Agenda of Corporate and Strategic Committee

HAWKE’S BAY REGIONAL COUNCIL

Corporate and Strategic Committee

Wednesday 30 January 2013

SUBJECT: Local Government Reform - Productivity Commission Draft Report

Reason for Report

1. In March 2012 the Government announced an eight point reform programme for local government as part of its broader programme for building a more productive, competitive economy and better public services.

2. The first four points were part of a work programme which culminated in the first piece of legislation which was passed in December 2012. Work is also underway on the second phase of the reform programme which now consists of six streams of work:

2.1. An efficiency taskforce (the subject of a separate briefing paper on this agenda)

2.2. An expert advisory group on local government infrastructure efficiency

2.3. A review of development contributions

2.4. A framework to guide the allocation of regulatory roles between local and central government (the subject of this briefing paper)

2.5. Investigation of a dual or two-tiered governance model for local government

2.6. Development of options for a performance framework for local government.

(The last two points have been added since the March 2012 announcement).

3. Each of these streams of work will feed into a second amendment Act in late 2013. There may also be changes which can be made without legislation. These will likely include process and practice changes.

4. The Productivity Commission has been tasked with developing a framework to guide the allocation of regulatory roles between local and central government. It has prepared a draft report and is now seeking submissions. The draft report is over 200 pages in length, and poses a series of questions throughout the report to prompt feedback via submissions.

5. Submissions close on 6 March 2013. It is proposed that this briefing paper provides an outline of the key points for potential submission by Council, with a final version to be presented to Council for adoption on 27 February.

Terms of Reference

6. The Productivity Commission’s inquiry into local government regulation is about three broad areas.

6.1. How could the allocation of regulatory functions between central and local government be improved?

6.2. How can central and local government improve regulatory performance in the local government sector?

6.3. How can the regulatory performance of the local government sector be measured in order to make improvements in the future?

Draft Report - Overview

7. The following paragraphs 8 – 29 reproduce the Commission’s own overview of its draft report.

What is ‘local government regulation’?

8. Local authorities are responsible for a wide range of regulatory functions, from land and resource use under the Resource Management Act 1991, to building construction standards, food and hygiene regulations, the control of liquor and gambling activity, and waste management. In fact, the Commission has identified some 30 pieces of primary legislation that assign regulatory responsibilities to local authorities, and many other secondary instruments.

9. Importantly, statutes that confer regulatory responsibilities on local government, including the responsibility to prepare district and regional plans, far outweigh the regulations made by local authorities under the powers of the Local Government Act 2002. Indeed, the Commission has found that most bylaws are made under enabling statutes rather than under the more general provisions of the Local Government Act. Overall, local authorities appear not to be using their powers of general competence to enter new areas of regulation; however, they will rigorously use existing regulatory tools to address community issues and concerns.

10. The Commission has adopted a ‘whole of system’ approach which recognises that local authorities are part of a broader regulatory system. It is the performance of the entire system that determines how well regulations achieve their objectives.

Divergent views are creating tension between central and local government

11. An obvious and growing tension exists between central and local government. The Commission believes a key source of this friction is different understandings of the role of local government in New Zealand’s regulatory system, and indeed in the broader constitutional context.

12. There is a tendency in central government to (incorrectly) view councils as simply operational arms of central agencies – subservient organisations that must be responsive to the instructions of the Minister. Local authorities on the other hand view themselves as largely autonomous organisations that have their own funding base and whose leaders are elected by, and accountable to, their local constituents.

13. In addition to creating confusion and frustration, the absence of a well-defined constitutional or fiscal relationship between central and local government can have implications for the design and implementation of regulations – particularly where the interests of local authorities do not align with the broader objectives of central government regulation.

The quality of regulations reflects central government processes

14. The Commission has found a number of shortcomings in the way that regulations are made at the central level – these including a lack of implementation analysis, poor consultation and weak lines of accountability. While these shortcomings are not universal across all agencies, they are common enough to be of concern.

15. These shortcomings were reflected in the Commission survey of local government (results available online) which illustrated a strong belief within the sector that central government neither understands, nor adequately considers, the impacts of new regulatory functions it assigns to councils.

16. This can reduce the flexibility of councils to allocate their internal resources and in doing so can draw resources away from areas with higher value to local communities.

How should roles be allocated between the tiers of government?

17. In principle, the Commission believes that regulatory functions should be performed closest to the community that is affected, unless there is good reason to centralise. By adopting this approach, regulatory decisions are most likely to reflect local preferences and lead to efficient outcomes.

18. However, there are circumstances in which the efficiency of local decision making needs to be balanced against the gains from coordinating or centralising. These circumstances include:

18.1. where the costs or benefits of regulation spill over to other jurisdictions (e.g. when discharges into a river in one jurisdiction create clean-up costs for downstream jurisdictions);

18.2. where cost-savings can be leveraged;

18.3. where jurisdictions have populations with similar preferences and demands for regulatory services (in this case duplication can be reduced without reducing the efficiency gains from reflecting local preferences); and

18.4. where the necessary competencies, information and resources are only available centrally.

19. The Commission has developed a framework to guide the allocation of regulatory functions.

National standards do not necessarily improve consistency

20. The Commission has found that national regulatory standards are often inconsistently applied. The inconsistency usually stems from different understandings by local officials working on the ground. Greater consistency can be achieved through sharing good practice and coordination between local authorities, which could be facilitated by relevant departments and ministries.

Monitoring and enforcement appears to be under-resourced

21. There is evidence to suggest that monitoring of local regulations is under-resourced and that this is undermining the achievement of regulatory objectives. Inquiry participants suggested that statutory timeframes are resulting in councils spending more resources on processing consents than they would otherwise consider efficient. The result is that other regulatory tasks (such as monitoring and enforcement) may receive fewer resources than necessary.

There may be gaps in the enforcement tools available to councils

22. While local authorities generally believe they have sufficient enforcement tools at their disposal, there is a strong feeling within parts of the sector that regulations would be considerably more effective if infringement notices were made further available to councils for a wider variety of noncompliant behaviour.

Cooperation on regulatory functions is widespread

23. The Commission has observed a considerable level of cooperation between local authorities on regulatory functions. Cooperation can capture many of the benefits of centralisation (such as economies of scale, access to skills and expertise, and the exchange of leading practice) while maintaining the advantages of local decision making (such as the ability to cater for spatial variations in community preferences).

24. The intersection between Māori interests and local regulations is becoming increasingly important.

25. Involving Māori in decision-making presents a significant opportunity and can act as a catalyst for innovation. Recent moves towards co-governance arrangements are, for those local authorities involved, one of the most fundamental changes to their nature and operations in recent times. To achieve meaningful involvement of Māori (and in particular to make co-governance arrangements effective) local authorities need to find new ways of working with their communities and carrying out environmental management.

26. Appropriately recognising the relationship of Māori to aspects of the environment involves effectively meshing two different systems of governance – local representative democracy and the tikanga and kawa of local iwi. At present, this governance or ‘system’ issue is left largely up to local authorities to resolve. There are real questions about whether the current legislative framework effectively enables such relationships.

Mechanisms for assessing the regulatory performance of local government need improving

27. There are a number of weaknesses in the current systems used to assess the regulatory performance of local governments. These include insufficient use of performance information to identify performance improvements, the absence of feedback loops between central and local government and a lack of balance in what is measured.

28. The Commission is seeking feedback on a number of options for improving these performance systems.

Ways forward

29. In developing solutions to the issues identified to date, the Commission is focusing on a number of broad themes.

29.1. Achieving a closer alignment of incentives among the different regulatory actors (including strengthening the accountability of central government for the quality of the regulations devolved or delegated to local government).

29.2. Ensuring that there is adequate capability at both central and local levels to provide effective regulation and to lift the quality of analysis applied to regulatory design. This includes seconding local government staff to central government to assist with policy development and providing training to local government officers and councillors when new regulatory responsibilities are introduced.

29.3. Better co-ordinating regulatory activity to avoid unnecessary strains on the system (e.g. ensuring local authorities are given adequate lead time to prepare for regulatory change and phasing in the introduction of new regulations to avoid bottle-necks).

29.4. Improving the quality of engagement between central and local government through meaningful consultation.

29.5. Encouraging a change of culture in both spheres of government so that they view each other as policy partners and co-regulators.

29.6. Developing new tools to better understand how the regulatory system is performing.

HBRC Submission

30. The Productivity Commission is seeking submissions by way of answers to a series of questions in the report. A draft submission on behalf of Hawke’s Bay Regional Council is appended as Attachment 1. Councillor feedback is sought to finalise the submission prior to bringing it to the February meeting of Council.

Decision Making Process

31. Council is required to make a decision in accordance with the requirements of the Local Government Act 2002 (the Act). Staff have assessed the requirements contained in Part 6 Sub Part 1 of the Act in relation to this item and have concluded the following:

31.1. The decision does not significantly alter the service provision or affect a strategic asset.

31.2. The use of the special consultative procedure is not prescribed by legislation.

31.3. The decision does not fall within the definition of Council’s policy on significance.

31.4. The persons affected by this decision are also entitled to make a submission on the Draft Report.

31.5. Options that have been considered include not making a submission.

31.6. The decision is not inconsistent with an existing policy or plan.

31.7. Given the nature and significance of the issue to be considered and decided, and also the persons likely to be affected by, or have an interest in the decisions made, Council can exercise its discretion and make a decision without consulting directly with the community or others having an interest in the decision.

Recommendations

The Corporate and Strategic Committee recommends that Council:

1. Agrees that the decisions to be made are not significant under the criteria contained in Council’s adopted policy on significance and that Council can exercise its discretion under Sections 79(1)(a) and 82(3) of the Local Government Act 2002 and make decisions on this issue without conferring directly with the community and persons likely to be affected by or to have an interest in the decision due to the nature and significance of the issue to be considered and decided.

2. Agrees to lodge the attached submission to the Productivity Commission subject to any further amendments arising at the meeting.

Liz Lambert

General Manager Operations

Attachment/s

1 View

Submission to Productivity Commission

Submission to Productivity Commission

Attachment 1

6 March 2013

Submission of the Hawke’s bay regional council to the productivity commission

on the

draft report: towards better regulation

1. Introduction

The following submission by the Hawke’s Bay Regional Council has been prepared in response to the Commission’s Draft Report: Towards Better Regulation (December 2012). Councillors formally considered the submission at a meeting on 27 February 2013.

2. INTRODUCTION

In developing a view for the Productivity Commission inquiry the Hawke’s Bay Regional Council is mindful and supportive of the following high level principles endorsed by the National Council of Local Government New Zealand:

Local autonomy and decision-making: communities should be free to make the decisions directly affecting them, and councils should have autonomy to respond to community needs;

Accountability to local communities: councils should be accountable to communities, and not to government, for the decisions they make on behalf of communities;

Local difference= local solutions: avoid one-size-fits-all solutions, which are over-engineered to meet all circumstances and create unnecessary costs for many councils. Local diversity reflects differing local needs and priorities;

Equity: Regulatory requirements should be applied fairly and equitable across communities and regions. All councils face common costs and have their costs increased by Government. Government funding should apply to some extent to ease this burden;

Reduced compliance costs: legislation and regulation should be designed to minimise cost and compliance effort for councils, consistent with local autonomy and accountability. More recognition needs to be given by government to the cumulative impacts of regulation on the role, functions ad funding of local government;

Cost-sharing for national benefit: where local activities produce benefits at the national level, these benefits should be recognised through contributions of national revenue.

3. General comments

The Hawke’s Bay Regional Council endorses many of the Commission’s findings.

Regulation, and its implementation, is a requirement for the proper functioning of any economy and society. We believe that in looking towards better local government regulatory performance it is necessary to look at the performance of regulation across the whole system. This is the approach the Productivity Commission has taken. There is no desire to point blame at different parts of the system, but to assess and review its efficiency as a whole and look for improvements in all parts of the regulatory system (including at central government level) which will have the outcome of improving the regulatory performance of local government.

The Productivity Commission has recognised the differences between regional and territorial councils in its Draft Report, although perhaps not to the extent that was sought by Local Government New Zealand. Hawke’s Bay Regional Council endorses the following points made by Local Government New Zealand:

· Regional councils have quite different roles and responsibilities to territorial authorities;

· This, together with the large geographical scale of most regional councils means they are different in their focus, concerns and relationships with their communities and stakeholders;

· In its report back to the government the Commission must be very clear about the nature and particular roles of regional councils, and ensure that discussions about the issues and solutions clearly distinguish how they relate to the different levels of local government.

To these points we would add the following:

· A significant proportion of regional council regulation derives from the Resource Management Act 1992 (RMA). By this we mean significantly more than for territorial authorities who also have major responsibilities through other legislation, notably building legislation, and liquor licensing;

· Regional council RMA responsibilities are fundamentally managing what are commonly perceived as “public resources” such as freshwater, air and coastal water, as compared to territorial authorities whose regulations cover primarily private resources (land use, buildings etc). This means that while regional councils are essentially regulating access to a public resource, territorial authorities are regulating the use of an already acquired private resource. In giving consideration to the government’s request to examine the role of local government in economic development the Commission should be mindful of how these separate duties influence economic development.

As a final general comment Hawke’s Bay Regional Council acknowledges the Commission’s findings in respect of the performance of central government. There has been a strong element of frustration expressed by local government at a lack of consistency and consideration for local government during the development of regulation by central government. An opportunity to address these is welcomed.

4. SPECIFIC COMMENTS

The following paragraphs provide Hawke’s Bay Regional Council’s response to the various chapters in the Commission’s report, rather than to the very specific questions posed in the report.

Allocating regulatory responsibilities

The framework identified by the Productivity Commission to guide the allocation of regulatory roles is supported; in particular the premise that recognises local and proximate factors: allocate the regulatory function locally unless there is a good reason to allocate elsewhere.

In our view information and capability to make regulatory decisions is a key driver for where that function should lie. The framework would be further enhanced by extending the options from national or local to encompassing the relative merits of allocation between territorial authorities and regional councils. The following matters would be of relevance:

· The scale and nature of an activity to be regulated – an activity that revolves around effects on the natural environment might be a better candidate for regional council involvement.

· The areas of benefit of the particular activity – an activity where benefits and costs “spillover” from one territorial authority to the neighbouring local authorities might be better allocated to regional councils

· The area over which coordinated activity and enforcement will be most effective.

The funding of regulation

In undertaking its ‘Better Local Government’ reform the Government expressed its concern at rates increases as a significant contributor to increases in the Consumer Price Index. What has been overlooked by the Government is the additional regulatory requirements that have been placed on local government by central government without full and proper consideration of the cost implications.

Local Government New Zealand has completed a report (November 2012) on the impact of government policy and regulations on the costs of local government. This report identified three forms of cost shifting :

Cost shifting – transfer of responsibilities without funding to local government and/or the reduction of funding for a local government activity requiring a greater contribution from rates; (e.g. reduction in funding for road maintenance and renewal; costs created by Treaty settlements; NES for Air Quality; reduction in funding for Enviroschools (has been increased again though last year); regional animal and plant pest strategies);

Raising the bar – a requirement of councils to raise the level of service of particular services, beyond what local citizens themselves are prepared to pay for; (e.g. impact of RMA national policy statements and reform of the Building Act; the introduction of water meter regulations; the extension of general powers of competence to regional councils in 2002 exposed us to increasing funding requests from community organisations and territorial authorities; and meeting the requirements for MfE’s environmental reporting plans);

Regulatory creep – the imposition of regulations and processes that increase administrative costs and increase the cost of ‘doing business’. (e.g. compliance with long term planning provisions, 2010 amendments to the LGA 2002 and the Public Records Act. Others include Land Transport Amendment Act 2008, Public Transport Management Act 2008, LGOIMA, increased consultation costs).

Hawke’s Bay Regional Council acknowledges that a number of these costs are the costs of councils carrying out their business and should be funded by local authorities. What we are however concerned about, and what we are pleased to see acknowledged in the Commission’s report, are the unfunded mandates where regulation requires local government to perform certain duties that are not accompanied by funding for fulfilling the requirements.

A notable example of an unfunded mandate for the Hawke’s Bay Regional Council has been the introduction of the National Environment Standards for Air Quality, via the Resource Management Act. The NES for Air Quality, while promulgated through the Ministry for the Environment, was driven by the Ministry of Health on the basis that PM₁₀ reductions would reduce premature deaths and hospitalisations as a result of respiratory illness.

The consequence for Hawke’s Bay Regional Council, and other regional councils throughout New Zealand, was a requirement to spend money on the establishment of air quality monitoring for PM₁₀,, on the technical evidence required to develop a plan change and take that Plan change through the First Schedule process of the RMA, and on ongoing monitoring of the standard throughout the region. In HBRC’s case this has amounted to approx $1.25M of ratepayer money, comprising $1.027M in since investigation and monitoring and the balance for the plan change process. This is a clear example of where the community has not been able to make its own funding choices.

It is also a clear example of the transfer of a central government responsibility to local government, without funding to fulfil the responsibilities. Prior to the RMA being legislated the management of air discharges was the responsibility of the Ministry of Health, including discharge consents. This recognised that the benefits of good outdoor air quality fell largely to the health sector. The benefits still do. Yet local government has been handed the duty to manage PM₁₀ without support funding, thereby incurring the costs without the benefits.

Regulation making by central government

Hawke’s Bay Regional Council agrees with the Finding F2.3 in the Commission’s report:

“Contrary to common perception, almost all regulations made or administered by local authorities are undertaken on the direction of central government, or are necessary for carrying out their duties under Acts of Parliament.”

It is interesting that the Commission found no examples of bylaws being made that were not obviously required or empowered by statute law. This links the effectiveness of local government implementation of regulations to the effectiveness of central government making of regulations. It is therefore disconcerting to find that the Commission has concluded that:

“Regulation making at the central level is below leading practice. This is having a material impact on the quality of regulations devolved or delegated to the local government sector”.

The Commission has asked what measures, or range of measures, would be most effective in strengthening the quality of analysis underpinning changes to the regulatory functions of local government. In the view of the Hawke’s Bay Regional Council the following measures should occur consistently across central government agencies when developing legislation and regulation for implementation by local government:

· Initial high level assessment of whether a function is genuinely a centralised issue or a more local one (as opposed to being an expedient issue for central government to divest itself of)

· Consultation with the local government sector throughout the process of developing the legislation or regulations for practitioner input.

· Consistency with the Local Government Act 2002 and other relevant regulatory responsibilities;

· Recognition of risk, liability, transition and implementation issues for local government in the Regulatory Impact Statement

· Alignment of governance arrangements and funding responsibilities with the extent of discretion conferred

· Inclusion of clear accountability arrangements i.e if the issue is nationally regulated and locally implemented (e.g liquor licensing, Building Code) then clarify the responsibility for the delivery or non-delivery of the regulation.

Local government co-operation

Shared services are increasingly a preferred modus operandi in local government, thanks partly to encouragement through the Local Government Act and also to recognition of the need for greater efficiencies, addressing of capacity issues and enhanced customer service. The costs and benefits of closer cooperation have been well-canvassed in various studies.

We refer back to our earlier comments on being very clear about the nature and particular roles of regional councils and the differentiation between them and territorial authorities in a regulatory sense. There are benefits to be gained from increased local government cooperation in the area of regulation. Logically it would seem that those benefits are maximised when there is a common regulatory driver. Within a region, the territorial authorities will have a far more solid base of commonality with one another (in the areas of planning and building for example) than they will with the regional council.

Nevertheless regional councils are already cooperating with territorial authorities in back office and non-regulatory areas; and among themselves are looking at various cooperative initiatives. One example of this has been the regional sector work on water reform over the past two years. The Regional Sector of Local Government New Zealand agreed that they would cooperate on an agreed joint programme to implement the National Policy Statement for Freshwater Management. The various components of this collaborative approach included:

· A legal opinion to resolve the status of Policies A1 and A3, specifically how their requirements to adopt the best practicable option fit with the legislative requirement to “avoid, remedy or mitigate environmental effects.”

· A paper on the First Principles of Water Allocation – looking at the methods for the allocation of freshwater to activities, and the consideration of possible transition paths from current allocation methods to possible future ones

· A toolkit to bring together best practice in non-statutory programmes designed to improve water quality with the aim of improving understanding of best practice both within regional councils and within the wider community that has an interest in water quality.

· A policy paper and related advocacy tools and advice to support regional councils to engage in a process to improve the ability of councils to implement RMA policy more quickly.

This work, undertaken cooperatively, has cost each contributing council approximately $10-12k and has is providing baseline information for the councils as they undertake their regulatory responses to the NPS. The aim of the work programme was to provide a level of consistency for regional councils in their regulatory approaches.

Making resource management decisions, and the role of appeals

Any system of rules creates incentives for particular behaviours. The current ability to appeal policies to the Environment Court creates a number of incentives that reinforce the very long time that it takes to complete a plan development process. From the outset of a plan development process the incentive for anyone other than the council is defer expenditure or effort and try to secure their objectives with the least possible effort or expenditure. This means that by the time of the council hearing few of the major submitters will have prepared a full brief of evidence to support their submission. The cost of a full brief of evidence is not incurred until after a submitter appeals. This is rational behaviour, but it invariably means that the council hearing does not benefit from the same level of evidence or research that would be presented to the Environment Court.

Despite the changes to the RMA intended to limit the scope for using it for anti-competitive purposes there is still ample incentive for large organisations, or sector groups to do so. For instance, where a particular sector has historically enjoyed very favourable access to resources and a new allocation mechanism is proposed that would benefit another sector, there is strong incentive to fight that and pursue every possible legal means to do so. This dynamic has been at play in all of the major water allocation decisions in the country. The competition for water between users creates powerful motivation to delay and frustrate any initiative that would change the allocation system. Within the current resource management system the easiest way to achieve this objective is to take the matter to the Environment Court and use every opportunity to delay a proposed plan becoming operative.

The current system also creates perverse incentives for local authorities. The current average time for developing a plan to the point that it becomes operative is in the order of eight years. That spans three electoral cycles. When a council considers its priorities and where its efforts might make the biggest difference there is little incentive to commit to an eight-year process that has substantial cost but indeterminate benefits. Every council knows that ultimately all of the major and contentious policy decisions that are provided for in their policy statement or plan will be referred to the Environment Court. The decision will then be made by a court with no accountability to the community and yet the council will be held accountable for the decision and the provisions of the plan – no matter what decision the Court makes. Councillors know that they can spend years of community service dealing with complex and challenging issues, with difficult community relationships and intractable conflicts only for a group of unaccountable people to make the ultimate decision for them.

The one single change that could dramatically improve the delivery of the resource management system would be to remove de novo Environment Court hearings on policy decisions. It is proposed that this change apply to all regional policy statements, all regional plans, all district plans and to all changes or variations to these policy statements and plans. Removing the ability to take appeals on policy matters to the Environment Court could remove at least third of the average time currently taken to develop a policy statement or plan and make it operative. This single change will remove the direct time associated with progressing appeals, mediation, preparing and presenting evidence and court decision making.

More importantly it will profoundly change the incentives, behaviour and engagement of all parties in the council process. The Environment Canterbury (Temporary Commissioners and Improved Water Management) Act 2010 removed appeal rights in order to streamline plan making. This move has resulted in significant behaviour changes. Parties now have a clear incentive to engage fully and early in the plan development process. Parties know that to be effective they need to influence the decision-makers (in this case the commissioners). That means they need to be able to put on the table as early as possible their concerns and their evidence. Parties are now incentivised to seek win-win outcomes and to work constructively with each other to get a result. This is a very different set of incentives than those described above. In this situation effective pre-notification work delivers the least cost outcome for all of the players. Equally, this approach ensures that for any party that is not happy with the plan as notified the council hearing will benefit from the best evidence that there is.

Local regulation and Māori

The Commission has found that on the available evidence, the current system for involving Māori in resource consent decisions does not appear to be working well for anyone, due largely to the costs and timeframes involved. Hawke’s Bay Regional Council agrees with this assessment, and considers that the longer this system, which relies on a reactionary process, is in place the greater the level of frustration likely to be experienced by all parties in the system.

Within the Hawke’s Bay Region Council has established a joint Regional Planning Committee with the representatives of the mandated Treaty claimant groups with an interest in the region. The Committee is based on equal representation of councillor and iwi members. It has created a true partnership between regional iwi and council and given the iwi representatives a seat at the policy-making table. They have a say in the setting of overall policy/rules for all natural resources in the region. So instead of having to react to a proposal once it has been made by an applicant they are at the decision making table setting the policies and rules under which that application must be made.

By focussing the input of Māori into regulation at the development stage the hoped for outcomes include: less likelihood of the fragmentation of regulation (through possible river boards), a reduction in the costs of decision making, greater certainty for stakeholders and the wider community, and the potential for reduced conflict and entrenchment of positions over resource management issues.

5. The Hawke’s Bay Regional Council thanks the Commission for the opportunity to make this submission.

Address for Service:

Liz Lambert

General Manager (Operations)

Hawke’s Bay Regional Council

Private Bag 6006

NAPIER

Ph (06) 835 9200

Email: liz@hbrc.govt.nz

HAWKE’S BAY REGIONAL COUNCIL

Corporate and Strategic Committee

Wednesday 30 January 2013

SUBJECT: Infrastructure Asset Insurance

Reason for Report

1. HBRC owns and administers approximately $145m of assets on behalf of the Hawke’s Bay community, for the protection of parts of the region against frequent flooding, to enable landowners to maximise productivity from their land and reduce the potential for community disruption resulting from flooding.

2. By their very nature these assets are at risk of damage in a major flood, and susceptible to damage from other natural hazard events. This document sets out how HBRC will mitigate the financial risk of disaster damage to infrastructure assets that it owns and administers on behalf of the Hawke’s Bay community.

3. Following a major disaster it is expected that there will be some assistance from central government, however the National Civil Defence Emergency Management Plan 2006 states that:

3.1. initial and primary responsibility for recovery rests with the local community

3.2. risk management and its associated costs should be carried by the local authorities that benefit and are best able to manage or mitigate the risk

3.3. local authorities have a responsibility to the extent possible to insure against and attempt to minimise or mitigate risk in advance of any event.

4. Central government funding is dependent on HBRC being able to demonstrate these requirements have been met.

5. The purpose of this report reviews how HBRC mitigates the financial risk of damage to its infrastructure assets, and recommends that HBRC retain membership of the Local Authority Protection Programme (LAPP) for its ongoing mitigation of financial risk.

Current situation

6. HBRC currently mitigates its financial risk through self insurance, commercial insurance, and through the Local Authority Protection Programme (LAPP). This is outlined in a report “Disaster Damage Risk Management Review” August 2001. This was further reviewed in 2006/07 and is documented in a series of Council briefing papers.

7. Current insurance markets are challenging and are expected to remain so for the next 3 to 5 years. The primary driver has been the Christchurch earthquake events of September 2010, December 2010, February 2011 and June 2011 which resulted in major change in how New Zealand is viewed by the global insurance markets. In 2011 Australia and NZ contributed just 2% to the global reinsurance fund but were responsible for 20% of the reinsurance payout. The global insurance industry has also been impacted by floods in Thailand, earthquakes in Haiti and Chile and tsunami in Japan and Chile.

8. Prior to the beginning of the 2011/12 financial year the annual commercial insurance premium and annual LAPP contribution providing cover for HBRC infrastructure assets totalled approximately $130,000 annually. This increased to $420,000 in the 2011/12 financial year. As a result of a change to the LAPP contribution, this has reduced to approximately $340,000 in the current financial year. There has however been an increase in the deductible that will apply to each claim.

HBRC Infrastructure Assets

9. HBRC owns or administers on behalf of the regional ratepayers infrastructure with a replacement value of $146,200,000.

10. These assets include:

10.1. 245 kilometres of stopbank

10.2. 540 kilometres of drains

10.3. 1637 groynes constructed from concrete units, wire rope and railway iron, or rock

10.4. 11 flood detention dams

10.5. 21 pumping stations.

11. These assets are administered under 22 separate flood control and drainage schemes which provide protection against frequent flooding and drainage outlets to some of the most productive land in the Hawke’s Bay Region, as well as to the urban centres of Napier, Hastings, Waipukurau and Waipawa, and other settlements throughout the region.

12. The Heretaunga Plains Scheme – Rivers is the largest of the Schemes with assets with a replacement value of $58,000,000, an annual maintenance budget of approx $1,450,000, and an annual capital budget of approximately $1,170,000, ($670,000 being capital loan repayments).

13. A major flooding event in any part of the region, and particularly the Heretaunga Plains could cause widespread devastation, economic losses and significant community disruption. The economic impact losses of 3 possible stopbank breach scenarios have been modelled. The direct industry production losses for these scenarios were:

13.1. Roys Hill $468m

13.2. Taradale $356m

13.3. Moteo $24m.

14. Regional impact modelling of these figures estimates total Hawke’s Bay-wide GDP/Value added economic impact losses, including flow-on multiplier impacts of $526m, $317m and $32m respectively. (Source: Upgrading of the Heretaunga Plains Flood Control Scheme – Economic Perspective – October 2010 – Economic Solutions Ltd.)

15. Scheme assets are in many cases high risk sacrificial assets (e.g. live tree edge protection, and groynes constructed of wire rope and rail and concrete units) and are exposed to damage in any significant flood event. While the Schemes are all designed to contain floods up to their design capacity, the assets may suffer damage in flood events. In fact they are designed with the expectation that they will incur some damage.

16. However there is a much greater risk of damage occurring to scheme assets in events that exceed their design capacity. Events which exceed the design capacity of any scheme, and particularly the larger schemes, i.e. Heretaunga Plains Flood Control and Drainage Scheme and the Upper Tukituki Scheme, are likely to result in extensive community disruption and have a significant impact on the region’s economy.

17. The Asset Management Plans set out the “Level of Service” provided by the schemes to the regional or local community. The Level of Service defines the standards to which the schemes are designed and maintained and amongst other things sets out the level of protection that is provided to the community. Following a disaster the same level of service would be expected to be reinstated.

Natural Hazard Risks

18. The Hawke’s Bay Region is at risk from a range of natural hazard events which have the potential to damage HBRC’s infrastructure assets and severely impact on the regional community and economy.

19. Figure 1 provides a comparison of risk between a range of natural hazard events to which the region is exposed.

20. Significant flood, earthquake and tsunami events all have estimated return periods of less than 1 in 1000 years. While the likelihood of a major event occurring that results in significant damage to the Upper Tukituki or Heretaunga Plains Scheme during the next 50 years is low, the consequences of such an event occurring would be significant.

Risk = likelihood of occurrence x consequence

21. Therefore the risk to the region of such an event may be high. Table 31 sets out the risk to Hawke’s Bay of natural hazard risks.

22. In considering the mitigation of risks to HBRC owned and administered infrastructure it is important to put this risk into the context of how the region will be impacted by such an event, and how this would impact on HBRC’s ability to repair or reinstate infrastructure that is damaged, and to fund that work.

23. Table 1 sets out the types of damage that could occur to HBRC owned infrastructure assets as a result of significant natural hazard event.

Table 1

Disaster type	Type of possible damage
Earthquake	· Slumping of stopbanks and drain sides · Liquefaction resulting in siltation of waterways · Ground movement impacting on drain grades · Ground movement reducing capacity of river flood channels · Structural damage to pump stations and other structures
Flood	· Damage to edge protection (live trees and groyne structures) · Lateral scour of river resulting in loss of berm land, edge protection works and possibly stopbanks. · Extensive siltation and sediment deposition impacting on flood capacity · Damage to environmental planting and other works · Stopbank failure with extensive scour in vicinity of failure · Siltation of drainage channels, culverts and pump inlets · Damage to pathways · Debris deposits throughout the Scheme areas
Tsunami	· Damage to stopbanks and river protection works in lower sections of rivers · Damage to East Clive sea exclusion bank, coastal groynes, and drainage channels and pump stations close to coast · Debris deposits in waterways
Volcanic ash fallout	· Build up of sediment in drainage channels · Abrasion of pumps

24. In addition to damage to HBRC owned infrastructure assets and their associated Schemes, there will be an expectation from the Hawke’s Bay public that HBRC will respond to issues associated with waterways throughout Hawke’s Bay.

Role of Central Government

25. Following a significant disaster central government can be expected to provide financial assistance to enable the community to recover, provided HBRC has appropriate risk mitigation provisions in place. The principles for central government financial support are set out in the Guide to the National Civil Defence Emergency Management Strategy. These apply whether or not a State of Civil Emergency is declared. The principles relevant to infrastructure assets managed by HBRC are:

25.1. The purpose of emergency recovery is to restore the affected community to a position in which normal social and economic activity may be resumed as quickly as possible. To achieve this, it is essential to have proper planning for risk management. The government considers local risks to be a local responsibility. Local authorities are primarily responsible for dealing with the impact of an emergency in their geographical and functional areas of responsibility. Government assistance is contingent upon that expectation.

25.2. The aim of any government assistance is to provide the minimum level of assistance required to restore to the community the capacity for self-help and to provide solutions that are the most appropriate long-term solutions. This does not imply an obligation to restore a community to a better state than existed before the emergency, and nor is there an obligation to restore to previous levels if those are not sustainable in the longer term. Upgrading of facilities to a level greater than existed previously may be considered as special policy in cases where such upgrading would decrease the likelihood of a recurrence of the civil defence emergency. Wherever possible, government assistance will be provided in accordance with existing departmental policies.

25.3. Specific principles for recovery assistance are:

25.3.1. government has a role in the recovery process after a significant civil defence emergency; and

25.3.2. any government response programme should be designed to restore the community capacity for self-help and be consistent with any government policies regarding mitigation and alleviation measures; and

25.3.3. initial and primary responsibility for recovery rests with the local community; and

25.3.4. risk management and its associated costs should be carried by the individuals, businesses, and local authorities that benefit and are best able to manage or mitigate the risk; and

25.3.5. individuals, businesses, and local authorities have a responsibility to the extent possible to insure against and attempt to minimise or mitigate risk, in advance of any event; and

25.3.6. government policies should encourage government organisations, local authorities, communities, businesses, and individuals in proper management practices such as

i. analysing local hazards and understanding risk exposure; and

ii. preventing the possibility of emergencies occurring, or reducing their likelihood or impact; and

iii. adjusting infrastructures and practices to reduce vulnerability, to mitigate the consequences, and to limit potential damage; and

26. The Guide states that the following may be eligible for government assistance.

26.1. Repair or recovery of essential infrastructure assets. These include water, stormwater, electrical, sewerage and gas facilities and other structures, such as retaining walls and tunnels upon which essential services depend. These assets must be local authority assets included on the local authority asset schedule, and which are not the property of trading utilities.

26.2. Repair or recovery of river management systems (including drainage schemes which are part of integrated river systems) where there is major community disruption or continuing risk to life.

26.3. Repair or recovery of other community assets where damaged as a consequence of the failure of flood protection schemes.

27. Government policy is to reimburse 60 percent of essential infrastructure recovery repair costs, above a threshold of 0.002% of net capital value in the case of regional councils.

28. The capital value of the region as at 30 June 2012 is $30,069,385,700. This means that central government will meet 60% of the cost above a threshold of $601,380 of restoring the community to a level where it has the capacity for self help, provided it is satisfied that HBRC has in place appropriate risk management provisions.

29. HBRC can plan on central government assistance for a disaster that impacts a large part of the region and particularly if the impact is focused on the Heretaunga Plains including the urban areas of Napier or Hastings. HBRC can also plan on no central government assistance if an event significantly impacts a relatively small part of the region, particularly a rural area; or has a relatively low level of impact across a significant part of the region. However, defining the threshold of when central government assistance will or won’t be available is not possible.

30. Through a series of scenarios discussed under the next section, an assessment has been made of HBRC financial exposure to a range of possible events.

Maximum probable loss and maximum financial exposure

31. The total replacement value of infrastructure owned or administered by HBRC is $146,200,000. HBRC annually reviews and updates the value of its infrastructure assets for audit and insurance purposes. This value is estimated on the basis that replacement of the assets would occur through an ordered programme of replacement. It provides for the replacement of assets in their current form and to the design standard to which they were constructed.

32. Because these assets are spread across the region any disaster event is unlikely to result in their total loss. However insurance industry experience from events that have impacted on other regions over the past decade is that estimated replacement values of assets requiring repair or replacement have been found to underestimate the actual cost of remedial works by a factor of 2 to 3. There are a number of reasons for this:

32.1. Design codes and construction detailing has changed since the assets were constructed. New codes and detailing add to the cost.

32.2. Construction is often more difficult as a result of other damage, loss of land, difficulty with access etc.

32.3. The construction industry can often be busy following a disaster with high demand for earthmoving machinery. This results in a less competitive market and therefore higher costs.

32.4. In house resources are above capacity and there is a need to commission consultants to undertake design work, prepare tender and contract documentation and supervise works.

32.5. There is insufficient time and resource to properly scope initial response and repair work before it commences, and therefore there is a substantial amount of work undertaken on the basis of hourly plant hire or consultancy rates.

32.6. Areas that are damaged in an event are more susceptible to further damage in subsequent events. In some instances temporary repairs will be made and there will be some delay before permanent repairs are completed, resulting in additional cost.

32.7. The situation has changed since the assets were constructed and technology used to assess options for providing a level of service that the asset was designed for has changed, resulting in an alternative design or approach being the most cost effective option.

33. The indicative estimates of probable loss, based on the expected impact of major events as assessed by senior HBRC operations and engineering staff, and utilising information provided by LAPP based on experience from other disaster events, are set out in table 2 below. If HBRC decides to remain with LAPP, then these estimates will need to be reviewed in accordance with LAPP “Flood Risk Assessment for Flood Control Schemes”.

Table 2

Return period flood	20 year average recurrence interval (ARI)	50 year ARI	100 year ARI	500 year ARI	1,000 year ARI
Estimated cost*	$785,000	$3,800,000	$7,200,000	$18,750,000	$41,550,000

* This estimated cost includes replacement of current assets at their indicative optimised replacement value (ref paragraph 37), the HBRC cost of responding to the disaster, and an allowance for unforeseen additional costs.

34. Repair costs are assumed to be up to 2.0 times replacement values. It should be noted that a more detailed assessment of potential loss will be required by LAPP if HBRC decides to retain LAPP as its infrastructure asset insurer. These estimates will then be used to review the HBRC insurance deductible and determine the change in risks associated with optimised replacement of assets over time.

35. A severe flood event that exceeds the capacity of the Heretaunga Plains stopbanks is considered to be the event that is likely to result in the biggest cost of repairs.

36. In 2005, HBRC responded to the devastation of significant areas of willow edge protection following its destruction by willow sawfly. At that time it was decided that the replacement of damaged edge protection to reinstate the level of service provided by the scheme should be achieved much more quickly than would be possible by planting new live tree edge protection. This was achieved using groynes constructed and wire rope and rail and concrete units with a range of tree species interplanted among these structures. The design was chosen as the most cost effective approach after a range of possible designs were tested through a physical model which would enable the level of service provided prior to the damage occurring to be returned in the shortest possible time.

37. Should extensive damage occur to live tree edge protection again, it will be reinstated using a similar approach to the work completed under the sawfly project. This is called the optimised replacement approach. The optimised replacement cost of critical reaches of edge protection on the Heretaunga Plains and Upper Tukituki Rivers increases the replacement value by $37m. Optimised replacement costs are not covered by the HBRC commercial insurance policy however LAPP has agreed to provide cover on the basis of optimised replacement costs. This is further discussed under the LAPP option.

38. HBRC’s financial exposure will depend on central government meeting 60% of the repair costs in accordance with the National Civil Defence Emergency Management Plan, and the amount of financial risk that HBRC wishes to transfer through insurance. Options for this are considered in the next section.

39. While HBRC can choose to transfer some financial risk through insurance, it must recognise that insurance may not cover all costs.

40. The estimates of financial exposure (ref paragraph 73) are based on a single event. Major floods can be the result in a change in weather patterns resulting in a series of events that either cause damage or aggravate damage that has already occurred in previous events. By way of example the Canterbury earthquake of November 2010 was followed by a series of aftershocks, including the February 2011 event that devastated Christchurch.

41. It is therefore prudent, in considering the level of financial exposure that HBRC is carrying, to be prepared for a series of damaging events.

Options for Risk Financing

42. There are four broad options for disaster risk financing. These are listed and discussed below.

42.1. Membership of a mutual fund eg LAPP

42.2. Commercial insurance

42.3. HBRC reserves

42.4. Post loss borrowing.

Membership of a Mutual Fund, e.g. LAPP

43. The Local Authority Protection Programme (LAPP) is the only established mutual fund available to HBRC. LAPP was established in 1993 as a mutual fund owned by Local Government. Membership of LAPP is recognised by central government as an effective way of complying with the National CDEM Plan requirements.

44. LAPP has the following features that allow it to build its reserves in a cost effective manner for the benefit of its members.

44.1. Its sole purpose is to pay local government claims following a natural disaster

44.2. It is a discretionary Trust governed by a Board of Trustees, all of whom are from local government

44.3. Given its purpose to assist local government by paying claims, it is a charitable trust and as a consequence its investment income is tax free

44.4. Being a not for profit organisation all surpluses are reinvested for the benefit of members

44.5. Fund administration costs, including risk management services to members, have been less than 5% of contributions paid to the fund.

45. The fund covers 40% of the cost of reinstatement of infrastructure assets for each member organisation above a deductible which is the highest of its central government deductible, its estimated 20 year flood risk estimate, and 50% of its 100 year earthquake risk. For HBRC the highest is the 20 year flood risk estimate which is $1,128,000. This deductible has been set for the 2012/13 year. Regional council members of LAPP are discussing the quantum of this deductible with LAPP. The deductible may be recalculated for 2013/14 and future years.

46. Payment of a claim by LAPP is not dependent on central government agreeing to meet its 60% share.

47. LAPP currently has 58 local authority members including 5 regional authorities. It covers a total of $18.6b in infrastructure assets. HBRC is currently a member of LAPP but has given notice of its intention to withdraw from the scheme. Under the LAPP trust deed this means that HBRC membership of LAPP shall terminate at the end of the funding year following notice, i.e. 30 June 2013. That notice may however be withdrawn at any time prior to this date.

48. LAPP has advised that 19 other members have also given notice of their intention to withdraw from the Scheme on 30 June 2013 and 1 new member has joined the Scheme. LAPP representatives do not believe that the Scheme would be any less viable if all of the member organisations that have given notice do withdraw from the Scheme. While a reduced membership may result in reduced income to LAPP, it will also result in reduced risk. LAPP believes that many of the organisations that have given notice will rescind those notices.

49. LAPP has requested HBRC to advise whether or not it intends to rescind their notice by 30 April 2013 to enable LAPP to secure the best terms for members who are known to be continuing with that membership in 2013/14.

50. Both Waimakariri District and Christchurch City are LAPP members. Following the 22 February 2011 Christchurch earthquake, LAPP advised its members that it had no further cover until the end of that financial year. LAPP advised that it will pay its 40% share for the Darfield (4 September 2010) and Christchurch earthquake events up to the limits of its available funds ($272.5m in a single policy period with one reinstatement – i.e. two large events in one policy period).

51. These two events occurred in one policy period (financial year) and resulted in extensive damage to the infrastructure of the largest LAPP member. The events were unprecedented and had return periods of between 2,500 and 10,000 years. The extent of liquefaction experienced had not been previously observed in an urban area. On 1 July 2010, LAPP had reserves of $40m and reinsurance cover for 40% of the cost of a claim up to $272.5m with one automatic reinstatement during the policy year. Prior to those events this was considered by LAPP and their reinsurers to contain generous contingency margins for any likely claim. The Christchurch experience has shown that these limits were in fact inadequate.

52. Prior to these events LAPP was providing its members with a 50% discount on premiums. In the 2011/12 year LAPP premiums doubled and all members were required to pay premiums without any discount. This means that the annual contribution for 2011/12 was 4 times higher than the 2010/11 financial year. HBRC contribution was approximately $80,000 in the 2010/11 year and $320,000 in the 2011/12 year.

53. Following consultation with its members, LAPP trustees chose to use for the 2012/13 year a model to calculate annual contributions which is a mixture of reinsurance and mutual self-insurance. This option will apply as LAPP rebuilds its reserves. Premiums have been substantially reduced (HBRC contribution is $195,000 for the 2012/13 year). All members have a collective exposure equal to 5 times their annual contribution per event (for any event that impacts on one or more of LAPP member organisations) with an agreed maximum of 10 times their annual contribution per year.

54. LAPP provides cover for the majority of constructed assets that make up HBRC’s flood control and drainage schemes, including the following subject to specific nomination by the member.

54.1. Live tree edge protection (where this is part of a stopbanked scheme)

54.2. Reinstatement of land within 8m of the stopbank toe

54.3. Silt clean-up costs from drains and channels.

55. In addition, for the same event LAPP covers 40% of the costs for temporary emergency repairs and response activities focused on:

55.1. Taking the necessary precautions or preventive actions (whether by evacuation of people, by construction, by demolition, or by any other means) to reduce the immediate danger to human life, where those actions were begun during the response period

55.2. Taking precautions or preventive actions with a view to reducing the impact of the event, where those actions were begun in the immediate period leading up to the event.

56. Staff have held discussions with representatives of LAPP, who have advised that LAPP will provide cover for optimised replacement value of assets, provided that they are declared by HBRC and appropriate contributions paid.

57. Staff will explore this possibility further should Council agree to remain a member of LAPP.

Commercial Insurance

58. HBRC currently has commercial insurance covering 60% of the cost of reinstatement of its assets up to a maximum of $23.5m, and with a deductable amount of $3.5m. This means that if HBRC assets nominated for cover were damaged such that their replacement value equalled or exceeded $23.5m, Council would receive an insurance payment of $12.0m. (Calculated @ ($23.5m-$3.5m) x 60% = $12.0m.)

59. The availability and cost of insurance cover, especially for high risk assets such as flood control schemes, depends on the insurance cycle. Insurance is subject to a cycle of high and low costs depending on, but not limited to, the level of natural disaster claims worldwide particularly in the developed and therefore more highly insured countries.

60. In the early 1990s commercial insurance was not available for “generally uninsurable” assets. This included most infrastructure assets. Since that time limited cover from insurance companies has become available. In “soft” conditions, commercial insurance premiums are low and insurers are more willing to cover a wide range of risks. However, following the Canterbury earthquakes, there has been a reassessment of the risks in New Zealand and the market has “hardened” significantly. This has resulted insurance and reinsurance becoming less easy to obtain and premiums and deductibles being higher.

61. Commercial insurance specifically excludes growing crops. This means that live tree edge protection which is an important part of major flood control and drainage schemes is not insured. Live tree edge protection is vulnerable to damage in any flood event and forms a major part of HBRC’s assets.

62. Examples of other repair or recovery costs that are uninsurable by commercial insurers are:

62.1. Event response costs

62.2. The need to reinstate a river into its old course

62.3. Increased length of stopbank as a result of a change in the course of a river, or the event rendering some of the ground unsuitable for the founding of a stopbank

62.4. The need to return a river channel to its previous capacity after agradation or changes in river profile has resulted in a reduced capacity

62.5. Additional costs resulting from subsequent flood events causing ongoing damage to river works

62.6. The cost of regrading drainage channels or building up stopbanks after land movement as a result of an earthquake

62.7. The cost of undertaking extensive reviews of scheme areas and assets to identify and revise flood risk areas, and the cost of any new assets needed to mitigate the risk of flooding in areas newly prone to flood risk

63. HBRC currently holds commercial insurance to cover the possibility of central government not agreeing to meet 60% of the repair costs in accordance with the policy set out in the National Civil Defence Emergency Management Plan. In recent years central government has shown a willingness to provide financial support following significant disaster events.

HBRC Reserves

64. A number of councils are understood to be using the strength of their own balance sheet to cover their potential risk. HBRC mitigates a portion of its own risk through its requirement that each flood control and drainage scheme hold its own disaster reserve. HBRC also holds a regional disaster reserve which is designed to meet the difference between the individual Scheme disaster reserve and the deductible value of commercial insurance. These reserves allow HBRC to obtain commercial insurance with a relatively high deductible which substantially reduces commercial premiums.

65. However industry advisors suggest that many of those councils which have chosen to cover their risk through the strength of their balance sheet have less than $5m set held in reserves for disaster recovery with larger councils holding $10m. They advise that in their experience reserve requirements are often set at significantly less than required, and quote Christchurch City as having loss estimates prior to the February earthquake of between 10 and 20% of the actual expected repair cost.

66. It is very difficult to estimate the level of reserves that may be required as large natural disasters are relatively infrequent and it is difficult to accurately predict their impact. Utilising the organisation’s balance sheet to meet the full cost of a disaster can result in exposure of the organisation to significant financial risk. This approach is also unlikely to meet the criteria set for central government under the Guide to the National CDEM Plan as an adequate means of providing for the cost of restoration of infrastructure assets. It could therefore result in central government declining to meet 60% of the cost.

67. The use of HBRC reserves for meeting the cost of natural hazard events that occur on average more frequently than once every 20 to 25 years is considered appropriate, however staff recommend that HBRC have alternative means of disaster risk financing for larger less frequent events.

Post Loss Borrowing

68. Some local authorities that have been impacted by a natural disaster have had to use debt financing to fund the reinstatement of their assets, especially if they have not made adequate provision to cover these costs in advance.

69. A proposal to finance disaster repairs through post loss borrowing may not be recognised by central government under the Guide to the National CDEM Plan as an adequate means of providing for the cost of restoration of infrastructure assets following a natural disaster, and therefore result in central government declining to meet 60% of the cost in accordance with the provisions of the Plan.

70. There is uncertainty on the availability and cost of debt financing following a natural disaster, especially if economic conditions are weak. The ability and willingness of the community to pay for increased debt through higher rate levies will determine how much can be borrowed and the timeframes.

71. There may however be a need for some post loss financing should a decision be made to reinstate assets to a higher design standard and/or with superior materials than the damaged assets, or if asset repair costs have been underestimated.

Consideration of Options

72. Table 3 is a summary of the pros and cons of each of these options.

Table 3

Option	Advantages	Disadvantages
1. Mutual fund (LAPP)	· Provides cover for wide range of infrastructure assets, including other costs that are likely to arise in any response to a natural disaster. · Has relatively low deductible. · Will cover costs based on optimised replacement value. · Aligns with central government policy expectations · Governed by local government representatives specifically to meet local government costs following a disaster.	· Decisions on fund management are made by LAPP trustees and not Councillors. · There is a contingent liability which may require HBRC to contribute to the cost of a disaster in a district or region outside HB. · Annual contribution can vary depending on need to build fund and reinsurance costs. · Can become depleted by significant event elsewhere in NZ, and may have difficulty in sourcing reinsurance following multiple claims.
2. Commercial Insurance	· Relatively low premiums for high level of potential claim. · Able to secure insurance at relatively short notice.	· High deductible · Will only cover costs for specified assets – there is likely to be significant costs not covered by commercial insurance. · Does not provide cover for live tree edge protection. · Premiums can fluctuate depending pressure on reinsurance markets.
3. HBRC reserves	· No ongoing premiums or contributions, except as structured within HBRC. · Unlimited flexibility in how disaster funding is paid.	· Difficult to financially justify holding significant reserves in case of a major disaster. Money may be more effectively used for other HBRC activities. · Significant risk of exceeding reserve amount, or having inadequate cover for single or series of disasters. · A disaster will have large financial impact on HBRC reserves at a time when rating income will be most under pressure, due to potential economic impact of event on region. · Unlikely to meet expectations for self help required as prerequisite for central government assistance.
4. Post Loss Borrowing	· No ongoing premiums or contributions, except as necessary to secure loan facility.	· Borrowing for each flood control and drainage scheme will place significant ongoing financial burden on scheme ratepayers who will be under financial stress. · Unlikely to meet expectations for self help required as prerequisite for central government assistance.

HBRC Financial Exposure

73. HBRC financial exposure to an event based on the estimated level of damage is set out in table 4.

Table 4

Return period flood	20 yr ARI	50 yr ARI	100 yr ARI	500 yr ARI	1,000 yr ARI
Estimated cost	$785,000	$3,800,000	$7,200,000	$18,750,000	$41,550,000
Costs met from
Option 1
Central government	$81,000	$1,860,000	$3,800,000	$9,690,000	$21,570,000
LAPP	0	$968,000	$2,270,000	$6,190,000	$14,110,000
HBRC	$704,000	$972,000	$1,130,000	$2,870,000	$5,870,000
Option 2
Central government	$81,000	$1,860,000	$3,800,000	$9,690,000	$21,570,000
Commercial insurance	0	0	0	$1,120,000	$5,090,000
HBRC	$704,000	$1,940,000	$3,400,000	$7,940,000	$14,890,000
Option 3
Central government*	$81,000	$1,860,000	$3,800,000	$9,690,000	$21,570,000
HBRC	$704,000	$1,940,000	$3,400,000	$9,060,000	$19,980,000
Option 4
Central government*	$81,000	$1,860,000	$3,800,000	$9,690,000	$21,570,000
HBRC	$704,000	$1,940,000	$3,400,000	$9,060,000	$19,980,000

*As stated above these options may not meet the expectations of central government in terms of the National Civil Defence Emergency Management Strategy. This additional degree of uncertainty should be noted when considering these options.

Funding of HBRC share

74. HBRC’s current policy (February 2007) is for the HBRC share of the cost of a disaster to be provided for in a combination of ways, including:

74.1. Disaster Reserve Investment Funds accumulated by the Regional Community

74.2. Disaster Damage Investment Funds accumulated by each individual Council managed Flood Control and Drainage Scheme

74.3. A proportion of annual maintenance budgets of various Flood and Drainage Schemes able to be redirected to repairing disaster damage.

75. These sources of funds are to be referred to as Disaster Damage Insurance Excess Reserves.

Disaster Damage Reserves

76. These reserves will be available to deal with any situation resulting in damage to infrastructure assets regardless of the level of financial loss but within specified criteria.

77. The disaster reserves for each scheme shall be built up to a level in excess of the minimum amount required to meet the costs of a single disaster. The disaster reserve for each scheme may be capped at a target level of the greater of 1.5 times the level required to meet the scheme excess of one disaster event, less 20% of each scheme’s current years maintenance budget; or the level required to meet the scheme excess for one disaster event. Furthermore, all schemes with infrastructure assets will have a disaster reserve of at least $5,000.

78. Table 5 sets out the required Scheme excess and target levels. If any scheme account ends with a significant surplus in any one year and the disaster reserve target level has not been achieved, consideration will be given whether or not to increase the level of contribution made to the scheme disaster fund.

Table 5

Scheme

Excess

(2006 asset values)

Maintenance expenditure able to be redirected

Target level for disaster reserve

Balance at 30 June 2006

Heretaunga Plains Rivers

Heretaunga Plains Drains

Napier Meeanee

Brookfields Awatoto

Pakowhai

Muddy Creek

Haumoana

Karamu

Twyford Raupare

Tutaekuri Waimate

Puninga

Upper Tukituki

Makara

Paeroa

Poukawa

Esk

Whirinaki

Ohuia Whakaki

Te Awanga

Kopuawhara

$654,004

$89,468

$10,681

$15,581

$14,623

$18,980

$189,943

$39,485

$41,115

$6,953

$408,690

$30,898

$20,735

$12,452

$5,000

$9,343

$11,332

$7,466

$5,000

$100,000

$30,000

$7,500

$11,500

$17,000

$9,000

$59,500

$16,500

$20,000

$8,000

$67,500

$2,500

$3,100

$2,000

$1,000

$2,800

$1,000

$881,066

$104,202

$10,681

$15,581

$14,623

$19,470

$225,415

$42,727

$41,672

$6,953

$545,535

$43,847

$28,002

$15,578

$5,500

$13,014

$14,198

$10,199

$6,500

$708,191

$55,482

$6,009

$13,523

$12,091

$115,754

$24,816

$21,078

$4,192

$266,696

$25,547

$23,912

$10,168

$11,834

$9,064

$10,126

$4,353

$100

79. Note these disaster reserve caps are now adjusted annually to take into account inflation.

80. The Regional Disaster reserve will:

80.1. Meet any extraordinary costs of managing the response and recovery to a disaster event.

80.2. Meet 60% of any unfunded portion of asset reinstatement cost following a disaster event.

81. The Regional Disaster Reserve will generally be managed such that the value of its investments (including any cash) remains within the range $2.75M to $3.75M.

82. If investments exceed $3.75M in value then some investments may be sold and the proceeds credited to Council’s general funding operating account. The Chief Executive of Council has discretion to decide what investments should be sold, and the timing of any sale, and is required to report any sales to Council.

Criteria for the Build-up, Use and Maintenance of Disaster Damage Insurance Excess Reserves

83. Reserves will always be a funding call of last resort e.g. if priorities can be re-established to cover the expenditure, or if unbudgeted income is received these sources of funds will be used.

84. Reserves will be used to meet the cost of reinstatement of infrastructure assets (to an equivalent standard to that in place before the damage was incurred).

85. The initial cost of restoring the Council’s infrastructure assets (to be referred to as Scheme Excesses) will be met by each relevant Flood Control and Drainage Scheme to a maximum level per Scheme of 2.5% of the replacement value of edge protection, plus 2% of the replacement value of stopbanks and detention dams plus, 1.5% of the replacement value of all drainage assets of each Scheme. This obligation will be met by Disaster Damage Investment Funds and annual maintenance budgets able to be redirected to repairing disaster damage.

86. All efforts will be made to maximise any disaster recovery contributions from Central Government or any other sources.

87. Income earned on Reserve investment funds may be used to meet the cost of commercial insurance cover taken on Council “generally uninsurable” infrastructure assets.

88. Income from all Disaster Reserve and Disaster Damage investments will be credited to the respective Reserves until such time as the Reserves build up their required level of funding. At such time as each Reserve meets the target level, income will be available to help meet the funding requirements of Council or Flood and Drainage Scheme annual operational expenditure.

89. Once Reserves have met their target level of funding and are subsequently reduced below the scheme excess the Reserve must be reinstated to the target level for each disaster reserve within 10 years.

90. Based on this policy the HBRC contribution to the cost of a disaster under Option 1 LAPP could be met as set out in table 6. Note that these estimates assume significant damage to the Heretaunga Plains Scheme and Upper Tukituki Scheme, but could vary considerably depending on the location of the area most impacted by the event and the type of damage incurred. They should therefore be considered indicative only.

Table 6

Return period flood	20 yr ARI	50 yr ARI	100 yr ARI	500 yr ARI	1,000 yr ARI
Estimated cost	$785,000	$3,800,000	$7,200,000	$18,750,000	$41,550,000
Option 1
HBRC exposure	$704,000	$972,000	$1,130,000	$2,870,000	$5,870,000
Costs met from
CDEM operational budget	$12,000	$25,000	$50,000	$100,000	$150,000
Other operational budgets	$40,000	$60,000	$70,000	$100,000	$200,000
Scheme operational budget	$150,000	$167,000	$200,000	$200,000	$250,000
Scheme disaster reserve	$502,000	$620,000	$660,000	$1,000,000	$1,200,000
Regional disaster reserve	0	$100,000	$150,000	$1,470,000	$3,500,000
Other HBRC reserves or reduction in work programmes					$570,000
Total	$704,000	$972,000	$1,130,000	$2,870,000	$5,870,000

Conclusions

91. Insurance cover for HBRC infrastructure assets has been assessed by staff. Their conclusion is that:

91.1. LAPP provides a cost effective insurance cover for HBRC infrastructure assets

91.2. Commercial insurance is no longer essential as there is now a stronger commitment from central government to meet a share of the disaster cost as set out in the National Civil Defence Emergency Management Plan.

92. Staff therefore recommend that Council:

92.1. Rescinds its notice of intention to withdraw from LAPP

92.2. Notes within its accounts the contingent liability associated with being part of a mutual insurance scheme

92.3. Continues to maintain a level of self insurance through Scheme disaster reserves and the Regional disaster reserve

92.4. Does not renew its commercial insurance for infrastructure assets effective from the 2013/14 financial year

92.5. Continues to work with LAPP to improve estimates of flood risk to HBRC infrastructure assets, and to develop optimised replacement valuations for all assets

92.6. Reviews its self insurance arrangements to provide the most cost effective cover for all HBRC infrastructure assets.

Decision Making Process

93. Council is required to make a decision in accordance with the requirements of the Local Government Act 2002 (the Act). Staff have assessed the requirements contained in Part 6 Sub Part 1 of the Act in relation to this item and have concluded the following:

93.1. The decision does not significantly alter the service provision or affect a strategic asset.

93.2. The use of the special consultative procedure is not prescribed by legislation.

93.3. The decision does not fall within the definition of Council’s policy on significance.

93.4. No persons are directly affected by this decision.

93.5. Options that have been considered are as outlined in this paper.

93.6. The decision is not inconsistent with an existing policy or plan.

93.7. Given the nature and significance of the issue to be considered and decided, and also the persons likely to be affected by, or have an interest in the decisions made, Council can exercise its discretion and make a decision without consulting directly with the community or others having an interest in the decision.

Recommendations

The Corporate and Strategic Committee recommends that Council:

2. Rescinds its notice of intention to withdraw from LAPP.

3. Notes, within its accounts, the contingent liability associated with being part of a mutual insurance scheme.

4. Continues to maintain a level of self insurance through Scheme disaster reserves and the Regional disaster reserve.

5. Does not renew its commercial insurance for infrastructure assets effective from the 2013/14 financial year.

6. Continues to work with LAPP to improve estimates of flood risk to HBRC infrastructure assets and therefore reduce the LAPP deductible, and to develop optimised replacement valuations for all assets.

7. Reviews its self insurance arrangements to provide the most cost effective cover for all HBRC infrastructure assets.

Mike Adye

Group Manager

Asset Management

Paul Drury

Group Manager

Corporate Services

Attachment/s

There are no attachments for this report.

HAWKE’S BAY REGIONAL COUNCIL

Corporate and Strategic Committee

Wednesday 30 January 2013

SUBJECT: Local Government Reform - Efficiency Taskforce Report

Reason for Report

2. The first four points were part of a work programme which culminated in the first piece of legislation which was passed in December 2012. The Act provides for:

2.1. A new purpose statement for local government

2.2. New financial prudence requirements

2.3. Changes to the way councils are governed, and

2.4. Changes to the process for reorganising local government.

3. Work is also underway on the second phase of the reform programme which now consists of six streams of work, which are:

3.1. An efficiency taskforce

3.2. An expert advisory group on local government infrastructure efficiency

3.3. A review of development contributions

3.4. A framework to guide the allocation of regulatory roles between local and central government

3.5. Investigation of a dual or two-tiered governance model for local government

3.6. Development of options for a performance framework for local government.

4. The last two streams of work have been added since the March 2012 announcement.

5. Each of these streams of work will feed in to a second amendment Act in late 2013. There may also be changes which can be made without legislation. These will likely include process and practice changes.

6. The efficiency taskforce has looked at the effectiveness and efficiency of the planning, consultation and financial reporting requirements and practices local government faces. Its report has now been completed and is under consideration by the Minister and officials. This briefing paper provides a summary of the key recommendations from the Efficiency Taskforce Report for the Committee’s information.

Terms of Reference

7. The Local Government Efficiency Taskforce (the Taskforce) was appointed to provide independent advice to the Minister of Local Government on how to streamline local government consultation, planning, and financial reporting requirements and practices under the Local Government Act 2002 to be more efficient.

8. The Terms of Reference for the Taskforce required reporting on options specifically to streamline local government consultation, planning, and financial reporting requirements and practices under the Act to be more efficient. The advice of the Taskforce will focus on:

8.1. whether the current consultation requirements and practices need amendment to be more useful, practicable, and effective, and if so, how. This includes if:

8.1.1. amendments are required to the processes for making decisions and considering community views; the special consultative procedure; and the policy on significance

8.1.2. current consultation requirements and practices are fit for purpose, particularly in today’s technological environment

8.1.3. mayors should have an explicit role of ensuring effective community engagement and powers to establish processes and mechanisms for the council to engage with the district

8.2. whether the current planning requirements and practices (particularly for long term plans) need amendment to be more useful, practicable, and effective, and if so, how

8.3. whether the current financial reporting requirements and practices (particularly for auditing long-term plans) need amendment to be more useful, practicable, and effective, and if so, how and

8.4. whether there is duplication in the consultation, planning and financial reporting requirements and practices under the LGA02 and other relevant legislation.

9. The Taskforce was asked to also advise on other opportunities (under the Act or non-legislative) to build efficient local government, in relation to:

9.1. how to reduce the costs of procurement; and

9.2. establishing processes to utilise and share good practice and innovation between councils.

Taskforce Findings

10. The Taskforce’s report is available online at www.dia.govt.nz. It contains 32 recommendations which the Minister is now considering. A summary of the key findings and subsequent recommendations (in italics) is as follows.

Representative versus participatory democracy

11. The drafting of the Act does not provide clearly for a representative democracy model as is intended, but rather is blurred and suggests that the elected decision makers have a primary role to implement the wishes of the community and not to assume a role of decision making on behalf of the community. This can result in extensive consultation when it is not required.

Amend relevant provisions of the Act (in particular section 10(A) to reaffirm that a representative model of local government is the intention of the Act.

Decision-making and consultation

12. The decision-making and consultation provisions in the Act are overly-prescribed and detailed leading to inefficiencies and delays in decision-making. Greater discretion should be given to councils so they have flexibility to respond to, and engage with, their communities in an appropriate manner.

Review the decision-making and consultation provisions of the Act (particularly part 6) to provide councils with a clear and flexible mandate to determine where or not to engage with the community and the most appropriate way to do so;

13. The Taskforce considers the prescribed decision making provisions of Part 6 have extended the potential for judicial review. There is a clear risk that they have the potential to contribute to slower, less effective, more risk-averse decision-making by councils, resulting in unnecessary levels of consultation that cause undue delay and increased costs.

Repeal the prescriptive rules related to decision-making in section 77 to 79 of the Act and replace the rules with a clear set of relevant principles for councils to consider when making decisions;

14. It is important that the Act is amended to make a very clear distinction between engaging with the community or considering community view and a legal duty to undertake consultation.

Ensure that the new decision-making and consultation provisions amending Part 6 of the Act define the decision-making discretion of councils in a manner that limits or confines potential scope for justiciable issues, or grounds for judicial review.

Ensure that relevant provisions of the Act requiring consideration of community views do not create a legal duty to consult.

15. The use of the special consultative procedure should be limited to the adoption of, and amendments to the long-term plan. In all other circumstances it should be up to the individual council to determine the appropriate consultation process to reflect the matter or issue in question.

Retain mandatory use of the special consultative procedure for the adoption and amendment of long-term plans. Repeal the provisions which make use of the special consultative procedure mandatory for other council consultation.

16. It is preferable that councils continue to determine “significance” and the thresholds and criteria for thewy way they will engage or consult with their communities. An engagement policy would provide the community with certainty about the engagement process to be followed given a particular set of circumstances.

Amend the Act to require councils to include an engagement and significance policy in the long-term plan.

17. The current consultation requirements in the Act are geared towards more traditional methods of consultation rather than the use of technology. Amending the Act to remove barriers to technology will ensure that councils have the flexibility to move with technology and utilise it as appropriate to engage and consult. It will increase councils’ accountability and transparency, enabling councils to connect with groups they may not have otherwise.

Review and amend the Act to ensure there are no barriers to the innovative use of technology in council decision-making, engagement and consultation processes.

Planning and Financial Reporting

18. The current purpose of Long-Term Plans is not efficient and effective, but a confusing mixture of strategic and operational obligations that does not encourage the “right debate” with communities. To be of value a long-term plan should be strategic in nature, connecting the council with its community debate around choices and priorities and provide the basis for long-term decision-making and accountability.

Amend the statutory purpose of long-term plans to make the plans a strategic document that provides the key options and choices for the community. Long-term plans should focus primarily on:

- Outlining the long term vision, strategies, priorities and the actions required to support these;

- A high level statement of financial strategy;

- Clear communication of priorities, policies and proposed actions; and

- Providing a clear basis for accountability of a council to the community.

19. Changes to the content of long-term plans are required to ensure they are more streamlined, fit for purpose and accessible to the community. A range of recommendations is made to deliver this and to significantly reduce detail, complexity, prescription and detailed management or operational issues.

20. Re-aligning the long-term plan with the election cycle will allow a newly elected council to prepare and consult on a long-term plan that will form the basis for their accountability with the community over their term of office.

Amend the Act to require a long-term plan to be adopted on 30 June (nearly nine months) after the election of a new council.

21. The scope of current audit requirements should be reduced to focus on the quality of forecasting assumptions and other information used to prepare the long-term plan.

Revise the Act to ensure the scope of the audit of long-term plans aligns and is consistent with the revised purpose and content of such plans.

22. Prior to the 2002 Act the annual plan was only intended to be an annual budget and one means for making amendments to the long-term plan. The 2002 reforms failed to amend its purpose and as a result there is still a requirement to consult on it, creating considerable duplication and opportunities for re-litigation.

Remove the statutory requirement for councils to produce an annual plan (section 95) and replace this obligation with a requirement to produce an annual budget with the same purpose (as defined in section 95(5)(a) and (b)).

Integration of Planning

23. One of the major difficulties in relation to better integrating the separate statutory planning required by the Local Government Act 2002, the Resource Management Act 1991 and the Land Transport Management Act 2003, is that each act has a different central purpose and contains different functions and components which are fundamental elements of comprehensive local government planning. Although there is some integration across the legislation, achieving the efficiencies associated with a comprehensive planning approach would benefit from better linkage and alignment between these three key Acts.

As part of the current Government reviews of local government and resource management legislation give priority to ways in which:

- the planning functions and associated consultation requirements of councils pursuant to local government, resource management, transport and other legislation can be better integrated;

- the overall number of local government, resource management and other relevant plans can be reduced and prepared in more streamlined, consistent and readily understandable formats; and

- spatial planning could be used as a way to better integrate plans across different statutory regimes.

Sharing Innovation and Collaboration

24. The current provisions of the Act provide only limited encouragement for sharing innovating and collaboration between councils. This may be redressed by strengthening the provisions in section 14(1)(e) of the Act and by the government exploring ways to change council practice on innovation and collaboration.

Amend the Act to establish a clear mandate and incentives for councils to share innovation and collaborate to improve efficiency and performance.

Explore ways to change council practice to encourage the sharing of innovation and collaboration.

Develop additional ways in which dissemination of good practice guidelines to assist councils can be better coordinated between central and local government, including through the establishment of a central database where guidance can be located.

Reducing the cost of procurement

25. There is no particular legislative guidance on procurement within the Act. There is however considerable work being undertaken in this area that may well change the processes of procurement on major council expenditure areas, i.e. the Road Maintenance Task Force, the Infrastructure Efficiency Expert Advisory Group and National Infrastructure Unit work on water and wastewater reforms.

Explore whether reducing the costs of procurement could be achieved through a requirement for councils to develop procurement policies and methods in relation to core services consistent with the Government’s procurement reform programme.

Conclusion

26. The Report from the Efficiency Taskforce is one of the strands of work being carried out to inform Phase 2 of the Government’s ‘Better Local Government Reform.’ As yet it is not known which of the Taskforce’s recommendations will be supported by the Government through to legislation. This will become clearer later in 2013.

Decision Making Process

27. Council is required to make a decision in accordance with Part 6 Sub-Part 1, of the Local Government Act 2002 (the Act). Staff have assessed the requirements contained within this section of the Act in relation to this item and have concluded that, as this report is for information only and no decision is to be made, the decision making provisions of the Local Government Act 2002 do not apply.

Recommendation

1. That the Corporate and Strategic Committee receives the report on the Findings of the Local Government Efficiency Taskforce.

Liz Lambert

General Manager Operations

Attachment/s

There are no attachments for this report.

Agenda Item	Action	Person Responsible	Due Date	Status Comment
5 Action Items	Councillor workshop to discuss Phase 2 Prosperity report in depth to be scheduled late January 2013	AN/LL		To be held 31 January 2013
11 General Business	Request for report on Lake Tutira water quality to E&S 5 December	IM		Verbal report and presentation made 5 December at Environment & Services Committee meeting
11 General Business	Request for staff report early in New Year on development of the 2013 Environmental Awards	LL		Memorandum outlining history of environment awards and proposals for environmental recognition in 2013 sent to councillors on 21 December 2012.

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