Local Government NZ pushing for shared services and procurement as a way to tame rates inflation amid pushes for 'Super Cities' in Wellington, Hawkes Bay

Local Government NZ pushing for shared services and procurement as a way to tame rates inflation amid pushes for 'Super Cities' in Wellington, Hawkes Bay

By Bernard Hickey

Could councils avoid having to amalgamate into 'Super Cities' by instead saving money through the use of shared buying and services companies?

That's one avenue some councils may push down in the coming year as Local Government New Zealand (LGNZ) tries to build a platform for such procurement and group services companies.

Over the last six months LGNZ has launched a push for a Queensland-style approach to shared services and procurement that is already saving Queensland councils more than A$100 million per year.

LGNZ President and Hastings District Mayor Lawrence Yule told me at LGNZ's annual conference in Hamilton such savings could help councils respond to central government and ratepayer pushes towards Auckland-style amalgamated 'super cities' that aim to find economies of scale to control rates inflation.

Yule, who is in favour of a merger of the Hawkes Bay's five councils, said opinions were divided about the merits of amalgamations, but that shared services companies gave councils other ways to save money and respond to ratepayer unrest over rates rising faster than consumer price inflation.

"The shared services model is a way of delivering value without the amalgamation spectre," Yule said.

The Greater Wellington Regional Council has applied for the creation of a Wellington and Wairarapa 'Super City'.

The Local Government Commission is now assessing amalgamation proposals for Northland, Hawkes Bay and Wellington/Wairarapa.

Statistics NZ figures show property rates and related services costs have risen at an annual rate of 3.9% to 4.5% for the last five quarters to June, while the broader rate of consumer price inflation has run at an annual rate of 0.7% to 1.0%.

The Queensland story

Local Government Association of Queensland (LGAQ) chief executive Greg Hallam presented at the conference on Monday on the development of Queensland's various shared services operations. Hallam said they ranged from shared liability insurance, employment law advice, process improvement, cloud computing and procurement.

Hallam, a former Queensland rugby player, said KPMG had estimated current total savings of A$100 million a year out of council budgets in Queensland now at around A$9 billion a year. He said Queensland's 56 councils were broadly the same size in total as New Zealand's councils and had been driving towards shared services for the last 20 years. Statistics NZ figures showed New Zealand councils spent NZ$8.5 billion in the year to the end of March 2013, including NZ$4.43 billion on purchases and other operating expenditure, NZ$630 million on interest costs, and NZ$1.8 billion on employee costs.

Queensland had looked for guidance and precedents for shared local government services operations in Britain, Holland, Denmark and Sweden over the last 20 years. LGAQ had since transformed itself from a pure advocacy and representative body, similar to LGNZ now, into a coordinator and owner of shared services companies that were now subsidising membership fees.

The shared services push started with Local Government Mutual, which provided public liability and indemnity insurance to councils. It now collectively buys A$250 million of reinsurance cover through Lloyds of London behalf of councils. KPMG estimated it was delivering A$9.5 million of savings per annum.

LGAQ's Propel Partnerships worked with councils to improve their business processes, improve customer service, reduce duplication and cut costs. It had the capacity to generate savings of A$130-140 million a year. Propel's staff had come mostly from Capita Group, Hallam said, pointing to its success with the Ipswich Council in Queensland.

Queensland's Localbuy group procurement operation was now handling 40 different contracts with more than 300 suppliers and turned over A$500 million annually, out of total Queensland local government procurement of around A$3 billion per annum.

'We're on tap, but not on top'

Using the shared services and procurement services wasn't compulsory, he pointed out. "We have a saying: 'We are on tap, but not on top. We're not bigger or better than local government."

Hallam gave an example of a small council previously having to spend as much as A$20,000 arranging for the scoping, advertising and tendering for a single purchase of a piece of construction equipment, while a supplier such as Caterpillar's Queensland franchise was also having to spend A$20,000 preparing and tendering for the same purchase.

Localbuy instead handled the procurement. "There's a A$40,000 saving on a A$500,000 piece of equipment right there," he explained. LGAQ's 'hurdle rate' for deciding on whether to pursue shared savings was savings of at least 10%, he said.

LGAQ had also created GovCloud for cloud computing services, which allowed councils to rent rather than buy infrastructure, Resolute Information Technology for IT services, and Local Government Workcare, which was a workplace compensation scheme. Hallam said the combined savings these shared services and procurement companies was forecast to be around A$300-400 million a year within four years and to have been around A$2 billion over the last 20 years.

"Do you want to save yourself NZ$2 billion over the next 20 years?" Hellam asked the audience of hundreds of councillors, mayors and staff at Hamilton's Claudelands showgrounds.

LGNZ's Yule said the New Zealand councils had signed a Memorandum of Understanding with LGAQ six months ago to look at introducing a New Zealand version of Propel. Yule said his own Hastings Council would look to team up with four to five other councils over the next year to use such shared services, which would be branded as from LGNZ.

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at 6% per annum rises, we have to do something about that %....oh and that doesnt account for more debt either, 12 years doubling time.

The savings are huge numbers and should be encouraged - however, they do amount to only 3-4% of budget which in the NZ context gets gobbled up the next year. And is the money ever  returned to the shareholders?

Bernard, if you buy any of this I have a bridge for sale too.
If local government can introduce some savings through shared services then they should go for it. But get real this is all stuff that is on the  margin. Local government already have two pooled insurance schemes, Civic Assurance and the LAPP fund. They already use Supplycorp, the government purchasing company.  None of any of this comes anywhere near where the real money gets spent or where the real cost drivers are.
A concrete example: say you could get rid of all the "dead wood" in your local council and knock 5% off the wages bill, how much could you knock off the rates bill? In most councils that would take about $15 off a $2000 rates bill (about 4 lattes a year for a whole household).
BTW councils don't buy heavy machinery in NZ, contracting companies do. Dangers of importing overseas experience uncritically.

It's all just fluff.  This is the sort of discussion you have about savings when you don't  want to do saving.
Councils are soft funders.  To save money they have to harden up.  Say no.

If Local Government NZ were any less pathetic they would be writing this not me.
Comparing rates inflation and CPI is like comparing apples and otters. The local council does not go to the supermarket to buy a loaf of bread and twenty Rothmans; it's money goes elsewhere. Rates buy eight things:

  • roads
  • fresh water supply
  • sewage disposal
  • stormwater disposal
  • solid waste disposal
  • parks, sports grounds and cemeteries
  • libraries
  • Council meetings

The first six of these account for 70-80% of your rates and 80% of that money is contracted out by competitive tender. This is the world of bulldozers, mowers, diggers, dirt, gravel, concrete, bitumen and steel. And how is that world going compared to the world of Tip-Top White Toaster, McDonalds and Sky TV?
Here's some data anyone can get for free from stats.govt.nz.
During the ten years from Q301 to Q211 CPI rose by 31%; during the same period the Civil Construction Price Index rose by 46%. When consumer costs rose by one dollar council costs rose by $1.50. This isn't even considering power and insurance, both big ticket items.
When costs are diverging like that over a long period one-off savings  like pooled purchasing only have a limited effect. Councils would have to find new savings every year if they wanted to match rates increases to CPI. Even then. at some point the only way to bridge the gap would be to cut services.
The best proof of the folly of this false equivalence is to consider the action (or more striclty the inaction) of Rodney Hide, once Minister of Local Government. Hide virtually campaigned solely on a platform of legislating that councils were restricted to raising rates in line with CPI. Once he became Minister and found out more about how the sector actually worked we never heard another word.

I was recently talking to an individual who is planning on running for council. One of the election promises was that 'tried and untrue' Rodney Hide approach (match rates rises to no more than CPI). I suggested existing debt in that council would likely make that unattainable. If they didn't have the debt, they might just be able to hold rises to inflation by cutting back on services - but just no chance given the level of debt.
I agree with your analysis above but I'd add that rates buy a ninth thing: interest on debt.

Not sure I follow why indebtedness would make it hard to restrict rises in rates. 
Agreed, however, about the ninth benefit which I would term rates smoothing and intergenerational equity.

Yes Kumbel.  Cut services is the way to go. 
We are a third world income country with a taste for Rolls Royce council services.  And as we know, you can't get more from the government (local) more than you give it.
There are people in this country with concern about getting food.  Meanwhile my local council spent two million dollars on rebuilding it's reception area.  The main result of which is that council staff are now protected from the public.  Logical - in an unacceptable way. 

Fix rates at the current level and council budgets where they are. 
Council can do this by squeezing their suppliers and contractors.  Salary freeze on all council employees.  Find productivity enhancements.  User pays, if the users of (for example) a library don't cover the cost, it gets closed and the land sold.
The same thing that the entire private sector has to do in hard times. 

Councils will just avoid all new projects and squeeze property developers harder. Building a home will become even more expensive, house prices will rise even more. The end result is that public expenditure and debt that would have brought new amentities and created a competitive market for residential land is swapped for private expenditure and debt to pay for ever more expensive existing housing.
The solution is to allow Councils alternative sources of revenue, PAYE Taxes, petrol taxes etc. So they can deal with rising costs that Kumbel discusses above and a infrastrusture deficit that I discuss here. http://www.interest.co.nz/opinion/65197/brendon-harre-thinks-we-have-problem-poor-quality-and-inadequate-quantity-local-infras

Take a $2 coin from your pocket and name one thing you can buy with that coin (I'm struggling - a sausage at a fundraising sausage sizzle?).
Before you decide that Councils are unrepentant wastrels here's what that coin buys you personally today if you live in a New Zealand city:

  • unlimited water the equal of any in a bottle for drinking, cooking and washing
  • flush the loo as often as you want
  • throw your rubbish out and someone else takes it away for you
  • leap into the car and drive all over town in adequate comfort and safety
  • wander through a park that someone else is maintaining
  • play sport on a sports field that someone else has mown and marked

and that's not all. Depending on where you live you may also get:

  • borrow lots of books, CD's, DVD's; access international digital databases at a library
  • visit an art gallery and museum
  • get a 50% discount on the true cost of a swim at the aquatic centre

Roads, water, sewer, stormwater and solid waste disposal are pretty unglamorous but ask the residents of Eastern Christchurch or Seddon how much value they place on the continuous supply of those services and they will probably tell you two bucks is a bargain.

Sounds good and I kind of agree But where I live for my $3000 rates bill I,
pay for own water
Pay for septic tank to be cleaned
Pay for rubbish to be taken away
Leap into car and drive 3km on council road then on nzta highway and town is in another council zone
Do enough walking on own property
Yes there are parks - probably too many of them
There is no library or art gallery
And no pools
The council has a very high debt loading so of course the rates bill rising every year.
Do you think that I get good value ?

That's why I qualified it with "live in a city". Just got my rates assessment: $2100 and I run my own sewer, pay for my own rubbish collection, pay separately for water to a differerent council, live on a gravel road that gets cut off every time there is a decent rain. So, no, I doubt there are many non-urban ratepayers who feel they get good value but there really aren't many of us.
This is a problem with rates incidence - who pays what. Rates are a blunt instrument that are sometimes unfair and they are never more unfair than on the farm.

Have a gander at some financial statements.
Note if they break out operating expenses by the good ol' Four Wellbeings.
Because if they do, ya can figure that a large proportion of the opex labelled Social and Cultural, wouldn't be missed if it didn't happen for a decade or three.  And events, zoos, CCO's, festivals, promotion, are notoriously hard to measrure, let alone manage.  So there's a possibility.  And as much is staffing, there's yer answer.  Pink slips.
Whereas Infrastructure, now That's where the capex construction indices and the essential stuff meet.  As the leetle shakiness over the week should be emphasizing, all the rest is luxury.
Luxury's all very well when the OPM is flowing hot and strong.
Not any more.

The well-beings never formed the basis of planning or decision-making; the late and very unlamented Community Outcomes were supposed to have. To the best of my knowledge not a single council changed the nature of their activities after the passage of LGA2002 and they are certainly not changing anything as a result of LGA2002 Amendment Act 2012 mainly cos there is nothing that needs changing. CCC ran its Buskers Festival long before the well-beings came in and cheerfully continues on even though they are gone.
I am not sure I agree that some items like festivals wouldn't be missed but there is a good case that they do not comply with the new Act. I am sure Dunedin's new stadium might have had a difficult time getting built if this legislation had been in place two or three years ago. And it is now apparent that a council is going to have to be seriously challenged before the sector takes any note of the intent of the new legislation.

Rises in rates are the pointy end of population growth, peak oil and climate change, all made worse by poorly thought out direction from central government and an economic slump.
We could accept that this is what it costs to live the way we do and, for the majority of New Zealanders (not including me), council rates deliver good value for money.
Clearly there is an affordability issue if rates and CPI/income continue to diverge. So can we put the brakes on? Yes but it involves hard decisions. 
Let's put staffing and debt to one side - they are side issues as well. When I crunched the numbers it worked out a 10% saving in staff costs at my council would only lower my rates from $2100 to $2070 - pink slips really won't do it. Debt is more complicated and, yes,adding new debt pushes rates up. But remember debt can only be used to fund capital works so the money that is used to repay principle would have been collected anyway through depreciation charges. The rates rise is only required to pay the interest.
Saving real money means cutting services and let's be clear what that means:

  • closing service centres
  • closing libraries
  • telling sports clubs they are on their own and selling the sports grounds
  • closing aquatic centres
  • switching off street lights
  • selling social housing
  • letting roads fall into disrepair
  • letting footpaths fall into disrepair
  • cancelling roading upgrades for capacity and safety
  • tolerating interruptions to water supply
  • tolerating sewage spills

Candidates in this year's local body elections can promise to rein in rates. But, if they are serious, then that is the menu they are picking from. If they have any integrity they will be upfront about what they propose to shut down.

Kumbel I love the reality you bring to this issue.
I for one would not mind buying two flat whites instead of one if I could get better Council services.
I think if that second cup was paid from my PAYE taxes I wouldn't even notice it. I would want better transport infrastructure and more relaxed planning rules so that housing became more affordable.
Is any local body candidate campaigning on this?

There's always a first-timer who invariably goes quiet by the end of their first term but officially there's these folk: http://www.affordable.org.nz/

They call themselves affordable campaigners, obviously trying to leverage off the publics concern about rising housing prices. But in reality they are just old fashioned right wingers campaigning on lowering rates.
They are being dishonest because for NZ to get affordable housing will require more public investment not less. Affordable housing means much more areas have to be opened up for potential development. This will require expensive new infrastructure (but not as expensive as the alternative do nothing housing bubble). And when you factor the elimination of developer levies to make housing more affordable and the encouragement of MUDs the promise of reducing rates is even more dishonest. 

Good God - the word "rein" correctly spelt and used.  Haven't seen that in years.  Marry me Kumbel

You will have to wait till I finish the bread-baking :-)

Debt is more complicated and, yes,adding new debt pushes rates up.
My observation is that more often than not, the debt that 'tips' a city or district into permanent rates rises above the rate of inflation is that debt associated with the "glory project" (or two) - a library, a council/civic building, a stadium, an aquatic centre, a town hall, a museum. 
And where sports clubs are concerned - again it's not the club grounds/rooms that generate most of the burden - it's the professional sport stadiums and associated infrastructure... the "glory projects".

The one-off rise I get but not the permanent differential in the rate of increase. Where there is a commercial component (especially stadia) there is a tendency to throw good money after bad as it turns out that the businesses earn less and cost more to run than the over-optimistic forecasts once projected. Not so much servicing the debt on the building as much as underwriting a loss-making business.

I'm not as familiar as you are with the way they work out depreciation and capital repayment - but I think they can defer either one or both for a period of time to lessen the immediate impact of the one-off rise in interest costs?  Then 5-10 or so years down the track those deferred costs kick in and there is another one-off rise relating to the repayment of capital and/or the charge for depreciation - often sitting alongside the next "glory project" or a core services (plant) major upgrade.  Hence the public focus (and subsequently the Govt.) focus on "core" services .. although as soon as they announced that change - LG came out swinging on what was meant by "core" (Auckland for example, said so you don't want us spending on Auckland Museum?).  Government backed down quick and the amendments (to my mind) will have nil influence.

That kind of chicanery was easier in the past. It got a whole lot harder with the first full LTCCP in 2006 when Audit NZ got inserted into the planning stage and had to approve budgets before they went out for public consultation. Also I think most councils are now signed up to comply with International Financial Reporting Standards which would make it very hard for them to pretend they had no depreciation going on.
When I first read the amendments I also thought they were meaningless but when I had a think about the Wellington Town Hall decision I changed my mind. Firstly all legislation has a normative effect in that it signals what constitutes orthodox behaviour to the community. And in this case there are specific teeth that could bite if anyone could ever be bothered. And it's really in the mechanics of how reports are written and decisions made. Every decision that involves expenditure has to satisfy three criteria under the amended legislation:
1. It is a local service (which I interpret as meaning within the territory of the TA)
2. There is a demand for the service today and into the future
3. There is no more cost-effective solution than this one
At a procedural level every staff report in support of a recommendation needs to contain those three items. It will be boiler-plate stuff for infrastructure spending as they have to do all that for their asset management plans anyway. A lot harder for stadia and civic buildings. I really wish the Property Council had complained to the Auditor-General over the Wellington Town Hall decision as we might have got some clarity over the amendments.

Great discussion people. I learned a lot. Thanks Kumbel in particular.

Who knew? Turns out I could have saved myself a whole lot of effort by pointing readers to this BERL analysis on the LGNZ website. Reinforces my perception of how useless LGNZ are that this is almost unknown outside the least visited NZ website.
PS Thanks for your kind remarks, Bernard.
PPS This is sad that this is my idea of a great way to spend Saturday night.