Should Local Government be passing a vote of sympathy for Simeon Brown?

Few ministers can ever have come in to a cabinet with such a strong vote of confidence from the Prime Minister as Simeon Brown has. At just 31 years of age he is Minister for Energy, Minister of Local Government, Minister of Transport, Minister for Auckland and deputy leader of the house.

In a government which has made an enormous commitment to changing the country’s approach to infrastructure by addressing problems of underinvestment, lack of coordination, poor project management and the like, this is both a huge vote of confidence, and a major challenge. For a minister who is still at what is likely to be the beginning of his political career, this is both a wonderful opportunity and a potentially worrying responsibility. Success, and he can look forward in due time to himself being Prime Minister. Fail, and he could be in the political wilderness for many years.

He has ruffled a few feathers with enthusiasts for modal shift in transport but also pleased a number of powerful interest groups including major infrastructure providers, engineering and technical consultants and providers of capital. His leadership of local water done well is creating a sense that three waters infrastructure is now an area of great opportunity; a sense strengthened by his clear determination to compel councils to move at speed including developing water service delivery plans which will:

“publicly demonstrate their intention and commitment to deliver water services in ways that are financially sustainable, meet regulatory quality standards for water network infrastructure and water quality, and unlock housing growth.”

He has also made clear his intention to ensure that councils, individually, collectively or through CCOs (which he will fine tune for water) will be able to access all the capital they require, primarily through off-balance sheet options to avoid the constraints imposed by current debt ratios.

Not content with this, he is also developing a Government Policy Statement on Land Transport he is convinced will solve the problems of congestion, and enhance the productivity of the New Zealand economy, by making it easier for people and freight to move when and where they wish.

It is an amazing set of achievements for a first-time minister who was sworn into his portfolios just a little over four months ago. Or is it? Could he turn out to be the Icarus[1] of public policy?

Let’s look at local water done well. On the surface, what the Minister requires seems to be straightforward:

Problem: councils have been relatively poor at developing plans for long-term service provision for three waters. Answer: tell them to do it, set a timeline and spell out what is required.

Problem: most councils have persistently under-invested, some in order to keep rates down, some because of constraints on their ability to borrow and the lack of off-balance sheet options. Answer: remove the constraints and direct them to invest what is needed.

Simple, or is it? An experienced minister (and an experienced Prime Minister) would be very aware that the devil is often in the detail and departments do not always brief ministers on the detail, often because they themselves are not aware of it. A new minister (and the new Prime Minister) may not be alert to this risk, and take the seemingly simple answer at face value.

Is there a possibility this may be the case with local water done well? Will this Minister’s apparent early achievements prove to be anything but the success he clearly needs to demonstrate if he really is at the beginning of an impressive ministerial career. Should local government be preparing a vote of sympathy for what could be a major ministerial failure and one quite likely by no means the Minister’s fault but rather the result of a combination of relative inexperience and the lack of the advice he really needed?

First to water services plans. Councils will have 12 months to prepare these to standards directed by government covering financial and asset information, investment required, and the proposed service delivery arrangements, and dealing with all three waters. The water services staff of most councils have been through a very stressful three years; for a number of councils this has meant loss of staff and a significant decline in morale.

There is a shortage of the requisite professional expertise. Planning for potable water and wastewater services is challenging. Planning for stormwater services in a post-cyclone Gabrielle environment will be extraordinarily demanding. It is not simply a matter of dealing with hard surfaces, stormwater drains, swales and so forth; it is whole of district planning for water flows in a variety of different conditions including major adverse weather events.

In this context, expecting all of New Zealand’s councils to prepare water services plans within a single 12 month period seems optimistic at best and with a very real probability it could further undermine the capacity and capability of councils, and their external professional advisers, to undertake adequate water services planning. I have spoken with more than one council worried that Australia looks increasingly attractive.

This begs the question of whether the Minister has received an objective briefing on the realistic capacity and capability of councils and their advisors to deliver. On balance, it seems possible he may not have had this support.

Now to funding. The minister has been very gung ho about the initiatives he is putting in place (occasionally with the legislative support of Parliament) to ensure councils have adequate access to the capital required to bring infrastructure up to the standard which the government is demanding. Streamlining the CCO process, and using legislation to ensure balance-sheet separation, should make the use of multi-council CCOs much more straightforward. Making it clear (almost certainly through amending the local government act) councils can use instruments such as public-private partnerships will open up access to very considerable amounts of capital.

There is certainly enthusiasm amongst infrastructure providers, their financiers and their professional advisers, for the opportunities this appears to present. For the moment, the Minister seems to have solved the problem of how local government can fund three waters infrastructure.

But has he? The initiative on the funding side assumes that the major barrier to further local government investment in infrastructure is access to capital. That view is widely shared throughout the infrastructure community, and seemingly government’s own policy advisers. It is also almost certainly wrong.

In the local governance think tank we believe the problem is not funding - accessing the requisite capital - but financing; servicing the cost of that capital. Think about where the money for that servicing (and associated costs) comes from. It’s not councils themselves. They are simply a conduit.

Regardless of how the capital is accessed, whether on balance-sheet or off-balance-sheet, and how the cost is recovered - as an interest charge, through a levy, or any one of a number of other possible fee or charging mechanisms, payment ultimately comes from New Zealand’s households and those businesses which cannot fully recover their costs.

The significance? The problem of funding further infrastructure investment is only solved by opening up access to capital if New Zealand’s households (and businesses) can afford the cost of servicing that capital. It seems clear this definition of the problem confronting further infrastructure investment is not something well understood by either the Minister or his advisers.

How extensive is it? Each year the Retirement Commission undertakes a survey of the financial capability of New Zealand households. Last year’s survey found that “Of those surveyed, 51 percent reported they were 'starting to sink' or 'treading water', while a further 3.5 percent reported they were 'sinking badly'”. Since then council rates are generally rising by at least 15%, and insurance premiums by significantly more.

This is not a picture of New Zealand households ready willing and able to meet the substantial costs of financing significant additional three waters investment ?(expect some very large numbers, especially for stormwater). A number of councils have already been stating, some publicly, some in discussion with advisers, that they are reaching the limit beyond which they cannot impose further increases without losing their mandate.

Not yet understood, what the country appears to be facing is a breakdown in the current approach of pre-empting on the cash flow of households for financing major infrastructure (outside the scope of this note, the same problem is likely also to affect major government investment in infrastructure). There is a clear need for a major rethink and almost certainly a radical change in the way in which major infrastructure is financed. This will be far from straightforward. Among other things it will almost certainly mean revisiting the mandate for and legitimacy of our current governance arrangements for both local and central government. To put it mildly, that is not advice which the current government, or many councils, will happily accept.

For the Minister, the immediate significance is the high probability councils’ communities will not accept the financing role which the current local water done well policy will require of them.

His options are likely to be either facing the consequences of a failure of local water done well, or revisiting the policy, and the advice he has (or hasn’t) had. It will be his opportunity either to demonstrate the ability to recognise the need for a very major rethink and culture change, or to deal with the consequences of failure. Failure, and the likely damage to a promising ministerial career, will deserve a vote of sympathy if only because much of that failure will be the result of a combination of inexperience and a lack of awareness of just how complex the problems of planning and financing for three waters infrastructure actually are.

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[1] According to Greek legend, Daedalus, a mythical inventor, created wings made of feathers and wax to escape from Crete where he and his son, Icarus, were held captive by King Minos. Icarus, however, ignored his father's warnings and flew too close to the sun. His wings melted and he fell into the sea where he met his end.