Auditor-General's overview and conclusions

Water and roads: Funding and management challenges.

Collectively, local authorities are responsible for more than $100 billion of community assets that provide essential everyday services. Local government's asset management has been a longstanding and important focus of work that my Office has reported on for nearly two decades.

This report sets out an overview of the approach that local authorities are taking to managing their infrastructure assets. We focused on assets used to deliver four networked infrastructure services operated by local authorities. The services are roading and the "three waters": water supply, wastewater, and storm water services.

Because the services these assets provide are so essential, I wanted to analyse the state of the assets, where and when major reinvestments are required, and whether asset management practice is giving local authorities the information they need to continue providing services into the future. The purpose of this report is to stimulate debate rather than to provide definitive solutions.

New Zealand has a good reputation internationally for managing assets because of the work of groups such as New Zealand Asset Management Support (NAMS). However, many local authorities' asset management practices fall short of asset management guidance, such as that developed by NAMS. This report suggests that local authorities need to better understand the local economy to plan for the longer term and that their management of infrastructure and capital needs to improve to meet the challenges ahead.

Two sets of information make up this report:

  • We analysed the asset-related financial and performance results of all local authorities, including specific asset management and service-level work on 31 selected local authorities. These results were collected through the work of my auditors. The 31 local authorities we looked at owned 74% of total local authority property, plant, and equipment assets at 30 June 2013.
  • We commissioned research from the New Zealand Institute of Economic Research (NZIER). The NZIER report provides a historical perspective of local government investment trends, the forecast investment outlook, and observations on differences in investment between the regions.

After more than 20 years of financial and asset management reforms and efforts, local authorities have various asset and financial management systems to support their decision-making. Our analysis shows that most local authorities' planning and decision-making about their infrastructure services, assets, and associated funding are adequate for short- to medium-term planning. However, local authorities need to do more to manage infrastructure and financial strategies for the long term, given the wider economic and population changes we face.

It's about using money for infrastructure effectively and efficiently

In our May 2014 report, Reflections from our audits: Our future needs – is the public sector ready?, we said that "If you rely on something, you need to recognise it and manage it over the long term." Changes such as wider economic and population changes mean that good infrastructure and financial management "is not just about having money – it is about using that money effectively and efficiently".

During the period we reviewed (2007 to 2013), local authorities consistently spent less than they intended on capital works, including on asset renewals. There are often explanations and good reasons for under-spending, such as project delays.

However, the ratio of forecast renewals expenditure to depreciation in local authorities' 2012-22 long-term plans also shows a downward trend in asset reinvestment. If actual spending trends continue to match those forecast, we estimate that, by 2022, the gap between asset renewals expenditure and depreciation for the local government sector could be between $6 billion and $7 billion.

Spending according to budget is only sensible and appropriate if the budget is likely to be a good guide of what should be spent. Infrastructure assets also typically have long useful lives. This means that we cannot draw firm conclusions on the basis of the forecast and actual financial information available for analysis.

These spending trends raise questions about local government asset planning, depreciation practices, and capital expenditure management. They should prompt each local authority to review these factors and consider whether there are better ways to plan and manage capital investment and development, and future funding. Local authorities should consider the effect of life-cycle costs – including operations and maintenance, renewals, and deprecation – during the life of the asset alongside their financial strategies and funding mechanisms.

Improve information about assets to help make the right calls

Although local authorities tend to have a lot of data, they do not necessarily use it well or use the best data to support decision-making. In our analysis, we found that local authorities:

  • have better and more reliable information (such as condition and quantity) about their above-ground assets than their below-ground assets;
  • are likely to know more about newer assets than older assets (such as those that have been in the ground for 50 years); and
  • are more likely to reinvest more in their roading assets than in their "three waters" assets (based on the ratio of their forecast renewals expenditure to depreciation).

We also found little relationship between asset expenditure and service-level performance in public information.

Good information about network asset performance helps good decision-making about capital expenditure and how to fund that expenditure. Therefore, the results of our analysis raised questions for us about the information local authorities use for asset maintenance, renewal, and replacement decisions. Our analysis suggested that local authorities could make better connections between critical information to increase the chances of making decisions that get the best results.

Good information is built from data that:

  • has consistent definitions and metadata, and is high quality;
  • is used to look at trends and to compare organisations and jurisdictions; and
  • is studied alongside other sets of information to identify wider implications and needs.

Our own observations and advice from experts is that other countries (such as the United States of America, the United Kingdom, and Canada) have better quality data and collection practices than those that our local authorities use to manage water and roading assets.

In my view, the evidence base for good decision-making and learning is not consistently available. However, it needs to be. Local authorities need to build their capability to use their information and systems to get the best performance from their asset networks. They need to understand how assets perform throughout their lives to know the points at which and whether to maintain, renew, or replace individual asset parts.

There are examples of positive information initiatives by some local authorities (as well as other public sector agencies) to improve infrastructure and financial management. However, I am concerned that some local authorities might not have the capacity for the increasing sophistication of information needed to keep delivering essential everyday services to communities affordably.

For local government infrastructure, it matters where people choose to live and work

The overall message in NZIER's report is that wider economic and population changes mean that there are long-term risks to local government's infrastructure and financial management. In Reflections from our audits: Our future needs – is the public sector ready?, we said that "Recent experience suggests that the financial implications of change can be material, intergenerational, sometimes unequal and, above all, difficult to control." We also said that "the complex and interrelated problems facing New Zealand … will continue to put financial and service expectation pressure on the public sector. The public sector will need to be in a position to make the right calls on questions about large investments in assets and using resources."

New Zealand is a relatively young country and is still undergoing significant change. Population movement into urban centres will continue to drive capital investment, particularly in areas such as Auckland, Hamilton, and Tauranga. At the same time, economic and population growth will decline in some provincial areas. New Zealand also has an ageing population. Retirees might own assets such as their home, but their incomes often do not change much and they might be living on savings.

New Zealand's population changes will affect demand for, and the affordability of, the services provided by infrastructure assets. This will result in diverging futures for regions. NZIER considers that three broad groups appear likely:

  • prosperous and growing places, which will need increasing capital;
  • prosperous or growing places, which might need more capital; and
  • poor and/or declining places, which might need to plan for a lower requirement for capital.

Managing the funding and timing for infrastructure development in areas of growth is challenging. For most of the last hundred years, as a country, we have built for growth. Now, up to nine regions face declining forecasts. For places in these regions, managing networked infrastructure services in conditions of economic and population decline, while standard and service-level expectations increase, might be more challenging. Although New Zealand has seen population movements before, today's population and economic changes could present infrastructure and funding challenges with which we have little experience.

The challenge for robust asset and service future planning is to find the optimal track to the future.

Understand the local economy to plan for the future

Population and economic growth is concentrating in some places and declining in others. Local authorities need to plan the operating and capital expenditure they need to maintain their services, and the related funding implications. Different regions need to plan for quite different futures. Having realistic and detailed asset management plans, co-ordinated with funding sources (including affordable rates), will be important.

In places with declining economic growth and ageing and shrinking populations, local authorities could end up with under-used assets (such as roads and water treatment plants). These assets will still need to be maintained and renewed so they can continue to provide services. Local authorities operating, and communities served by, these assets will eventually face costly replacement decisions on shrinking revenue bases.

Some local authorities will face real difficulties in managing decline and in ensuring that their assets are the right size for their needs. They might hope that capital investment will reinvigorate growth and prevent further decline – but it may be only hope. NZIER's work suggests that decline scenarios are more likely than growth for many.

Infrastructure development waves create investment echoes

In its analysis of the last hundred years, NZIER identifies two clear waves of investment for assets other than roads: in 1920-30 and from 1950 to 1986. Investment in roads peaked around 1965, then trended lower until 1990. It then trended higher between 1990 and 2013. Borrowing by local government for capital investment has tended to be synchronised with infrastructure investments.

Infrastructure development waves are likely to create investment echoes. Local authorities need to be prepared to manage these infrastructure renewal cycles.

Industry experts and practitioners in NZIER's workshop session advised that many roading assets could be approaching second or third renewal cycles, with bridges next approaching a renewal cycle in about 2025. Although the timing for three waters assets is difficult to predict, because councils are more likely to take a "run-to-fail" approach to underground assets, our experts advised that a significant renewal cycle of three waters assets is likely to occur during 2040 to 2060.

The date of construction is one of several influences on the likely life of assets built during these investment waves. Factors such as the redevelopment of urban centres and changes in technology are also important.

Local government is strongly affected by mandate and central government funding

The construction of capital assets in waves eventually echoing in replacement needs could be costly. NZIER's historical analysis shows that local government income is highly dependent on the legislative mandate set by the Parliament. It is also strongly affected by fluctuations in central government funding and the overall economic cycle.

The historical data shows how the local government sector has changed over time, including changes to its purpose, role, and ways of funding.

We observed that, except for bridges, asset management results were better for roading than for three waters assets. In some instances, the results were only slightly better, but in others they were significantly better. More than one factor is likely to account for this difference. For example, roads are above ground, which makes it easier to assess their condition. Roads also have a shorter life expectancy so are more likely to need frequent attention.

However, it is likely that the arrangements for roading funding and management also play a part. Local authorities receive funding towards capital expenditure on roading through New Zealand Transport Agency (NZTA) subsidies. In contrast, capital expenditure on three waters assets comes primarily from rates and other revenue.

NZTA requires local authorities to provide regular information to receive roading subsidies. NZTA regularly audits the information in local authorities' roading asset management information systems. Although there have been government grant and subsidy schemes for water (for instance, the wastewater subsidy scheme administered by the Ministry of Health), there are no arrangements similar to transport for three waters or other local authority assets.

Changes are emphasising long-term asset planning

I have been pleased to see a greater focus on long-term asset planning in central and local government. Examples include the National Infrastructure Unit within the Treasury preparing a National Infrastructure Plan and Local Government New Zealand's Three Waters project work.

The 2014 amendments to the Local Government Act 2002 require long-term plans to include an infrastructure strategy. Local authorities will need to develop these strategies by 1 July 2015 for inclusion in their 2015-25 long-term plans. The purpose of this strategy is to identify significant infrastructure issues, options, and implications during a 30-year period.

Overall, 30-year strategies will be a useful planning tool for local authorities only if they are supported by robust information about asset performance. The strategies will also need to deal with a range of economic outlooks and plausible states for the district or region. Local authorities will need to match their revenue and financing policies, and their choice of funding tools, to their asset management and service intentions. Linking the infrastructure policy to the financial strategy is therefore critical. Local authorities will also need to improve their understanding of the resilience and future needs of their networked assets and services to address risks, including those posed by major geo-hazards.

Local government infrastructure and capital management needs to improve to meet the challenges ahead

All this means that local authorities need to "step up" in managing their infrastructure assets. For instance:

  • The focus needs to be on sustainable services and long-term fiscal strategy, not short-term budgets.
  • Planning and risk management exercises must inform decision-making. All those involved with asset services need to talk and work closely – planners, asset managers, finance officers, engineers, and operational departments. Budgeting must be connected to planning, asset management, service management, and risk management.
  • Although local authorities tend to have a lot of data, they do not necessarily use it well, or use the best data, to support decision-making.

In seeking feedback on the draft of this report, we received two different points of view. We were told that we needed to consider how asset management practices should fit the size and scale of local authorities. We also heard that we had not been demanding enough about the improvements in long-term asset and financial management needed to protect and make the right investments in roading and water infrastructure for the future.

These are valid observations and deserve debate by both local and central government, so our regions and communities can continue to have the core services so essential to our well-being.

In 2015, my appointed auditors for local authorities will audit the 2015-25 long-term plans, which will include 30-year infrastructure strategies for the first time. Because these strategies are a new requirement, the 2015 versions are likely to be the basis for improvement and development in future long-term plans.

However, these infrastructure strategies will cover periods during which local authorities will need to make decisions about, and changes to, the services and service levels that they can sustainably and affordably provide.

Councillors and communities need good information so they can understand and make choices about the services that are so important for their future. We have found that the information to enable understanding and choices is not consistently available – this must change.

Ultimately, stepping up a gear is needed to allow the development of more appropriate and robust service and funding strategies – something that is fundamental to their overall financial strategy, and to all current and future ratepayers.

I thank my auditors for their assistance with the analysis of the financial, asset, and service performance of local authorities. I also thank NZIER for its historical perspective on local government investment cycles during the last 50 years.

Signature - LP

Lyn Provost
Controller and Auditor-General

7 November 2014

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