Local government funding changes

by John Pfahlert, Chief executive, Water New Zealand

There are potential changes ahead in the structure of local government that civil contractors might like to keep an eye on. On 3 November the Minister of Local Government Paula Bennett signalled that government proposes to introduce legislation early in 2016 to allow councils to transfer functions and responsibilities between regional councils and territorial authorities.

So, why should civil contractors care? Well, at present a great deal of the work you do relates to local roading and water-related infrastructure projects. These are commonly tendered by one of the 78 regional or territorial authorities. Indeed, nearly half of all council expenditure in New Zealand is roading and water related.

The structure of contracting is such that there are a few major contractors who operate nationally and provide services to NZTA for the state highway network. They both build new infrastructure and provide maintenance under long-term agreements. The rest of the sector tends to be made up of smaller local contractors who either work as subcontractors to the principal contractors, or who tender directly for smaller work packages on local roads and water projects released by local councils.

At central government there is increasing concern that the disaggregated nature of local government is both inefficient and leading to poor infrastructure outcomes. The Thirty Year New Zealand Infrastructure Plan 2015, released in August, focuses on the aging nature of council infrastructure; the fact that in nearly half the districts the population is aging, declining in numbers and quite poor in terms of income.

The Productivity Commission’s October report into the availability of land for housing discussed at considerable length the way in which 3 Waters services were delivered in this country, noting that in Scotland there is only one authority delivering these services for a population not dissimilar to NZ. They also noted that it’s only when a water authority has more than 100,000 connections that efficiencies of scale are achieved. Only Watercare and Wellington Water achieve that scale in NZ.

At the Local Government New Zealand conference in June, the Minister of Local Government signalled very strongly that she wanted local government to do more work in the space of “sensible spending on reliable infrastructure”. She called on councils to work together across council boundaries in the roading and water space and was quite clear that the current situation could not continue. Her focus was on achieving regional solutions.

While she was clear that she would not legislate for council amalgamations, she did signal her support for the establishment of regional CCOs. The Local Government Commission is being tasked to work up various structural options for each region to look at. The minister was absolutely clear that structural change in the way councils deliver services at a regional level is on the table for debate.

She has now followed up that speech by announcing that new legislation will be introduced early next year that will provide councils with greater flexibility to change their structures and coordinate infrastructure across a region. In announcing the legislation she specifically referred to major infrastructure resources like water and transport.

Central government envisages local government transferring core services like water and transport planning and delivery between regional and territorial authorities, or to arm’s length organisations similar to Watercare or Auckland Transport.

The new legislation is intended to be enabling, with the government stating clearly that it would not force change on the regions. However the intent and desire of government is crystal clear – change is expected in the way in which infrastructure is both planned and delivered – and presumably funded. Regions that take a more integrated approach, allowing the government to work more closely with them, could be in line for a funding “top up” from central government – at least according to an article in the NZ Herald.

While these changes won’t occur overnight, it’s important for civil contractors because if and when it does occur you’ll need to be thinking about tendering for work at a regional scale. Think about the sophistication and skill sets required by the NZ Transport Agency to pre-qualify and tender for work on the state highway system. Similar approaches are being developed by Wellington Water which delivers water-related services to all of the Wellington region’s city councils.

If a similar approach was eventually rolled out at a regional level for all local roading and 3 Waters – how would small contractors respond to the challenge?

Central government is actively working to assist councils develop consistent methods of data collection about road and water assets. This will lead to improved planning and asset management. Work is currently underway to develop metadata standards to determine condition assessment for 3 Waters pipelines. There is an expectation all councils will move to use these. Treasury is also planning different approaches in a range of other infrastructure planning – such as hydraulic modelling.

Contractors should be giving thought to what changes to their businesses might be required if a region moved to delivering all local roading and water services via an arm’s length CCO or similar model. Change is on the way.

This comment was first published in December’s Contractor magazine.

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