," he said.

Asked if that meant the government would force councils to amalgamate their water services with smaller councils that would otherwise face being left out in the cold, Brown again referred to the planned "regulatory backstops".

"As I said there'll be some regulatory backstops, we're working through what those options will look like. Obviously there's a policy development phase that I outlined yesterday, that's in the second stage. The first stage will be about enabling those CCOs to be able to be set up for regions, across regions, more easily."

Asked again if the government would step in if larger councils refused to merge with smaller councils he said: "Well, there'll be a regulatory backstop in place. We're working through what that looks like but ultimately our expectation is really clear, we want councils in regions to be working together.

"That's the model they asked for, that's the model that we're delivering."

"Ultimately this is about local water, this is a local council issue, and we're providing the framework for councils to be able to make those long-term investments."

'It doesn't add up, it's not going to work'

The government's plan outlined on Monday said its legislation would introduce a new class of council controlled organisation to achieve the all-important balance sheet separation Labour's plan had aimed for, allowing greater levels of borrowing.

Brown on Tuesday said the legislation would streamline the process for setting up the CCOs.

"At the moment it's quite convoluted. It's going to make it easier for them to be able to borrow money off balance sheet, and to be able to make those long term investments and spread that cost."

He said it would be different to the current setup of CCOs.

"It'll absolutely be different in that they'll be able to access the long-term funding and financing separate from councils' borrowings for council services, and they'll be able to have ringfenced revenues so they're able to make those long-term investments."

But McAnulty said that did not add up.

"The government is claiming that balance sheet separation will be maintained, but it's not backing that up. Their own advice says that if they get rid of the entities, they won't be able to have balance sheet separation - it's sitting on their website - and every time they're asked about that, they don't give a genuine answer.

"You can't have council control and balance sheet separation: that is a consistent thing in all the advice and the peer reviews and actually the peer review of the Castalia report, which the National plan is based on.

Kieran McAnulty

Photo: RNZ / Samuel Rillstone

"Rating agencies have already said that if the entities [set up under Labour] are scrapped and balance sheet separation is not maintained, then the credit ratings of councils will go down. They've said that publicly.

"It doesn't add up, it's not going to work. And I get in pretty hot under the collar about it because I know what it's going to result in. It's going to result in unaffordable rates."

The government knew it could not achieve balance sheet separation, he said.

"They're trying to cover over that and be very unclear with the language. But I know exactly what we're dealing with here: Council Controlled Organisations especially on a voluntary basis will not achieve balance sheet separation, it will result in one thing and that is unaffordable rates.

"I come from an area in Wairarapa where some of our councils have had 20 percent rates increases two years on the trot, and that doesn't even account for the future costs that they're going to have to bear with water services - that was taking into account the fact that water services were going to be reformed."

He said the government's refusal to underwrite council debt would likely also curb the borrowing the new CCOs could achieve.

"Credit rating agencies said that it was likely to do that. So, yeah, probably."

Prime Minister Christopher Luxon on Monday was asked if he had sought assurances from ratings agencies his model would allow the borrowing required, but only said district councils had already had conversations with ratings agencies and "we're well aware that model meets their needs as well".

Labour defends cost of its reforms

McAnulty also defended the previous government's spending on the reforms, which National had criticised at its media briefing the day before.

Brown had said the $1.2 billion spent on the scheme had amounted to nothing, and the government was aiming to shut it down as quickly and cheaply as possible.

McAnulty said Labour did not apologise for the spending.

"The decision ... to repeal things is not on us, that's on this government," he said. "They are the ones that need to justify reversing a system that is now set up that can be proved to save ratepayers money - and their alternative will not, it will cost ratepayers money.

"We're talking about $185 billion that needs to be spent. And we found a way in which we could do that in an affordable way. But it required massive structural overhaul that costs money. We don't apologise for that 1.2 billion because it had to be done."