NZX Announcement
08 August 2024
UPDATE ON LOCAL WATER DONE WELL AND ADDITIONAL FINANCING FOR HIGH GROWTH COUNCILS
New Zealand Local Government Funding Agency Limited (LGFA) has been working alongside Central Government, the Treasury and Department of Internal Affairs regarding financing options to support Local Water Done Well.
LGFA has confirmed that it will provide financing to support water organisations [1] established under Local Water Done Well and look to assist high growth councils with additional financing.
LGFA will extend its existing lending to council-controlled organisations (CCOs) to new water organisations that are CCOs and are financially supported by their parent council or councils. The ability of councils to establish water organisations will be provided for by the Local Government Water Services Bill.
• LGFA will support leverage for water organisations up to a level equivalent to 500 percent of operating revenues [2](around twice that of existing councils), subject to water organisations meeting prudent credit criteria. LGFA will treat borrowing by water organisations as separate from borrowing by parent council or councils.
• LGFA will lend to multiply-owned water organisations, who are supported by the parent councils.
• LGFA will make available to water organisations its existing suite of financial products that are currently made available to councils and CCOs. These include green and sustainable loans and climate action loans, short and long-term loans and standby facilities.
Councils will also retain the ability to borrow through LGFA should they choose to keep water services ‘in house’ rather than establish a water organisation.
Alongside the broader policy framework developed by Central Government as part of Local Water Done Well (which ensures that water organisations will be commercially focused and subject to economic regulation), the steps being taken by LGFA will support councils to prudently and sustainably invest in long lived water infrastructure. Councils will be able to set up their water services in a way that suits their own circumstances and will not be reliant on ‘balance sheet separation’ to achieve effective access to financing.
In preparation for the above, and in recognition of the expected growth in debt required by councils as expressed in their Long Term Plans, LGFA has taken its own steps to improve its working capital and financial strength over time. From 1 July 2024, both borrower loan margins and the borrower notes subscription rate have been increased.
LGFA is also reviewing whether it can prudently provide additional flexibility to councils to meet the future challenges faced by the sector. That work will include consideration of the following options:
• LGFA increasing debt limits for high growth councils beyond the current ceiling of 285 [3] percent of operating revenues to a level of 350% subject to LGFA board approval on a bespoke basis; and
• In time, and subject to prudent criteria and LGFA stakeholder approval, LGFA lending to water organisations on an unsupported basis.
Central Government is working collaboratively with LGFA in this review. The Crown is a 20% shareholder in LGFA and currently provides a NZ$ 1.5 billion liquidity facility to LGFA. It recognises the importance of the role that LGFA plays in providing access to financing for councils and CCOs. The Crown has confirmed the existing support it provides to LGFA, and as part of the review will consider whether that support will remain appropriately sized given the growth in LGFA’s balance sheet.
A Department of Internal Affairs Factsheet: “Financing for councils and water organisations” is available below:
Released on behalf of New Zealand Local Government Funding Agency Limited by
Mark Butcher
Chief Executive.
Telephone +64 4 974 6744
Email mark.butcher@lgfa.co.nz
Website lgfa.co.nz
[1] ‘Water organisation’ means the separate organisations that councils may establish to provide water services – and does not include councils. There will be various types of water organisations under Local Water Done Well, and LGFA will only be lending to water organisations that meet the qualifying criteria for LGFA membership as a CCO. In particular, financially independent water organisations will not meet the qualifying criteria.
[2] Note that this metric is being used for comparative purposes only and a more appropriate metric for water organisations will ultimately be used.
[3] This reduces to 280% from 1 July 2025.