The alternative proposed by the new mayors of Auckland and Christchurch lasted all of 90 minutes – so what now?

This article was first published in Bernard Hickey’s newsletter The Kākā.

For an hour or two on Monday, Labour looked to have been given an offramp to abandon Three Waters for a much less politically divisive alternative that would have allowed for more investment in and consolidation of water assets, but without the compulsory co-governance or councils losing control.

Instead, prime minister Jacinda Ardern and local government minister Nanaia Mahuta drove right on past, smiling and waving politely, seemingly unable to disconnect the self-driving software built for them by the policy wonks at Treasury and the Department of Internal Affairs, and powered by Labour’s Māori caucus.

Surprisingly for a median-vote-hugging group that usually course-corrects with the help of focus groups and polling, the sixth Labour government has decided to barrel on and to hope anti-centralisation and anti-co-governance backlash from the regions has subsided before next year’s elections.

The new mayors of Auckland and Christchurch put forward their proposed alternative to the four water entities being created under Three Waters on Monday afternoon, but it was all but rejected within hours by a government that sees no alternative to complete “balance sheet separation” and co-governance for all water assets.

The mayors’ alternative plan would see councils retain ownership of water assets and not have to adopt co-governance with iwi, but would have access to government investment and government-guaranteed loans. Any consolidation and form of co-governance would be driven and decided by councils, rather than legislation.

Here’s the difference in how it could look, with the current Three Waters map first, and the suggested alternative below that.

The idea launched by Auckland mayor Wayne Brown and Christchurch mayor Phil Mauger was also backed by Waimakariri Council mayor Dan Gordon and was put out for other councils to consider.

The key details:

• The creation of Regional Water Organisations (RWOs) that couldn’t be sold outside local authority ownership and would be directly controlled by councils in their region, without the need for an intervening committee, as proposed under Three Waters.
• The RWOs would have access to investment capital through a new Water Infrastructure Fund (WIF), administered by the government’s Crown Infrastructure Partners (CIP), which funded the ultra-fast broadband rollout.
• CIP would act as the lead facilitator of financing and investment and could manage the balance sheet risk at the national level.
• The RWOs would form their own co-governance arrangements at regional level, if opted for by councils, rather than being made compulsory from the centre.
• The RWOs would be subject to regulation by the already-created regulator Taumata Aromai.
• Smaller rural schemes not in RWOs would be able to apply for capital subsidies via the Water Infrastructure Fund, the Ministry for the Environment and Te Whatu Ora.

The mayors said the election results effectively gave them a mandate to argue for another alternative and that the promises by the opposition to repeal Three Waters undermined certainty for everyone in the long run.

“Everyone agrees tens of billions of dollars need to be invested over several decades to upgrade New Zealand’s freshwater, storm-water and waste-water infrastructure – and that requires maximum political consensus to deliver policy stability,” the mayors said in a statement. “As a nation, we need to find a way move forward in a positive and consensus manner – and stop the ugly and angry Three Waters debate that is dividing our county.”

But any hopes the proposal might be a useful offramp for the government lasted barely 90 minutes before Jacinda Ardern and Nanaia Mahuta politely ruled out any alternative that did not include “balance sheet separation” and the “economies of scale” of the four entities. Ardern said “balance sheet separation” was a bottom line for the government, which is currently driving Three Waters legislation through the consultation process in select committee.

Ardern told her weekly post-cabinet news conference the government’s bottom line was there would have to be balance sheet separation and economies of scale to get the benefits needed to avoid the higher rates and water bills projected with the status quo.

Ardern and Mahuta were asked what they thought of the mayors’ proposal in last night’s post-cabinet news conference.

“We’re at a juncture now where we’ve been receiving public feedback. And of course, we’ve said we’re open to making refinements and changes that improve the reforms here that are just so necessary,” said Ardern. “But our bottom line is, we don’t want to change those matters, which are focused on keeping cost of living in check. Without reform, ratepayers will see increases in their water bills. So we don’t want to change the fundamentals of these reforms that are designed to make sure we don’t see escalating bills.”

Both Ardern and Mahuta pointed to the ongoing select committee process, which is expected to produce a report to parliament next week with any changes after the committee stage. If any changes are planned, this is where they would be made.

So what’s actually going on here? Why is the government persisting with a policy that clearly is not supported by the bulk of councils and became the subject of a “backlash” referendum in council elections this month? With Labour around 10 percentage points behind National in the polls and on track to be replaced outright by National and ACT late next year, it’s somewhat surprising the government has yet to throw Three Waters under the bus and move on.

Both the mayors and the government know there is a real problem to solve. There is at least $100b worth of infrastructure underfunding built into our system from the last 30 years, before another $100b needs to be spent over the next 30 years to handle a population growth rate projected to be less than half what it actually was over the last decade.

Water infrastructure is a crucial part of this. Without the pipes, there are no houses or roads or railways or offices or factories built. The Three Waters process has estimated up to $185b has to be invested over the coming 30-40 years to both fix existing infrastructure, handle fresh population growth and improve the quality of our drinking water, storm water and waste water.

The government is currently planning $61.9b of infrastructure spending, which does not nearly fill the $200b hole already identified by the Infrastructure Commission. The investment is also needed to kick-start the housing and public transport investments needed to have any hope of solving our housing unaffordability, climate change inaction and child poverty problems. See more on that here in my analysis earlier this month about infrastructure and population.

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Why Three Waters matters so much

Three Waters was the government’s solution to this problem in a way it hoped satisfied the major constraint that both parties have effectively agreed to for the last 30 years. Both believe central government taxes should be limited to around 30% of GDP and debt should be limited to 20-30% of GDP over the long run. That effectively means neither Labour nor National governments can significantly increase taxes or create new taxes that generate net extra revenue, or use the Crown’s balance sheet, to borrow for a sustained and permanent increase in public investment in infrastructure.

Any party advocating for higher taxes and debt would get slaughtered by the other, so the status quo remains, although it is also a very lucrative policy for the median voters that both parties need to govern. That’s because these voters largely own standalone homes in suburban and provincial areas and have made $1t of tax-free and leveraged capital gains on their residential land values in the last 30 years. That, in turn, is largely because this infrastructure inaction and dysfunction between central and local government has limited the land available for new housing. Extra demand in the form of a higher population and lower interest rates turned into spectacular gains in land prices. Any increase in government debt or increase in taxes would increase interest rates (and therefore reduce land values) and/or reduce disposable income available for leveraging up into ever larger mortgages.

The (very) dirty (not so) little secret of our infrastructure mess

The dirty little secret of infrastructure financing is that it’s in the interest of residential land owners and the politicians who need their votes to do nothing to fix our infrastructure deficits. It’s also in their interests not to plan for population growth, and/or unleash massive population growth that is further stretches supplies of land available for housing. It’s the perfect combination when you realise your pathway to a comfortable retirement and leveraging up plenty of equity to help your kids into housing is to ensure no new land is available, migration is strong, taxes stay low and interest rates stay low.

Under our political economy’s dual 30/30 constraints on tax and debt, any large new infrastructure has to be funded privately through private debt or private equity, or at least far enough away from Crown and/or council balance sheets to avoid putting Aotearoa-NZ’s AA+ sovereign credit rating at risk. This is the whole point of Three Waters. It shifts the council-owned assets into new balance sheets that are also separate from the Crown’s, which would then be able to borrow against streams of water charge revenues unconstrained by politicians trying to avoid ratepayer revolts against water meters, water charges and higher council debt.

Three Waters was a way to allow “someone” to borrow and apply water charges without having to get specific permission from either general election voters or council voters for higher charges, taxes and debt.

Unfortunately for the government, the debate got meshed up with the debate about co-governance, which I think is a red herring. Anyone deeply involved in local government, infrastructure and resource management and who understands co-governance has no great fear of it. For example, former National treaty minister Chris Finlayson thinks co-governance should be embraced, not feared.

But is Three Waters actually the best idea?

The debates around the actual merits of Three Waters as a vehicle for doing the necessary investment should be shorn of co-governance and judged on the cost, the logistical viability and the political sustainability of it. The off-balance-sheet structure adds hundreds of millions of cost and undermines it long-run politicial sustainability because it is at least a couple of arms lengths away from both sets of voters.

As soon as National and ACT said they would repeal it, Three Waters was in trouble. As soon as many of the councils said they were opposed, and the biggest ones were lukewarm, it was in deeper trouble. The local election results should have been the nail in its political coffin. But that hasn’t been the case yet.

The latest counter-proposal from Auckland and Christchurch appears to have called the government’s bluff. It addresses the investment financing issue, but still allows local control and does not force centralised co-governance. The PM’s dismissal-with-a-smile appears to have dug the government even deeper into its mess.

If only it had been up front about what it wanted to do to start with, which was to unleash the infrastructure investment needed to underwrite housing growth for decades, then it would be in a stronger position. Then we would have had a proper debate about what amount of population growth we want, what level of taxes and debt we’d need to properly underpin that growth, and what type of direct governance we wanted.

The bottom line: The government has strapped itself to the Three Waters ship and can’t seem to untie itself from the orthodoxy wrapped around it by Treasury and DIA. A captured government is going to stay down in the polls well under water while it holds on to Three Waters. The opposition are now licking their lips – although they too will have to come up with their own solution before next year’s election.