By Cranmer
Brown declares Three Waters ‘doomed’ as Watercare is ordered to stop work and S&P announces that no new rating decisions will be taken by the agency until after the election which it calls ‘vital’.
The local government elections have been widely viewed as a referendum on Three Waters but in reality they also appear to have triggered a series of announcements which dramatically call into question the viability of the controversial project.
It was no coincidence that, in the aftermath of the local government elections, with anti-Three Waters councillors in the ascendancy, Standard & Poor’s made its announcement that it would not be making any adjustments to the New Zealand Government or local authority credit ratings until after the 2023 general election. At first glance that may not appear significant but if you look at the detail of the message it becomes eye-opening.
By way of background, Standard & Poor’s is the global ratings agency which reviewed the proposed Three Waters structure last year in order to issue an indicative credit rating for the water services entities. Then earlier this year it issued another report setting out indicative credit rating implications to Auckland Council and Wellington City Council of implementing the proposed reforms. This is normal practice for these types of financings.The government pays S&P a fee and it provides them with indicative ratings based on various hypothetical scenarios. Those ratings then form part of the marketing material which is provided to potential lenders. During this marketing phase it’s important to generate positive momentum behind the lending opportunity in order to attract a sufficient number of influential lending institutions for the financing to be a success. Any negative ‘noise’ around a potential deal coming to market can severely jeopardise its chances of success. By coming out publicly as it has, S&P has effectively flagged its concerns to every potential lender in the market immediately putting them on notice to be aware of these issues.On the basis of 6 hypothetical scenarios, S&P gave the mega entities an indicative credit rating of AA+ based largely on the extremely high likelihood of government support in the event of financial distress. Without the backing of government support, the mega entities are hovering just above junk bond status. On the Jack Tame measure of success, the government effectively got an A for aspiration.What happened on the weekend was the first indication, as reported by RNZ, that S&P, like Jack before it, is now considering giving the government an E for execution. The message from S&P was that it hasn’t received enough information from the government to change any of the credit ratings at this stage, and that the unknowns include “clarity over the government’s future course of action, such as what assets were to be transferred and when”. That’s pretty fundamental stuff to have outstanding at this stage.Furthermore S&P is unclear about “how the reforms would be implemented, such as whether everything would change on 1 July 2024, or be gradually implemented”. S&P is of course right to be raising concerns about the practical details of the asset transfers from each of the local authorities to the 4 mega entities – which will be a massively complicated process.After all, the government’s record on deliverables such as this is not good. Take for instance the merger of 16 polytechnics and institutes of technology which currently resembles a multi-lane pile-up. At the end of 2019 a handful of polytechnics were facing deficits, with the sector estimating a $48 million shortfall. Three years and $200 million on from the merger, the result was a $110 million deficit. By comparison Three Waters is immeasurably more complex and the stakes are far higher.In addition to questions of practicalities, S&P has also said that “the financial aspects of the reforms were also unclear, such as whether the councils would receive any payments in return for the transfer of their assets and how large any payments would be, or how much debt councils would be left to carry”.These are huge issues to remain open at this stage of the process. It suggests that as S&P has moved from looking at hypotheticals to examining the details of the reforms, a number of fundamental questions and issues have emerged that need addressing.That could well include an explanation as to how exactly the 1200+ Te Mana o te Wai statements will work in unison with each other without totally overwhelming and jamming up the mega entities. There is no guidance or indication anywhere as to how these will work, nor how much they will cost. S&P and each of the lenders will need to understand this mechanism in minute detail in order for their lending proposals to have any chance of getting through their investment committees.So far the government has sought to minimise discussion of Te Mana o te Wai statements with the public – sticking very closely to the vague and open-ended wording in the Bill. Only in Cabinet Papers does one see the full unbridled power of these instruments and realise that they are totally incompatible with a large infrastructure upgrade of this nature. The government has fudged this issue with the public for far too long, but it won’t be able to treat their potential lenders with the same level of contempt. The question is what will S&P make of it when they understand the full impact of this mechanism.S&P has also clearly picked up on the growing public and political opposition to the reforms. It wisely decided that “we’re unlikely to actually upgrade or downgrade before we actually see that election outcome because that will be vital”. Effectively S&P is pausing work until the outcome of the 2023 election is known and in doing so is demonstrating a lack of confidence in the government either to deliver these reforms as promised or to survive the next election.That cautious approach was rewarded within 48 hours when newly-elected Auckland Mayor Wayne Brown issued a copy of his letter to Watercare chairperson Margaret Devlin in which he stated:
As Mayor, I expect that you will not be unnecessarily spending your resources on assisting or preparing for Three Waters reforms that are unlikely to happen. That is also true of Auckland Council to which I have given the same advice.In more than 300 campaign events, I detected no support for it [Three Waters] at all among Aucklanders. I promised in the election campaign to stop it.It is not in the best interests of Watercare, its shareholder or its customers for it to spend any more money on the doomed proposal – and that is also true of Auckland Council.
Brown is not alone in leading renewed opposition to the reforms. Winston Peters has been outspoken in his criticism in recent days, adding his voice to Act’s and National’s who have both consistently opposed the reforms. At the local government level, newly-elected Nelson Mayor, Nick Smith conveyed the feeling of Nelson voters by stating:
The other issue that I think is very clear in the national results and was just so clear in Nelson’s is that there is real anger around the Government on Three Waters. Unless the Government has a death wish, they do need to revisit that.
The government’s timetable for these reforms has always been very tight. The questions raised by S&P over the last few days suggest that the government is not as far progressed as it should be and that fundamental issues remained unresolved. Vehement local government opposition to the reforms will only exacerbate these problems from which the government will not be able to escape.
Put simply, the structure is far too complicated and totally unworkable, and the financing is unnecessarily risky and wholly unsuitable for a project of national significance.
