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A Lamborghini for everyone on the West Coast?

Posted by | Answering your questions | Nov 25, 2014
One hundred billion dollars would buy everyone on the West Coast a shiny new car. It’s a colossal amount of money – and it’s the value of the assets that our councils are managing.

new-cars-for-allTogether, councils and the companies they own are managing assets worth one hundred BILLION dollars. It’s pretty darn important that they do a good job of it, because the implications for us – whether we’re ratepayers or not – are huge.

The Office has just published a report that takes a fresh look at how councils are managing their water and roading assets. Roads, water pipes, and wastewater treatment plants often last decades, but they are expensive to maintain, repair, and eventually replace.

Thankfully, our councils have a good reputation for how they manage their assets. The planning and decision-making about services, assets, and associated funding are mostly adequate for short- to medium-term planning purposes. But the Auditor-General’s latest report suggests there is a possible long-term issue looming that councils and others need to pay attention to.

Many of the country’s major infrastructure assets were built in “waves” between 1950 and 1986. Those infrastructure assets are ageing, and ageing concurrently. Asset failures, if they occur, could happen in several places at once.

How do you prevent asset failures? You carry out renewal work. You plan for how you’ll fund replacing those assets.

Since 2007, councils have consistently spent less than they budgeted for on capital expenditure, including renewals. And their long-term plans say they’re going to spend less on “reinvesting” in their assets.

The reasons why are not entirely clear yet. But the Auditor-General’s report, Water and roads: Funding and management challenges, says that if these patterns continue, by 2022 councils will have between $6 billion and $7 billion less than they need to keep their assets in working order.

That’s quite a gap, and then there are population changes to consider. Mostly, people are moving into urban centres and out of provincial areas. We also have an ageing population – and the provinces are getting older faster, because it’s younger people moving away. So where will the money come from to replace those ageing, expensive, but absolutely essential assets?

The Auditor-General’s report doesn’t have any “quick fix” answers – each council is going to have to take a hard look at the long-term picture, and figure it out. That’s going to take some work.

For many councils, the asset management, service delivery intentions, and funding mechanisms are disconnected. There’s work to do before some councils have enough sophistication in their systems to manage all this as well as they need to. Whether they can find and keep people with the skills they need is another question entirely.

There’s always hope, right?

When councils prepare their long-term plans for 2015 to 2025, they will have to include an “infrastructure strategy” that covers 30 years. If it’s done well, the strategy will identify the significant infrastructure issues, options, and implications for the council. It’s the perfect opportunity to look at what councils need to do to manage assets into the future.

To do those strategies well, every council will need superb information about their assets and need to consider a range of economic and demographic outlooks. To get uber-technical about it, they’ll need to align their revenue and financing policies, their choice of funding tools for asset management, and their service delivery intentions. Linking the infrastructure policy to the financial strategy is critical.

The Auditor-General’s office has been pointing out for years that assets need more managerial love and attention. “Asset management” isn’t nearly as sexy as a Lamborghini, so getting people to pay attention to the topic can be tricky. But we can’t and won’t stop trying – it’s too important not to.

And by the way, if you like space more than you like fast cars, $100 billion is apparently also enough money to fund the American space programme for five years.

Larry Mitchell
Larry Mitchell says:
Nov 26, 2014 11:13 AM
The issues facing NZ ratepayers related to the funding of municipal infrastructure asset renewals (to say nothing of scheduled new capital expenditures) would today be much better served if the financial reserves accumulated from service charges over the previous decade had been properly husbanded/safeguarded, (they have not been).

The policy (furthermore OAG approved!) whereby so termed Treasury Funds Management policies permitted these reserves to be raided (misused by applying them to all sorts of adventurous "Opera House" type capital works) has completely undermined the prudent strategy of saving/accumulating funds in accordance with carefully planned asset management funding strategies ... " ("the funding for the inevitable renewal expenditure due date")

Fine maybe, to replace the raided financial reserves with short term borrowing when circulating funds are not immediately to hand to make scheduled infrastructure expenditures ... unless of course ... "Uh Oh,we are hard up against our maximum prudent borrowing limits". Result: deferrals of the most economic timing of capex and the compromise of (sub optimal) applications of asset management funds-planning.

What to do?

We must now rebuild these reserves and put in place limits on their application if this mess is to be sorted for future generations. And the OAG must do its job and take the leadership in fronting the staff and politicians of our Councils who prefer above ground visible vote catching expenditures on monuments to their tenure rather than on spending monies taken for their legal purpose to be properly spent on the way less "sexy" stuff ... the pipes, pumps and purifiers.
Ralph Fouche
Ralph Fouche says:
Nov 28, 2014 09:31 AM
We all agree we can't keep repeating the past - we need a new strategy. Engineers can sweat the assets harder than they realized so we have some time (apart from the growth challenges in some regions). Lets start exercising our minds around finding a CREATIVE NEW WAY to deliver the same services for the money we CAN afford. I have some sympathy for Larry's comments - but effectively he's suggesting that some Councils can't be trusted with managing the infrastructure parts of their businesses, so OAG needs to define better "rules" or regulation. Lets keep deliberating....
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