Councils face flood of water infrastructure costs

Councils are facing a flood of costs to replace ageing pipes and drains, but they are reluctant to take on debt to do so. Photo: Lynn Grieveson

Councils across the country are facing a flood of bills to replace ageing water pipes, sewers and drains put down in the 1960s and they are calling on the Government to help plan and pay for the replacement infrastructure, which Local Government New Zealand says will cost up to $100 billion.

Pointing to the pressure from new water standards set by the Government, Local Government NZ CEO Malcolm Alexander told a media briefing yesterday that councils needed more help to deal with the funding gap, as the current model of paying for infrastructure with increased rates or debt was not sustainable.

“Setting standards on the one hand with no idea of who is going to pay or how it is going to be paid, is not coherent policy,” Alexander said.

“At the same you have increased environmental standards, you have increased resilience standards, so the question becomes: how are we going to do this? Under our current funding model, it’s rates and debt. And the question becomes: is that a sustainable position? Our view is it is not.”

Not asleep at the wheel

Both Alexander and LGNZ President Lawrence Yule agreed that the fact that the pipes and drains were now coming to the end of their lifespans was always expected, but denied it was a case of councils “falling asleep at the wheel”.

“When a lot of this stuff was put in it was a co-funding model between central and local government and in the last couple of decades that has gravitated to slowly being local government funds, which means rates, and that worked because the renewals curve wasn’t here and it was good, long-lived infrastructure,” Alexander said.

“Now we are hitting that curve, and at the same time we have an ageing population who are on fixed incomes so the ability just to rack up rates is constrained, even if you wished to do that," he said.

LGNZ is calling for a co-regulatory structure for water infrastructure, with a core set of common standards for the provision of drinking water, drainage and sewerage.

Yule said they still wanted to retain responsibility for the services – but they hope that Government would step in to help with the “renewals curve” facing councils.

“We need a review of local funding to support investment in infrastructure,” he said.

“The growth itself should be able to fund most of these costs, but at the moment the way it is set up it is largely not.

LGNZ is asking for councils to be given a wide range of funding tools, such as fuel taxes or congestion charges, as well as be given the chance to “capture a share of visitor spending”, or even get a slice of the GST pie (the latter ruled out emphatically by Finance Minister Steven Joyce later in the day).

But some councils may just need Government investment.

“In the long term, as you look at what is happening with population movement and urbanisation, some smaller communities are going to struggle to fund the three waters (storm water, fresh water and sewerage) and there may have to be input from central Government at that point,” Yule said.

Government asking councils to take on more debt

Another option is for councils to set up special funding vehicles to enable them to borrow money to pay for the infrastructure without it going on their balance sheets.

What they don’t want to do is borrow more and increase their debt to revenue ratios, as that will affect their credit ratings and increase the cost of any future borrowing.

Yet this is what the Government is apparently asking them to consider.

“They are having a debate with us around those ratios as to what is the relevance of those ratios,” said Local Government Funding Agency CEO Mark Butcher.

He denied local authorities, such as Auckland Council, were being too rigid about their debt ratios.

“The ratios are rigid because Auckland wants to maintain its AA credit rating,” Butcher said.

“Any relaxation of financial management in those ratios will lead to a drop in the credit rating, and then your borrowing costs increase. You get into a really horrible spiral of increasing debt, increasing interest costs, increasing pressure on your financial management system."

“If you pile a lot of debt onto councils’ balance sheets now, you will have to put up rates because there is no other way of raising revenue to actually meet the interest and the repayments. And if you put a lot of debt on councils’ balance sheets they have no flexibility if a natural disaster comes along…or to put in alternative infrastructure as those demands come along, because they are still paying off the existing infrastructure.”

Butcher said it was “interesting” that the Government set a goal for itself to get debt to GDP down to under 20 percent, while “on the flipside they are saying to local government 'you’ve got to borrow more.'”

Joyce unconvinced but has ideas

Asked about the estimate of $100b to replace ageing pipes and drains, Joyce told Newsroom he was “not convinced on those numbers.”

But he said the Government was “having discussions with various parties at the moment as to how we can perhaps bring in other capital” to assist councils, although he would not give any details on how that might be done.

“It’s certainly not the role of central Government to take over the local government responsibilities, but I am sure we can assist with some methods that will actually help attract some more investment into these sorts of infrastructure they need to invest in,” he said.