Our elected members have taken a proactive approach to exploring what may happen if the reforms don’t go ahead. This would mean Palmerston North City Council is left with the responsibility of running our water assets day-to-day and funding future water infrastructure.
This issue is of particular significance for our city as we’re currently in the midst of planning our Nature Calls project, with estimated costs of approximately $450 million dollars in upfront capital costs, including property acquisition, and around $7 million to operate annually.
In December 2022, Council discussed how we may be able to fund Nature Calls if reforms didn’t happen. Officers investigated alternative options for funding and financing Palmerston North’s water assets, and a report was presented to Council in May 2023.
The report sets out a number of alternative funding and financing options for water for our city. Funding refers to the capital required to build or upgrade the infrastructure while financing is the means by which that lump sum will be paid off (like how homeowners pay off a mortgage).
Option 1: status quo
A traditional funding method in which general and targeted rates would be used to fund water services, along with commercial water users and contributions from developers. Capital investment would be loan funded and serviced through increased rates and charges .
Option 2: user pays
A traditional funding method in which volumetric charges (eg -water meters) and higher charges for heavy industrial users would pay for water use and infrastructure. Development contributions would be used toward funding new water infrastructure.
This would see those using the service paying for it but may be inequitable for those less able to afford the costs. It may also place prohibitive costs on developers which may result in a lack of new homes and commercial premises being built in the city.
Option 3: infrastructure funding and financing model
This option would see a new entity created called a 'special purpose vehicle', which would own the assets and raise the required funding. This entity would be owned and run by Crown infrastructure partners (the Government). It could either deliver the infrastructure itself or pay Council to build it. The costs would then be paid off in the form of an agreed levy. This type of model is relatively new. Tauranga City Council has recently implemented this model to help fund a package of transport projects. Wellington City Council is also using it to fund the new Moa Point sludge disposal facility.
While this option would keep the debt off Council’s balance sheet, we would no longer have direct control over the assets, it may be complex, and involves additional costs to initially set up and would likely lock in levy payments for at least a couple of decades. The affordability impact on serviced properties who will repay the levy will likely be tested with a project of the value of Nature Calls, but this is indeed a viable option.
Option 4: specified development project
This is an option under the Government’s recent Urban Development Act, which is focused on assisting sustainable new urban development. It would mean a special purpose vehicle could be set up to run the project. This entity would own the assets, raise the funding and run the financing itself. This may be by rating customers within the new urban areas and getting development contributions from those building there.
While Council would no longer have control of the new infrastructure it would have a place on the governing board instead. This option could really only be used for infrastructure to enable urban growth. Council’s Nature Calls project would not meet the criteria for this option.
Option 5: regional partnership
This option would involve partnering with another council, or multiple councils, to raise funding toward water infrastructure across the region. Financing to pay back the debt could be raised through traditional rating methods, volumetric charges and development contributions.
This option would require finding partners willing to come on board to assist with funding Nature Calls, which is likely not appealing to other councils. There is also the possibility that even with a wider asset and population base we still may not be able to raise the amount of debt required, given Palmerston North is already the largest council in the region.
Option 6: commercial investment
This option would see investment from a commercial party to reduce the initial cost burden on our ratepayers. This investment could come from partnership with an iwi or commercial organisation. This could involve funding being raised and supplied from the commercial entity in return for benefits. These benefits may include repayments of the debt over time or additional services provided by the new infrastructure. There are examples of this across the country.
This option would mean finding a commercial partner interested in an arrangement like this. This option could result in concerns from the community around our water services being tailored to suit a commercial enterprise. Also, the repayments or benefits required to make this worthwhile for a commercial organisation may be too high for our ratepayer base.
This option would be difficult to achieve, and in part would almost certainly depend on what by-products could be generated from the land used as the discharge area.
Option 7: project finance arrangement
A special purpose vehicle (explained in option 3, above) would be set up to deliver a project. This entity could be made up of private funders who would deliver the development and its day-to-day operation costs in return for a set payment over an agreed period of time. This would be similar to a toll road or public-private partnership arrangement. Once this time period is reached the assets would then be vested back to Council to be responsible for. During the agreement Council would be responsible for raising the money to repay regular set payments through any of the funding tools it has.
Though this option would mean Council could keep the debt off our own books, the associated costs of paying for the infrastructure through private equity is likely to be significantly higher than through other funding mechanisms. Council would also have limited control over the assets over the duration of the agreement. Setting up the arrangement would likely be expensive.
The report also briefly outlines a range of alternative opportunities or scenarios that may facilitate Council being able to move forward with these crucial water developments. These include:
• Government funding
• changes to the Local Government Act
• changes to tax legislation to benefit councils
• development partnering and active property development.
Our preferred option
Our Council’s preferred option is continued Council ownership and operation of 3 waters assets, supported by Government co-funding. This funding would need to be of a substantial level for this project to be possible given the size of our rating base. Something of a similar model to the co-funding provided for roading through Waka Kotahi is the closest example to something that already exists that we can pinpoint.