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Underground Infrastructure

Brian Fallows had a rant in today's NZH over the reluctance of councils to match infrastructure expenditure with depreciation claimed in their accounts and projections. He is spot on in this regard, and our Council is precisely in this category - planning a major underground survey over the next year or two that that will reveal substantial under-provision leading inevitably to a dramatic reconstruction of their 2018 LTP, and consequential rate increases.

Just to show what Brian Fellows is talking about - TCDC's projection for renewals and depreciation in their draft LTP are in round figures - $89m and $238m respectively - that amounts to a $149 shortfall, and demonstrates graphically the real anomoly to which Brian is drawing attention. It will come back to bite our Council in exactly the same way that it will eventually effect all other councils that are engaging in the same deceptive practice. Note that there is only about $10m of growth in the period.  

They can only maintain their financial projections with the acquiescence of a compliant Audit Office temporarily - the AG appears to be on their case, and the message must surely eventually sink in down the line. In the meantime, the response to my complaint to the OAG would indicate otherwise.

Here is a synopsis of what Brian Fallows said:

"Councils are collectively responsible for more than $100 billion of community assets, the lion's share of which consists of roads and "three waters" infrastructure. That is, water supply and the sewerage and stormwater networks. Auditors are not, of course, experts on the state of the nation's drains. But they can compare numbers and when they look at the councils' accounts the results are troubling.

There is a huge gulf between the depreciation expense claimed by councils in their annual financial reporting, and the capital expenditure on renewing those assets budgeted for in their 10-year plans. On average the latter is only two-thirds of the former, resulting in a cumulative shortfall by early next decade of $6 billion to $7 billion.

An investor looking at that sort of gap between depreciation and capex in an infrastructure company's accounts would not necessarily run a mile, but would have some pretty pointed questions. Not only that. The Auditor-General's office found that between 2011 and 2013 the councils collectively underspent their capital budgets.

Nor are they collectively conserving cash for a spend-up to come. And their cumulative debt is forecast to increase by $6 billion by 2022, even with the gap between depreciation and renewals spending. The gap between budgeted renewals spending and depreciation is narrowest for roads (9 per cent), where deterioration in the asset is visible. The fact that this spending is co-funded by central government and not entirely a charge on ratepayers may also be a factor.

By contrast, only a third of the depreciation of stormwater drains is being covered by budgeted renewal spending. In light of climate change, and the expected greater frequency and severity of flood events, that could prove very false economy indeed.

Clearly the depreciation expensed in the councils' accounts is not Holy Writ. The numbers will embody assumptions about the useful lives of the assets, their current state and their replacement costs. But when there is an uncertainty band around these numbers, it is unwise to assume it will be resolved in our favour. Things might be worse, not better, than today's numbers portray.

The issue is bedevilled by the mismatch in time frames between the optimal management of physical assets and councils' finances - over decades on the one hand and a three-year electoral cycle on the other.

And it may be that arguments in favour of providing decent infrastructure for future generations cut less ice at a local level than they once did, given how mobile people now are. But that is what long-term bond markets are for."

- NZ Herald




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