Discussion Document

Local Water Financing Done Well

An innovative public/private funding model for council water infrastructure using direct monetary financing within a robust institutional framework

The Issue

The availability of finance has dogged meaningful water reform and this continues with the current Government’s replacement for Three Waters, Local Water Done Well.

The Local Water Done Well document provides the option of a funding model that would allow for neighbouring councils to own a standalone entity. That entity would have the ability to access long-term borrowing to invest in infrastructure, without it impacting council balance sheets (balance sheet separation).

While the debt would be off the councils’ balance sheets and onto the standalone water entities, councils will still be left with significant debt levels to service with interest payments syphoning off funding for other council commitments.

The Solution

Flow chart showing how the Local Water Financing Done Well model works

(A detailed explanation of this chart can be found below.)

The Local Water Done Well document states that it will be up to councils to decide what model they opt for and following is a model that addresses the important issue of affordable funding with minimal impact on council revenue.

Our funding model proposes using two trusted existing independent entities: the Infrastructure Commission (or a body similar to it, such as Crown Infrastructure Partners) and the Reserve Bank.

Councils would submit projects to the Infrastructure Commission for consideration in the Commission’s 10-year plan of priority projects. The approved priority projects would then be sent to Parliament for review and approval, including a proposed 10-year funding contribution.

That funding contribution would be delivered over the 10-year timeframe by the Reserve Bank through its purchase of bonds issued by the Local Government Funding Agency Bonds with the bonds being issued at a very low interest (perhaps less than half of the current wholesale rate).

Purchasing of LGFA bonds would be similar to the Large Scale Asset Purchase (LSAP) programme where the Reserve Bank bought $4 billion of Local Government Funding Agency bonds.

Councils would “top up” any shortfall via private market financing.

Benefits of the proposed model

  • It provides long-term certainty of projects and funding
  • It retains local ownership and control of water assets
  • It allows decisions about merging council water assets to be made on the basis of efficient regional planning and delivery, not the security demands of finance
  • It delivers funding at little cost to taxpayers while protecting them from credit risk
  • It provides a mechanism to leverage the public funding contribution to boost finance available from private sources

Flow chart showing how the model works

Flow chart showing how the Local Water Financing Done Well model works

Narration

1Councils plan and deliver water at a local or regional level and own the assets. These decisions can be made based on local interests, not artificially dictated by financial requirements.

2. Local water plans are submitted to the Infrastructure Commission (or a body within or similar to it, such as Crown Infrastructure Partners), reviewed, and “scored”, taking into account local, regional and national priorities. Based on the resulting 10-year water infrastructure plan, the Infrastructure Commission sends a recommendation to Parliament which includes a proposed 10-year public funding contribution delivered via the Reserve Bank.

3. Parliament accepts or modifies the funding recommendation and it authorises a 10-year “Water Bond” facility, e.g. $20 billion.

Councils/CCOs (Council-Controlled Organisations) then bid for a share of this public funding to deliver projects included in the authorised list.

4. The LGFA issues very low-interest Water Bonds on behalf of the Councils/CCOs for their approved finance, with terms, timing, etc. set in consultation with the Reserve Bank.

5. The Reserve Bank purchases Water Bonds issued by the Local Government Funding Agency (LGFA) during this 10-year period on behalf of its member councils and water CCOs. Funding is ringfenced to specific projects, and unlike traditional government bonds, repayments will come from councils and not taxpayers.

Councils/CCOs retain the ability to raise finance from other sources to “top up” shortfalls in funding or fund rejected projects. This includes issuing bonds via the LGFA to the private market and using other private financing sources.

The funding from the Reserve Bank would be subordinated to private debt (i.e. it would be second in line for repayment) to assist councils/CCOs in obtaining private finance.

The Reserve Bank could serve as the financial regulator for publicly-funded water entities, monitoring those entities to ensure prudent financial management and highlight problems that might lead to default. It could recommend appointment of a commissioner to protect the interests of both the Crown and private bondholders.

The Reserve Bank would set the terms of the bonds it will purchase. A useful byproduct of this arrangement is that the Reserve Bank would directly control a fiscal tool that would complement its other tools in meeting its inflation mandate, e.g. by timing bond purchases to the availability of physical resources or varying interest rates or repayments with OCR changes. It can potentially use part of any interest rate premium above the OCR to fund a debt default insurance scheme.

Conclusion

At a time when desperately needed water infrastructure is not repaired or installed due to a lack of money, our model uses existing independent institutions, and familiar concepts (like infrastructure bonds) to provide needed funding.

In addition, it keeps ongoing costs low for ratepayers and taxpayers while keeping the assets under local council ownership and control.

About Positive Money New Zealand

Positive Money NZ is an independent, non-profit group advocating for monetary reform in New Zealand. Our patron is Bryan Gould and we are aligned with Positive Money UK who has the following advisory panel to guide and support its research.

Dr Carolina Alves, Dr Louison Cahen-Fouro, Frances Coppola, Prof Joshua Farley, Prof Steve Keen, Rohan Grey, Prof Tim Jackson, Dr Johnna Montgomerie, Katie Kedward, Dr Maria Nikolaidi, Eric Lonergan, Prof Julia Steinberger, Beth Stratford, Dr Keston Perry, Lord Sharkey and Dr Ndongo Samba Sylla

For further information

Contact Don Richards, National Spokesperson for Positive Money New Zealand.

Email: info@positivemoney.org.nz
Mobile: 0274 778 147
Phone: 07 307 1158
http://www.positivemoney.org.nz/

[Version 1.6. Lasted updated 7 May 2024]

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