Discussion Document

Local Water Financing Done Well

A proposed scheme for the public funding of water infrastructure

Finance, especially the central government’s role, has dogged attempts at water reform and this continues with the latest version, Local Water Done Well

At the heart of the problem are demands by successive governments for so-called balance sheet separation of water assets. The purpose of balance sheet separation is to limit councils’ control of those assets by moving them to a separate entity in order to secure private funding. But this has led to concerns about loss of ownership and democratic control, and forced grouping of disparate councils.

A better approach to financing water infrastructure

Instead of this controversial system, we propose using two trusted independent agencies that already exist to provide the necessary “ring fencing”: the Infrastructure Commission and the Reserve Bank. 

The former would work with councils to scope and prioritise projects, the latter to deliver the government’s funding contribution and help to mitigate taxpayer and bondholder risk.

Essentially, council water entities would submit projects for public funding to the Infrastructure Commission. The Commission’s 10-year plan of priority projects would be sent to Parliament for review and approval, including a 10-year funding contribution. 

That funding contribution would be delivered to approved projects over the 10-year timeframe by the Reserve Bank using direct monetary financing, a form of non-market financing similar to that used for Covid. Councils would “top up” any shortfall via private market financing.

Benefits of the proposed scheme

The proposed scheme addresses several thorny challenges:

  • 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 central government funding at little cost to taxpayers, protects them from credit risk and takes the politics out of it
  • It provides a mechanism to use the public funding contribution to boost finance available from private sources

How it works

Chart showing institutions and their relationships to support public funding of water infrastructure

In broad terms, it would work like this:

  1. Councils plan and deliver water at a local or regional level and own the assets – this is what most people want, other than private financiers
  2. Local water plans are submitted to the Infrastructure Commission (or a body within or similar to it), reviewed, and “scored”, taking into account local, regional and national priorities
  3. 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
  4. Parliament accepts or modifies the funding recommendation and it authorises a 10-year “Water Bond” facility, e.g. $50 billion
  5. Councils/CCOs (Council-Controlled Organisations) then bid for a share of this public funding to deliver projects included in the authorised list  
  6. In consultation with the Infrastructure Commission, the Reserve Bank assesses the bids and agrees to fill or partially fill requests for public funding (i.e. the right to issue Water Bonds up to each council/CCO’s approved limit)
  7. Using the facility granted by Parliament, the Reserve Bank directly purchases approved Water Bonds issued by the Local Government Funding Agency (LGFA) during this 10-year period on behalf of its member councils and water CCOs. Any public funding will be ring-fenced to specific projects, and unlike traditional government bonds, repayments will come from council water charges, not taxpayers.
  8. Councils/CCOs retain the ability to raise finance from other sources to “top up” shortfalls in public funding and/or to fund rejected projects. This includes issuing bonds via the LGFA to the private market and using other private financing sources.
  9. The public debt would be subordinated to private funding (i.e. would be second in line) to assist councils/CCOs in obtaining private finance
  10. Parliament would have the right to appoint a water commissioner with significant powers to step in in the event of a council/CCO default of either public or private financing
  11. Optionally, 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 can recommend appointment of a commissioner to protect the interests of both the Crown and private bondholders.
  12. 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

 

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