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Commission reaffirms ring-fencing decision

Date: 6 March 2015

The proposal to ring-fence the debt and financial assets of four councils in Hawke’s Bay has been reaffirmed by the Local Government Commission, after a number of concerns were raised in a letter from the Chief Executive of Napier City Council (NCC).

The original decision was announced by the Commission on Friday 27 February. On Monday 2 March the NCC Chief Executive contacted the Commission by phone to raise a number of specific issues about the decision, and followed this with a letter on Tuesday 3 March.

The concerns related to the contents of a report on council infrastructure prepared by MWH, a global engineering consultancy. MWH prepared the report based on information supplied directly by the councils and from their publicly available planning documents. MWH advises that it had repeated communications with the councils during the preparation of its report.

Nevertheless, the Commission asked MWH to review the concerns raised by the NCC Chief Executive. MWH has now advised the Commission it stands by the information in the report, its approach, methodology and conclusions. The Commission has released a letter from MWH setting out that agency’s position.

The Chair of the Commission, Basil Morrison, said that in light of the assurance from MWH, the Commission is satisfied it based its decisions on the best available information.

“MWH and Napier City Council have used different methodologies and asset valuations to derive their figures.  Local government infrastructure renewal and asset valuation is a highly complex area, a point made recently by both the Office of the Auditor General and Local Government New Zealand”, Mr Morrison said. “MWH reject the suggestion that ‘their facts are out by nearly $1 billion.’ ”

The MWH report released last week also commented on these complexities. It noted on page 25 that there are variations between councils in the way they fund the renewal of their assets, and there may also be inconsistencies between the way a single council may apply these approaches.

Another report, the Waugh report prepared for Napier City Council, noted on page 22 that “under NCC’s current renewal funding methodologies, rates will need to increase substantially in the future to meet the renewal needs. An alternate approach would be to use debt funding…In either case it is possible that the cost of replacing existing assets will fall disproportionately on future ratepayers rather than today’s ratepayers”. 

“Infrastructure renewal is a looming issue for most councils across New Zealand,” Mr Morrison said.

 “Even if the Commission was to use the Napier methodology and resulting figures, the decision to propose ring-fencing of assets and debt would remain valid. It is based on the fact that each council, and their ratepayers, is starting from a different position.  There is an issue of fairness that must be recognised. The relative debts and financial assets of each council was an issue which generated significant comment and debate during submissions and hearings on the draft proposal.” 

Mr Morrison said the Commission stands by its decision to propose that debt be ring-fenced to the area where it was incurred, and to ring-fence financial assets as well. The arrangements would continue till 2021, in the event a new council was formed in 2016.

This means that until July 2021, the loans raised by the current district and city councils would continue to be serviced and repaid by their current ratepayers. Those councils’ current financial assets would be used for renewing and replacing infrastructure in their areas, to address the differences in infrastructure life. The remainder of any outstanding loan balances after 2021 would be addressed by the new council.

Mr Morrison confirmed that a planned survey by the independent research company Colmar Brunton would go ahead.

“The survey is seeking feedback on the whole proposal for local government reorganisation in Hawke’s Bay. The ring-fencing proposal is just one aspect of that reorganisation. The results of the survey will be weighed up with all other relevant information before the Commission makes any decisions on its next steps,” Mr Morrison said.