The independent local government review announced by Minister of Local Government Nanaia Mahuta on 23 April is not before time.
While it’s just the first move – with the interim review due this month, the draft report by September 2022 and the final report in April 2023 – it’s a big step in exploring how councils can maintain and improve New Zealanders’ wellbeing in the communities they serve far into the future.
Since the last meaningful review of the sector 30 years ago, the world is a very different and increasingly complex place. And in the last 5 to 10 years in particular, local councils have been grappling more than ever with how they keep their services and facilities current, safe, valid and fit for purpose.
“It is about our people” says Nanaia Mahuta, “The approach was needed to improve wellbeing of communities and environment.”
The pressure today on local government is huge. Population growth, ageing infrastructure, a capped funding base (via rates), increased community demand for new facilities and services and constrained balance sheets (limiting borrowing) make for a challenging time.
On top of this, councils are faced with a number of broader social and environmental issues affecting wider NZ, including an affordable housing shortage, increased homelessness and climate change to name a mere few – some of the solutions of which probably lie more at the feet of central government rather than with community-governed entities.
Part of central government’s response to date has been an injection of economic funding, particularly in regional New Zealand, to encourage economic development and infrastructure investment. While this is a positive initiative, it ironically increases the demands on many of the faster growing regions to provide even greater levels of infrastructure investment! So how does local government fund all of these demands?
Local authorities’ combined asset base (circa $150 billion) is largely made up of “property-related” assets such as land, buildings and infrastructure (fixed assets). This is a vast and complex portfolio including diverse assets such as in-ground infrastructure like the water assets (for the moment pending the Three Waters reform), roading, recreational and community facilities, town centre “spaces”, specialist facilities (like airports, ports, quarries etc) and the operational facilities occupied by local authorities themselves.
Much has been said about the ageing nature of this asset base, particularly in-ground infrastructure (the pipes). Many community facilities have also often been only maintained to a minimum level of service rather than being proactively renewed through planned reinvestment. As a result, councils are faced with not only “catch up” investment needed to replace these assets (take Wellington City’s water assets as an example) but a further surge in investment to meet growing demand.
Property touches everything
So where does TwentyTwo come into it? What role do we, as independent property advisers, play in any of this? It’s simple… property touches everything.
If you look at the asset base, most of councils’ assets involve “property” in some shape or form. Whether it is a swimming pool, library, wharf or council’s own civic facilities, the ageing nature of many of these assets, coupled with the increased demand and increased expectations from communities, is requiring councils to reconsider how these services are delivered and how reinvestment is funded.
“We find ourselves in a really privileged position of being able to talk to elected members, chief executives and leadership teams about how some of the priorities (within or outside the LTP process) are funded and delivered – “what is the “strategy” to do more in a quicker time” contends David Lambie, TwentyTwo’s Practice Lead for Advisory, who works with many local authorities up and down the motu.
“In a constrained funding environment (the solution of which is clearly in the line of sight of the local government reforms), councils are looking for alternative solutions to traditional funding and delivery. Invariably, this involves partnering, either with the private sector or Iwi. We are increasingly involved in helping clients navigate through the strategy, engagement, procurement and commercial negotiation processes required and put together solutions that allow facilities to be delivered much sooner than having to wait for headroom in the Balance Sheet or queuing in the LTP process alongside other priorities”.
TwentyTwo’s 30+ years’ experience in helping clients develop innovative commercial solutions and strong roots in the public sector, is being increasingly called upon by local government to help design and lead new initiatives. This coincides with private sector property developers and investors waking up to the opportunity that both local government and regional New Zealand potentially provides.
As David explains, many of the leading developers and investors have historically focused on central government and Auckland and Wellington, with some “early innovator” exceptions. “I think the market is recognising that local government is a large sector with pressing issues to resolve and a sector open to innovation. Many years ago we saw councils like Wellington and Auckland unlock their waterfront precincts by selling long-term ground lease interests to the private sector in exchange for investment and activation. Some of this was “trial and error” but the pre-paid, long-term arrangements (100 years + terminating ground leases) have generally been successful in accelerating development and changing the nature of these areas. The same principles are now being used for other facilities/initiatives that councils would have always funded/owned through their own funding and LTP processes”.
What options are available?
Local authorities have traditionally owned and managed everything! With such a wide role and mandate to deliver services and manage assets, with a long-term planning horizon, ownership of land, buildings and infrastructure (all things being equal) has been a logical decision. However, many of these local authorities are now very large businesses in their own right. A recent presentation by Peter Winder (McGredy Winder & Co) to the Institute of Directors highlighted that Wellington City Council, for example, sits alongside large businesses like Auckland International Airport, Port of Tauranga and Genesis, for example, on a league table when you compare revenue, expenses, assets and liabilities. They also employ large numbers of people either directly or through contracting relationships. As a result, local authorities face the same challenges as any business, including remaining agile to cope with change and how they use limited resourcing in the most economic way.
These dynamics are requiring local authorities to turn their minds to alternatives. When considering civic or community facilities, for example, (which is some of what we are involved with), you have three simple choices:
- Fund the development/redevelopment using council debt or equity on the basis of long-term use, ownership and management (probably with an expected life of 50+ years depending on the nature of the facility)
- Partner with a development partner to develop the facility on council-owned land, either via:
– a long-term ground lease interest in the land, to allow the partner to either hold the asset as an investment, sell the leasehold interest back into the investment market (for some development margin) and a commercial lease for the building facility on a market rental or open book return on cost (this type of arrangement could extend to allowing the partner to further develop the balance of the land as well – if feasible – to create additional investment opportunity); or
– a finance lease or concession-type arrangement (which is a form of public private partnership) whereby council retains the land but enters into a long-term structured commercial arrangement for the development and potentially operation of the facility for an agreed return on cost, generally with the asset returning to council at the end of the period, which may be extraordinary longer compared to a commercial lease depending on the specialist nature of the facilities
- Lease the facility from the market on a long-term commercial lease with ideally multiple rights of renewal, with a market or return on cost rental formula
These options provide a range of alternative choices to be considered at the time investment is needed. All three options may be valid. Developing a clear brief, robust evaluation criteria and transparent process is important to drive best value and the optimal solution. Increasingly, we are seeing long-term leasing solutions for councils’ own civic and office facilities being considered (including partnering with Iwi) when traditionally local authorities would have been restricted to funding, developing, owning and managing these types of assets themselves. As ever, each project requires a tailored approach.
This highlights the added complexity of public perception when navigating through alternative options and decisions. As with any public entity, there is an obligation to act responsibly, prudently, fairly and with long-term interests in mind. There is always a risk that when alternative solutions are implemented, the short-term ‘optics’ may not readily appeal to the electorate which may impact electability, and therefore bold decision making. This is particularly so in local government and with community-elected governance. To offset this risk, maintaining a series of “principles” is important – well-developed communication, clear strategy, robust consultation and genuine Iwi engagement and jointly explored opportunities in the spirit of Te Tiriti o Waitangi.
In many ways, local authorities should be agnostic to the investment route depending on the nature of the facility or service needed. However, this change in thinking will take time. As noted, not only has local government traditionally had an “own and manage” view because of their long-term horizon, but because the ownership of loca-funded assets is seen as a core principle of local democracy – “we’ve paid for it so we own it… would be a long-held community view.”
Increasingly, we are seeing long-term leasing solutions for councils’ own civic and office facilities being considered (including partnering with Iwi) when traditionally local authorities would have been restricted to funding, developing, owning and managing these types of assets themselves. As ever, each project requires a tailored approach.
We work with a wide range of local authorities across the country. Recent examples include Tauranga City (various civic/workplace urban renewal and infrastructure projects), Taupō District (community, civic/workplace and airport), Tasman District (civic/workplace), Porirua City (social housing in partnership with Tregaskis Brown), Auckland Council (civic/workplace and community) and Hutt City (community), for example.