Infrastructure: Local funding for growth (NZ Herald)
Are restrictions on local government funding mechanisms stifling the ability of our cities to grow at their best?
When running for mayoralty in 2016, Phil Goff made the following commitment on rates:
“Rate rises will be kept low and affordable at an average of 2.5 per cent per annum or less, if current council fiscal projections are correct and the consumer price index stays low.”
The question of how much rates will rise — and the commitment to keep them as low as possible — are cornerstones of any recent Auckland mayoral bid. But there are concerns the current restrictions on local government’s funding mechanisms are stifling the ability of our cities to grow at their best.
Reliance on revenue from rates
In New Zealand, council revenue is largely separated from economic performance.
Local government is the core funder of transport and water services for new development, yet its revenue is derived from property rates — which are a cost allocation method linked to council costs, and not to the success of the economy or land prices.
Conversely, central government is the direct benefactor of growth: receiving increased GST, income tax and corporate tax when the economy grows.
Increased council costs mean an increase in rates, irrespective of economic performance, and any efforts made to charge ratepayers more to deliver additional services — including for those without homes who pay no rates — is consistently met with strong opposition from homeowners.
Councils see little funding benefit from growth, and as a result tend to have a culture of cost minimisation, heavily influencing their decision making at the expense of value creation.
“Importantly, from a local government economic development perspective, property taxes are not the best incentive to encourage councils to invest in infrastructure,” says Local Government Funding Agency chair Craig Stobo.
“If council revenue streams were tied to their performance, successful councils would accrue more revenue, providing more choices for their communities.”
This is not a new concern: a 2015 review into local government funding by Local Government New Zealand (LGNZ) found that the heavy reliance on property taxes to fund local services and infrastructure fails to incentivise councils to invest for growth.
The only other major source of revenue local government currently has in its toolkit is to lobby central government: Shane Jones’ Provincial Growth Fund will see an investment boost in regional New Zealand, and the Housing Infrastructure Fund is aiding high growth councils to advance infrastructure projects that will help increase housing supply.
Yet the patience required for central government to fill the funding gap has seen growth issues turn chronic. Infrastructure New Zealand is concerned that private capital which could have filled the gap has been left searching for opportunities overseas.
Funding and finance inquiry
Local Government Minister Nanaia Mahuta acknowledges the funding challenges faced by local government and the constraints of rate rises, noting they are rising faster than incomes and cannot be the only solution. She says that — if not met — the funding gap will have consequences for local communities and for the entire country.
“Local government is facing increasing costs for things like three waters, roading, housing, and tourism infrastructure as well as adapting to climate change,” she says.
And some of the councils facing the biggest cost increases also have shrinking rating bases.”
Last month the Minister of Finance, Grant Robertson, asked the Productivity Commission to conduct an inquiry into how to fund and finance local government.
The inquiry will investigate:
- Cost and price escalation for services and investment, including whether this is a result of policy and/or regulatory settings
- Current frameworks for capital expenditure decision making, including cost-benefit analysis, incentives and oversight of decision making
- The ability of the current funding and financing model to deliver on community expectations and local authority obligations, now and into the future
- Rates affordability now and into the future
- Options for new funding and financing tools to serve demand for investment and service
- Constitutional and regulatory issues that may underpin new project financing entities with broader funding powers, and
- Whether changes are needed to regulatory arrangements overseeing local authority funding and financing.
Stobo says the terms of reference given to the Commission by Robertson are very good, and the requirement to consult with the sector is a helpful recognition of the expertise the sector can bring to the table.
“Prospectively this could lead to some devolution of tax setting and collection powers to local government, and a cessation of inefficient quota handouts from central government.
“The final results need to improve the incentives for councils to responsibly invest in local growth,” he says.
The New Zealand Initiative’s executive director, Dr Oliver Hartwich, is confident the Productivity Commission will produce good results.
“What is important for the Productivity Commission’s inquiry is to consider the incentives under which local government operates, and the Terms of Reference certainly allow that,” he says. “More specifically, it will allow the commission to consider the OECD’s recommendation to the New Zealand government that councils should participate in tax revenue increases resulting from economic growth.”
The commission’s final report is expected to be presented by November 2019.
Calling for localism
Coinciding with the announcement of an inquiry, LGNZ and The New Zealand Initiative launched their Localism project, calling for a shift in the way public decisions are made in New Zealand by seeking a commitment to localism. LGNZ President and Dunedin Mayor David Cull says it is important the new funding options incentivise growth.
“[The Localism Project] will highlight how the right incentives and funding can build strong local economies and vibrant communities. The urgent need to properly empower councils is reinforced by the fact that decentralised countries tend to have higher levels of prosperity than centralised ones.
“New Zealand is among the most centralised countries in the world.
“We should not expect central government in Wellington to be the best decision-maker for every local problem. Communities often know best what they need.”
The New Zealand Initiative’s Hartwich adds: “After more than a century of centralism, New Zealand needs to go local.
“Councils and communities must be able to make their own decisions about their future.”
A final report and publication of the Localism Proposal is expected in early 2020, and Hartwich notes there will be ample opportunity for the Localism report and the Productivity Commission inquiry to cross-fertilise.
Taking lessons from America
The city of Houston uses sales taxes to fund general activities.
Earlier this year, Infrastructure New Zealand led a delegation of NZ representatives to Portland, Denver, Dallas-Fort Worth, and Houston — four US cities that are growing more affordably than Auckland — to consider how they are doing what they are doing, and what New Zealand can learn from them.
The report, Enabling City Growth: Lessons from the USA, provides detail on the lessons learnt from the visit, including the following on how local authorities are funded:
- US cities have a number of funding mechanisms that are tied to their economic performance. Denver, Dallas, and Houston use sales taxes to fund general activities, and each has levied a 1 per cent sales tax to deliver improved public transport.
- Dallas and Houston have property taxes with a strong link to property value. In each case, the revenue of the city and its component institutions increases with the success of the city in growing the economy and delivering homes.
- Portland, the city with the greatest growth challenges, also has the fewest incentives to grow. There is no sales tax in Oregon, removing this option also for Portland.
- Instead, Oregon relies on comparatively high income and corporate taxes, but has not extended the ability for Portland to levy these direct.
- Property taxes in Portland have been tied to inflation since the early 1990s. Thus, property values have now become detached from property rates and the two are only reviewed when properties are significantly changed or redeveloped.
Infrastructure: Proposals that hold water (NZ Herald)
Suggestions for reform could impact on local councils, reports Tim McCready.
Figures released last month in a Ministry of Health report show one in five New Zealanders are drinking water from water supplies that don’t meet current drinking water standards.
The report shows larger suppliers — including Auckland’s Watercare, Wellington Water, and Dunedin — are meeting compliance standards throughout the year. But many smaller communities are failing to comply, including some of New Zealand’s most iconic tourism destinations: Coromandel, Whangamata, Waitomo Caves, Tekapo and Milford Sound.
In the 2016 outbreak of gastroenteritis in Havelock North, an estimated 5500 of the town’s 14,000 residents became ill with campylobacteriosis and 45 were hospitalised. It was ultimately traced to contamination of drinking water supplied by two bores — with sheep faeces being the likely source of the pathogen.
The Havelock North incident raised serious questions about the safety and security of New Zealand’s drinking water, and sparked a Government Inquiry into the outbreak.
The inquiry made 51 recommendations to improve drinking water safety — including that all water supplies should be treated, and that a dedicated drinking water regulator should be established.
Speaking at the Local Government New Zealand annual conference last month, Minister for Local Government Nanaia Mahuta said:
“The findings of the Havelock North Inquiry have been a sobering reminder of how, for the sake of our communities, we must make sure that drinking water services are high quality and safe. Too many areas across the country do not meet drinking water standards; in smaller areas, the level of compliance drops to less than 50 per cent.”
A shift to dedicated providers
Stage two of the Three Waters Review was launched in March, and is considering how to improve the management of drinking water, stormwater and wastewater.
New Zealand’s three water infrastructure and services are primarily owned and delivered by the 67 territorial (district and city councils) and unitary authorities, or council-owned and controlled water organisations (in the case of Watercare and Wellington Water).
Accountability for overall service performance is through the local government election process. In theory, if the public is unhappy with the performance of their council they will elect new councillors. But in reality, most members of the public do not have the information, capability, or desire to effectively monitor service outcomes. In many cases — including Havelock North — it is not until things go wrong that the public find out the extent of the problem.
The Havelock North inquiry recommended moving to a system of aggregated, dedicated water providers. A Three Waters public discussion document released by Internal Affairs asks what the options for a new model might look like:
- Regional, publicly-owned water providers?
- A small number of cross-regional, publicly-owned providers?
- Something else?
Infrastructure New Zealand chief executive Stephen Selwood says scale really matters in the water business, because as well as enabling economies of scale, it provides the revenue base to maximise skills capability and capacity to govern, fund, oversee and operate water service delivery effectively.
“The value of scale and capability is already being clearly demonstrated by Watercare and Wellington Water who have between successfully implemented significant improvements in services in their regions that were not previously possible under local council management,” he says. “I favour a small number of providers, from one to to five. One provider like Scottish Water with independent regulation has proven very successful. With one provider you would look to benchmark performance with international comparators like the Australian states. Between three and five providers provides the opportunity to benchmark across NZ companies as well.”
Mahuta, who recently returned from a research trip to Scotland and Ireland to consider the models used there, says there are no pre-determined solutions, but a bottom line is continued public ownership of existing three waters infrastructure.
“Any option must ensure continued public ownership of existing infrastructure assets and we must provide the protections of that assurance through governance and ownership arrangements, at law and ministerial oversight,” she says.
Mahuta says it is critical the Government works closely with councils, iwi, and stakeholders with an interest in three waters services to develop options and recommendations.
How the overhaul will be paid for remains unclear, and Mahuta has acknowledged funding challenges: “Climate and population change alone mean that, even if we address the challenges in front of us now, significant funding pressures will continue to arise for decades to come.” Selwood says it should pay for itself, citing Scottish Water as an example:
“This publicly-owned national water service provider delivers drinking and wastewater services to five million people across an urban and rural hinterland comparable to NZ.
Since formation in 2002, Scottish Water has delivered substantial improvement in water quality, environmental performance and customer satisfaction, while reducing operating costs by 40 per cent and capital costs by 20 per cent on an enlarged capital investment programme.”
One of the main challenges with reform of the water sector will be the impact on local councils. For smaller councils, water is a significant component of their responsibilities.
Removing these raises questions about future viability.
Says Selwood: “I think this provides an opportunity to refocus councils from managing utilities and engineering challenges to being more focused on their communities, their people and giving true meaning to local engagement and participation by people in local affairs.”
Sector deficiencies
Successive reports over the past two decades undertaken by a diverse range of agencies and organisations (including the Office of the Auditor General, Water New Zealand, Engineering New Zealand, Infrastructure New Zealand, the Parliamentary Commissioner for the Environment and the Local Government Infrastructure Efficiency Expert Advisory Group) have pointed to serious deficiencies across the sector. Between them, these expert bodies have compiled a compelling case for change.
- Major challenges include:
- lack of information about the state of infrastructure assets — especially in small rural councils
- lack of information or control of the cost of providing water infrastructure and services
- excessive and inefficient water use
- contamination of surface water and groundwater from uncontrolled or poorly managed storm water drainage and wastewater disposal — one in five wastewater treatment plants are operating on expired discharge consents
- poor recreational and bathing water quality
- lack of investment and deferred maintenance, in part through incomplete pricing or small ratepayer base, and political constraints to increases in local authority rates and charges
- institutional and regulatory barriers to improved management
- regular water supply shortages — especially during summer
- high frequency of “boil water” notices
- a backlog of investment in water infrastructure of up to $7 billion
- infrastructure failure.