Wellington City:whose competence is more worrying?

Local government Minister Simeon Brown’s statement of his intention to appoint a crown observer to Wellington City Council raises some very serious concerns, not so much about the council as about the quality of the advice the Minister has received. Those concerns go to the very heart of the intended role of the Department of Internal Affairs of advising on Water Service Delivery Plans including whether plans satisfy the financial sustainability requirement.

What has this got to do with Wellington city’s LTP? Actually, a great deal. This is what the Minister says the Department told him about the Council’s approach to funding water infrastructure:

The Department has found that the Council has demonstrated an inability to understand the mechanisms it has available to manage financial pressures it is facing.

This includes the Council choosing in its Long Term Plan to use rates revenue to pay for its water infrastructure up-front, rather than appropriately using debt financing.

“The advice from the Department highlights that the 2024-34 Long-Term Plan shows the Council’s net borrowings for water services increase by just $66 million to fund this investment (6 per cent of the total), with the remaining $1.10 billion of capital investment proposed to be funded by rates (94 per cent of the total).

“This is an inefficient and expensive way to fund infrastructure investment. The Council is front-loading costs on current ratepayers rather than utilising debt financing to spread the cost over current and future users of the assets,” Mr Brown says.

In a description which followers of Yes Minister will recognise, the Department has made a courageous statement. Perhaps it has not reflected on the fact that the council’s chief strategy and finance officer is a former and very highly regarded assistant auditor-general responsible for local government. This might have prompted the Department to recognise the council in all likelihood did have the internal capability to understand the financial mechanisms available to it. It seems not to have done so.

The picture presented by the council’s funding impact statements is somewhat more complex than the Department’s belief 94% of expenditure is to be funded from rates although it is certainly the case the LTP provides that a significant proportion of capital expenditure would be funded from the surplus in operating revenue much of which comprises targeted rates.

More generally, as the council’s LTP stresses, its borrowing capacity is restricted by a debt to revenue requirement. It is very clear that had the council decided to fund a greater proportion of water infrastructure capital investment from borrowing, it would have had to make an equivalent reduction in capital investment in other activities.

This LTP, as with those of other councils (and enhanced annual plans where that choice was exercised), was being prepared in a somewhat artificial environment; the impact of local water done well with the virtual certainty, in Wellington’s case (explicitly acknowledged in the LTP), its water infrastructure assets would become the responsibility of a multi-council arrangement. Accordingly, the 10 year projections, although representing the council’s best estimates of likely cost and revenue associated with those assets over that period, are essentially projections which will form part of the operating and capital expenditures and revenues of a separate entity.

On this basis it is the Department, not the council, which is demonstrating an inability to understand the relevant mechanisms. It is perfectly sensible and very much in the interest of ratepayers that the council should allocate its borrowing capability to activities which will remain its responsibility throughout the period of the LTP, rather than to an activity which will shortly disappear.

The same reasoning applies to the Department’s advice that the LTP approach would overcharge Wellington City residents by more than $700 million over ten years. That is presumably the difference between the total rate burden on the Department’s assumption capital investment will be fully funded from rates and the total rate burden if capital investment were fully debt funded. It is highly unlikely that approach will be followed by whatever entity takes over Wellington city’s water assets.

This raises a couple of questions. First, has the Minister any grounds for determining there is a significant problem when the main ‘evidence’ is a serious departmental misunderstanding of the way the council has treated water infrastructure?

Next, how much reliance can local government, and the Minister, place on the Department’s (technically the Secretary for local government’s) advice on water service delivery plans both in terms of financial sustainability and generally in terms of their proposals for funding operating and capital expenditure? This is going to require an expert understanding of the financial and operating environment of complex infrastructure which the Department’s advice in this case suggests it may not have.

It will be tempting for the Minister to brush over this analysis and say he still has justification to put in a crown observer because of the behaviour of councillors. Prof Dean Knight from Victoria University has correctly pointed out that robust exchanges are a common characteristic of democracy especially when controversial issues are involved. Imagine if New Zealand’s parliament were subjected to similar standards; it might well cease to function. The Minister needs to respect the nature of local democracy and recognise not all councils sit around chanting Kumbaya.

In this case there are two things are Minister should consider. First is the importance of restoring the credibility of the Department with both the local government sector and with the general public. The enormity of the task ahead of local government in responding to local water done well demands that central government’s contribution is of the highest possible standard. The Minister should make it clear restoring the Department’s credibility is a priority for him.

Next, he should revisit his decision to impose a crown observer. Given all of the criticism Wellington City Council has attracted over the past few months, much of it undeserved, there could be merit in an alternative approach; inviting the council to request the appointment of a crown observer on the basis that the Minister and the council would agree on both the terms of reference, and the person who should be appointed.

While he does this, he should also consider another signal in the council’s LTP, the repeated reference to concerns the city’s ratepayers are increasingly unable to afford the rates council feels compelled to charge. This is a generic problem for the sector as a whole.

The Prime Minister, for his part, should see dealing with the Department’s performance in this case as an important test for his Minister of local government. Whatever the Prime Minister might see fit to say in presentations to LGNZ conferences, he needs to recognise that a strong local government sector is a crucial element of New Zealand’s governance and it is his ultimate responsibility to ensure central government adequately discharges its responsibility both to the local government sector and to the public both tiers of government serve. This includes turning his attention to another serious water infrastructure problem; the challenge of affordability.

It should be a cause for serious alarm that the infrastructure sector as a whole, the Local Government Funding Agency, government and a number of councils have all greeted extended borrowing arrangements for councils as solving the problem of funding further investment in infrastructure especially water (some councils are looking forward to reallocating the rates revenue currently applied to water infrastructure for other purposes missing the point that their ratepayers will be still picking up the same costs but as water user charges). This is a classic illustration of enthusiasm out running analysis. There is already ample anecdotal evidence that perhaps as many as 10% of all ratepayers find their rates unaffordable if the test of affordability is the ability to pay rates whilst also meeting all other essential but non-compulsory payments such as insurance, healthcare…

Simply splitting out water user charges from other charges and sending the same person/household two bills from different entities rather than one from a single entity has no impact on affordability (and might possibly make it worse).

The implication is clear; implementing local water done well is likely to have a major negative impact on affordability, significantly increasing the cost of living stress on many thousands of households. It is potentially a threat to the entire LWDW program especially if it spills over into issues of credit rating. This could happen if water services entities are prohibited from cutting off supply to households because of non-payment. If that turns out to be the case, and ?unaffordability evolves as looks likely to happen, there could be real question marks over the robustness of water entity cash flows. Alternatively, if water services entities are allowed to cut off supply, the damage to the government’s social licence could be very major.

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Conclusion

The Minister’s release of the advice on which he has based his decision to appoint a crown observer to Wellington City Council has raised some very serious questions regarding the capability of the Department of Internal Affairs to provide him with the advice he needs, and to be responsible for overseeing the rollout of the government’s local water done well program.

The question mark over whether the Minister can claim there is in fact a significant problem which justifies intervention can be solved by the Council inviting the Minister to appoint a crown observer on the condition both in terms of reference and the person are mutually agreed.

More generally the inadequacies of the departmental advice is a wake-up call both for the Minister and for the Prime Minister, including the importance of rethinking the na?ve assumption that simply increasing borrowing capability for entities responsible for water infrastructure will solve the problem of inadequate investment. There is every possibility that unaffordability will turn out to be the Achilles heel of local water done well in a major threat to the government’s ongoing social licence. Very much time for government to reengage with local government with an emphasis on seeking collaborative rather than imposed solutions.