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BUSted

Paul Paynter09 June 2014

The council has muffed it again! But can you guess what I’m referring to? Is it the art deco buses, the huge losses constantly made by the Aquarium and Splash Planet, the MTG fiasco, inefficiencies at Napier Port, the Ruataniwha dam’s business case or the teetering walls of the Opera House?

Our elected officials are not inherently evil or stupid – OK, so the odd one is stupid – but mostly they are just seduced by the idea that they know how to do wonderful things for the community. Worse, there are endless community groups with similar ideas who will grovel at their feet for funding. And all this is because taxation, in the form of rates, is the easiest money you’ll ever get your hands on.

So how do councils end up going off on so many foolish tangents? What should councils do and what should they avoid doing? Recent history gives us a guide to where it all went wrong.

Little more than a decade ago, then Prime Minister Helen Clark was criticised for spending money on the America’s Cup. “Is this the role of Government to fund yacht races for fat cats?” she was asked. Clark replied, cool and adept as always, “the government’s role is whatever the government defines it to be.” Really!? We vote these guys in to do whatever they feel like? But she was right. That seems to be the case these days.

About the same time, local government legislation was changed dramatically and, true to her word, local bodies were given ‘powers of general competence’. That meant they could undertake pretty much any lawful activity a citizen could do – undertake works, start a business or enter into any lawful transaction. This was a big change when compared to the past, where central government kept local bodies on a short leash.

These ‘powers of general competence’ worried a great many commentators, but they were told not to worry. But Parliament did worry, and in 2012 passed legislation replacing ‘powers of general competence’ with this narrower statement of the purpose of local government: “to meet the current and future needs of communities for good-quality local infrastructure, local public services, and performance of regulatory functions in a way that is most cost-effective for households and businesses.” Hmmm … still plenty of wiggle room.

Consultation a waste of time

In any event, before a council does anything, they are required to ‘consult’ with their constituents. Basically this suggests a democracy, where citizens and councils work together for the betterment of the community.

Such a democracy would be a wonderful thing – except for the age-old problem. Once elected, governments ignore the people as best they can and do whatever they feel like – fund yacht races, sell off state assets, or hand out interest-free loans. I can hear Helen Clark cheering in the distance.

The problem with ‘consultation’ is that it’s tedious and often a waste of time. Often the only people that make a submission are greenies, naysayers, Mäori, special interest groups, delusional do-gooders and retired people with too much time on their hands. The majority of submissions are also negative, as we only get motivated to engage with government if we think they’re getting it wrong.

Council officers sternly consider these public submissions, make the occasional tweak and push on regardless. That’s because politics is, as an American commentator once observed, ‘based on the indifference of the majority’.

To really understand the views of the community, you might think councils would have to run things like a giant committee or a perpetual public referendum. The only example of this that actually seems to work exists in the Swiss cantons. In many of these cantons, new local government spending programmes over a certain size must be approved by a referendum. Such an approach would have seen a fair few white elephant projects voted down in Hawke’s Bay. Then again, the Swiss might just be smarter than we are.

More commonly, democracy seems to work best when you elect people and just let them get on with it. The proviso is that you keep them on a very short leash. You can only safely ignore them between elections if you’ve already strictly limited their budget and activities. As things stand, councillors could, at any moment, invest in a dago dancing school or build a perfect replica of the Taj Mahal, completely justified of course by visitor fees, jobs created and ‘downstream’ economic benefits … each estimate inflated by compliant consultants.

Stick to your knitting

The age-old adage of business is ‘stick to your knitting’. For councils, that’s street lights, water, parks, building regulations, streams and waterways, etc – pure public good functions. Beyond these core activities some simple rules should be imposed on councils.

First, if the private sector does it, don’t do it. People in the private sector run profitable bus companies and tourist activities, so local government should NEVER do these things.

Second, if the private sector can be encouraged to do something, encourage them rather than doing it yourself.
For example, make an operational contribution, but no capital investment. If there is a community benefit in running say, a Napier-Hastings bus service, but the numbers don’t quite stack up, pay a private company a top-up per trip to help underpin it. This avoids any major capital investment by council and limits the operational exposure.

Another example, make the capital contribution, but avoid operational losses. If Hastings needs a decent city hotel, council could potentially fund construction, but only on the back of a long-term operational lease to a reputable hotel chain. The community good aspect may mean council can accept a return of say 7%, where a commercial investor requires 10%. In this way ratepayers have reasonable confidence of a modest return on their investment, but are protected from operational losses.

Even this last option makes me feel a little queasy. After all, council could have built a leaky hotel, or the hotel company might go out of business and a new tenant proves difficult to secure. Every time you spend ratepayers’ money, there’s a chance things will go wrong. So the golden rule is – don’t spend ratepayers’ money.

You have probably realised that councils have broken these rules with the art deco buses and splash planet. They can reasonably argue that the private sector won’t invest in a museum or an aquarium, despite some evidence to the contrary, but they do invest in buses and parks with water slides. The best deal you can get in such circumstances is to get the private sector to make the capital investment on the back of a council subsidy. If they prosper, then that’s great; but if they go belly up, it might be even better.

The art deco buses are a fine example.

The NCC would have been well advised to find an investor to fund a more sensible $800,000 art deco bus company. To incentivise this they might offer a ten year $100,000 per annum subsidy. Despite this generosity let’s say the art deco bus company goes broke after just two years. The assets are liquidated and sold for perhaps $200,000. Whoever purchases the assets at that price has a much lower capital burden and is well placed to make a financial go of it. Better still, the council also has no arrangement to subsidise them and so the ratepayers have also had a win.

This scenario has played out many times before. It’s particularly common in ‘romantic investments’ like wineries, where the second or sometimes third owner buys the asset cheap enough to be profitable.

When large investments go wrong, there will be blood on the floor.

Please, councils, make sure it’s not ratepayers’ blood.

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Paul Paynter09 June 2014

One response to “BUSted”

  1. Dexter McGhue says:

    Great analysis Paul!

    I once put a submission to the Hastings District Council to rate properties on their productive capacity eg stock units for pastoral farmers……..no one at the council including the Mayor could understand or define what a stock unit was!

    There was hardly a quorum at the meeting; I handed papers with my submission to one councilor who refused to look at it!

    So from a farmers point of view 20%of the NZ RATE TAKE IS FROM FARMERS; FARMERS are 2% of the population and are on (net)less then the average wage!

    To me this is a breach of the Bill of Rights; discrimination on the grounds of employment.

    Basically the council completely ignored my submission.

    70% of councils in NZ operate on capital valuation to set rates Hawkes Bay does not!

    This very point means farmers are paying a lot more for their rates than they should be and as a farming based region it is an impediment to productivity and viability of the whole region_ some farmers are paying more in rates than than their net income!

    This a a major reason why Hawkes Bay is performing so badly compared to other farming regions!

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