"Cityscapes 2002" Global Convention on Agenda for Urban Infrastructure Reforms
October 21-22, 2002, New Delhi

Special Address by Mr. Basil Morrison, President, Local Govt, New Zealand

Mr Chairman thank you very much for the opportunity to explain some of the development issues for Urban Infrastructure in New Zealand. First I need to tell you briefly about the organisation I represent - Local Government New Zealand and the nature of local government in New Zealand.

Local Government New Zealand is a sector organisation funded by the 86 local authorities covering a population of nearly 4 million people. As the interface between these local authorities and central government, our organisation's role is to secure national policies and legislation that supports effective local governance.

Local Government New Zealand also provides services to local authorities to enhance their effectiveness and promotes best practice throughout the local government sector.

Of the 86 councils in New Zealand 12 are regional councils and 74 are territorial local authorities.

The role of regional councils is predominately planning and regulation of the environment and catchment management issues. Some of the major metropolitan regional councils have functions of urban transport, bulk water and in some cases bulk disposal of sewage. Regional councils are funded from regional land taxes (rates) based on property values with little or no financial support from central government.

Territorial local authorities are also locally funded through land taxes, provide local services and are locally accountable to their communities. Their functions are wide ranging and include infrastructure management, recreation services, planning, and local regulation such as dog control, building control and local bylaw enforcement.  In the past the functions that local authorities have undertaken have been subject to the  constraints of legislation but in the near future we expect that local authorities will be able to undertake any functions, provided they have the support of the local community.

Where I referred to infrastructure earlier I meant roading, water, wastewater, storm water and solid waste services (refuse). Although I have suggested above that all local government functions are funded locally, the one exception is roading where approximately half the funds are received from central government. The central government income for roading comes from commercial road user charges (based on truck weight and distance travelled) and from a petrol excise tax of approximately 
12%. As approximately 50% of their roading maintenance and construction funds are from central government, the funds are tagged by requiring that all physical works be publicly tendered.

This change took place in the early 1990s where there was previously a mix of local government direct service provision and private sector provision, to now a 100% private sector provision. The experience has been that significant reductions in cost have been achieved and since that time there has been a trend towards larger contracts (network maintenance) and longer term contracts. The extent of competition in the private sector has been of concern and the experience is that there are now only four major companies bidding for these larger contracts in New Zealand. Some of us have concerns that competitive pressures may not be sufficiently strong.

Transit New Zealand - the government owned reading agency, maintains approximately 12% of the nations reading network by length - the main roads and state highways. They have recently developed a procurement policy that in the near future a third of the contracts with the private sector will be for a ten year period. These contracts are called performance specified maintenance contracts - they are not prescriptive and the contractual outcomes are very broad. To date Transit New Zealand's experience has been that significant further savings over conventional shorter term contracts have been achieved - in the order of 30% at times. These contracts also include the professional engineering services of project management, design and supervision.

The use of formal public/private sector partnerships in reading has been reasonably limited to date in New Zealand. It is expected that in early 2003 there will be new legislation to allow for public/private partnerships for roads. It is expected that these provisions will require partnership agreements to be for a specified term, the assets at all times will be operated under public supervision and all assets will become publicly owned at the end of the agreement. It is expected that these types of arrangements in New Zealand will be on the main roads, will be few in number, and will be associated with the introductions of toll roads. (Currently there are no toll roads in New Zealand, although there have been three instances in the last 40 years).

The advantage of this form of partnership are being espoused as being similar to international experience, often they can be more cost efficient, a higher quality outcome can result, opportunities for innovation are higher, and there is risk transfer to the private sector. It is my view that one of the driving influences of this proposal is to reduce the need for increases in government debt. Central government in New Zealand has never funded reading improvements through debt, rather through income received from road users on an annual basis.

Some of the disadvantages of partnerships are considered to be the higher cost of finance from the public sector, higher transaction costs arising from more complex processes, the risk of being locked into an inflexible longer term arrangement, and a risk of compromising future network developments.

With regard to the infrastructural services of water, wastewater and storm water, this is solely provided by local government in New Zealand. Up until ten years ago these services were provided directly by local authorities' staff but with the growing trend toward outsourcing, it is estimated that up to 50% of the maintenance of these services is now contracted out. Traditionally major new capital work has been outsourced to the private sector, typically in one off project contracts. However in recent years there has been a trend to adopt some of the international models - design build operate (DBO), build own operate transfer (BOOT), and design finance build operate transfer (DFBOT), particularly for wastewater treatment plants. Some of the terms of these contracts have been for typically 25 years.

Only one small urban local authority has entered into a concession/franchise arrangement for the maintenance of its water, wastewater and storm water network. The term for this contract was 30 years with the right of renewal for a further 20 years, and was reasonably controversial in New Zealand. As a result the current government is now seriously considering legislation prohibiting contracts for the management of whole systems for water, wastewater and storm water for any longer than 15 years. This would not prevent 25 year public/private partnerships for components of the system such as a wastewater treatment plant.

Longer term public/private partnerships are currently under consideration for the provision of urban rail systems. These may develop in Wellington and Auckland where the land and the physical infrastructure will remain in public ownership but maintenance of the infrastructure and the rolling stock may be the subject of a long term concession/franchise.

A further variation of public/private partnerships are Joint Ventures local authorities are able to establish Local Authority Trading Enterprises, where they have 50% or more of the shareholding. There are a number of cases where local authorities have established these to undertaking road and other maintenance contracts. Some have used this mechanism as a stage in diverting themselves of the function, and sold off their shareholding as a viable commercial entity.

One of the important ways that has been developed to ensure the integrity of infrastructure assets in New Zealand is through asset management planning. This has been driven in New Zealand through financial reporting requirements and asset
valuation. Asset management plans in New Zealand are now in widespread use and are becoming more and more sophisticated.

In conclusion the experience with public/private partnerships in New Zealand has evolved from traditional full public sector provision, to both mandatory and voluntary outsourcing for shorter term contracts, and this is now evolving into longer term contractual arrangements. We are also now seeing development of conventional public/private partnerships such as DBO, and BOOT and DFBOT. Joint ventures, particularly for the maintenance of infrastructure has also been common.

While there has been some disquiet over these trends, the legislative framework provides plenty of scope for continuation of these changes, and seem to generally follow international trends in procurement.

It is my view that while in many cases we can see tangible savings, as politicians we need to ensure that our public stewardship responsibilities are met. Asset management planning and financial reporting are used in New Zealand to achieve this. We need to ensure that private monopoly situations are not developing, and competitive pressures are not being blunted. We also need to recognise that the so called risk transfer under these arrangements is often more illusory than real.

Thank you.