The Issue

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

Our solution is to use direct monetary financing (DMF) to lower overall funding costs while retaining local control over water assets. The Reserve Bank issues new money to buy water bonds from the Local Government Funding Agency (LGFA) to provide councils and water CCOs with infrastructure funding at little or no interest. DMF was used in New Zealand from the 1930s to the 1980s but fell out of favour with the rise of monetarism in the 1980s and ’90s. Download our Direct Monetary Financing Explainer to learn more.

An innovative aspect of this proposal is to wrap direct monetary financing in an institutional framework that (a) addresses concerns about possible over-use and inflationary impacts and (b) coordinates the pipeline of work with the finance availability when it’s needed.

Benefits of the proposed model include:

• It saves ratepayers and water users billions of dollars by significantly lowering finance costs compared to any alternative.
• It provides long-term certainty of projects and financing
• It secures local ownership and control of water assets
• It allows decisions about merging council water assets to be based on efficient regional planning and delivery, not the security demands of private finance
• It places trusted independent institutions at the centre to ensure the issuing of public money is strictly controlled and inflation impact minimised
• It delivers public financing at little cost to taxpayers while protecting them from credit risk—ratepayers and water users repay these loans, unlike Government bonds, which are repaid from taxes.
• It offers a way to leverage public contributions to boost the finance available from private sources if needed.

How it works

Our proposal uses two trusted, independent entities to give councils access to the cheapest possible borrowing, called direct monetary finance. 

Direct monetary financing is money issued directly by the Reserve Bank. It is a powerful tool but to retain public confidence, it must operate within a robust institutional framework that ensures it is used within strict limits. With rates as low as 1% among its benefits, it’s time to bring back this valuable source of public financing.

Flow chart showing how the model works

Here’s how it works (refer to the diagram above).

1. Councils would decide their own needs and submit water infrastructure projects to the Infrastructure Commission for consideration in the Commission’s 10-year plan of priority projects.

2. Based on its independent analysis, the Infrastructure Commission would decide on priority projects and funding requirements and propose a public finance contribution.

3. The group of priority projects and their expected funding needs would be sent to Parliament for approval of a 10-year public financing contribution, say $20 billion, providing certainty across political terms.

4. Working closely with the Infrastructure Commission and the Reserve Bank, the Local Government Funding Agency (LGFA) would periodically issue ‘water bonds’ to finance successful projects. The same bodies would monitor project milestones and financial performance, asking Parliament to appoint a Commissioner if problems emerge.

5. The Reserve Bank would purchase the ‘water bonds’ issued by the LGFA over a 10-year timeframe up to Parliament’s approved credit limit. Bonds would be issued at low interest rates—we’d expect between 1–3% based on the previous use of this financing method—and for terms up to 30 years. (The Reserve Bank already holds $4 billion of LGFA bonds bought as part of its Covid emergency response.)

6. Councils could “top up” any shortfall or fund out-of-scope projects via private market financing.

A comparison between current funding options and our proposed Local Water Financing Done Well

Notes

• Interest saving comparisons: Interest comparisons in the table above are based on 30-year terms at 4.5% p.a. (based on current funding options) and 3% p.a. (proposed higher-end rate using direct monetary financing). At the lower end, a 30-year term at 1% p.a. using direct monetary financing would cost just $7.9M in total interest.
• Raising additional private finance: Bonds purchased by the Reserve Bank could be subordinated to private debt (i.e., second in line for repayment) to assist councils/CCOs in raising additional private finance where needed.
• Reducing taxpayer risk. The Reserve Bank could be given statutory powers to monitor water entities’ finances and recommend the appointment of a commissioner if problems arise. It could use part of its earned interest to fund a debt default insurance scheme, further reducing the already small risk to taxpayers.
• Inflation risk. A valuable byproduct of this arrangement would be that the Reserve Bank would directly control a fiscal tool that could help it meet its inflation mandate, e.g., by timing bond purchases to the availability of physical resources.
• Physical resources planning: The Infrastructure Commission’s national planning and coordination role would help to address resource bottlenecks before they became inflationary. (A similar body, such as Crown Infrastructure Partners, could replace the Infrastructure Commission’s role if this was preferred.)

Treasury advice: Direct Monetary Financing and QE

• Stuff article: Treasury, Reserve Bank told Government it could just print money to pay for Covid-19 (link)
• Aide Memoire: Quantitative Easing and Monetary Financing Compared – Treasury/Reserve Bank memo to Finance Minister Grant Robertson (PDF pp 5–10)

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 to provide needed funding. It keeps ongoing costs low for ratepayers and taxpayers while ensuring the assets remain 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
https://www.positivemoney.org.nz/

[Version 1.8. Last updated 11 September 2024]

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