As part of its Local Water Done Well policy, the Government has released more information regarding its proposed new delivery system for water services. A core plank of this involves a new financing option for water services and infrastructure, to be made available by The New Zealand Local Government Funding Agency (LGFA).

LGFA will extend its existing lending model to new water organisations that are council-controlled organisations (CCOs), provided the water CCOs are financially supported by their parent council(s) and can meet certain credit criteria.

This financial support is expected to consist of a parent guarantee, or the issuance of ‘uncalled capital’ that is kept in reserve and may only be called on to support borrowings.

Under the new model, LGFA will support leverage for water CCOs up to a level equivalent to 500% of operating revenues - almost double the current level of existing councils at 285%. Borrowing by water CCOs will also be treated as separate from borrowing by parent council(s). This is a change to LGFA’s existing approach to CCO debt, where financial covenants are typically tested at the consolidated group level.

Through LGFA, it is expected that water CCOs will be able to access cheaper debt than would otherwise be available to them through alternative financing sources. By financing investments in water infrastructure through debt, the cost of the asset can be spread over its lifetime, reducing the up-front pressure on operating revenues. The use of water CCOs also allows councils to separate their revenue streams, meaning non-water services revenue streams can be kept for investments in non-water assets.

Separately:

·        LGFA is also reviewing whether debt limits for high-growth councils can be increased beyond the current ceiling (285% of annual rates revenue) to up to 350% of revenue. This will be of critical importance for councils that are close to reaching their debt ceilings and who choose to keep water services ‘in house’, rather than establishing a water CCO.

·        While water CCOs that are not financially supported by their parent council(s) will be ineligible for LGFA lending at this stage, LGFA has noted that it is also reviewing whether lending to water organisations on an unsupported basis may be possible in the future.

This announcement is the next step in LGFA’s journey to make its borrowing programme available to a wider range of organisations, and follows the 2021 amendments where LGFA’s borrowing programme was first opened up to a limited range of CCOs.

Get in touch

Simpson Grierson has advised a number of councils and CCOs on how to structure their arrangements in order to provide for LGFA eligibility.

To discuss this latest announcement, please contact Josh Cairns, Edward Norman or your usual Simpson Grierson contact.

Special thanks to Katie Daly for her assistance in writing this article.