Thursday, February 23, 2012

Frank Newman: Regulatory controls for local councils


This week Greece was given a 130 billion Euro lifeline by the European Central Bank and the International Monetary Fund. The main purpose of the bailout was to retain intact the membership of the European Community, but few believe it will save the Greece in the long-run. Most predict a third bail out in a couple of year’s time.

The day the European talks were concluded, talks began in Whangarei to “merge” the tiny Kaipara District Council (KDC) with the Whangarei District Council (WDC). I mention this because there are some pretty interesting parallels between Greece and Kaipara. Both are heavily and hopelessly indebted, and both are looking to others to bail them out of problems of their own making.

In some ways the KDC is in an even deeper hole than Greece, although the numbers are expressed in millions rather than billions. When debt is measured against income, Greece’s debt is 160%; meaning its debt is 1.6x more than its annual revenue. Part of the latest rescue package is a series of austerity measures to reduce this to 120% by the year 2020, and even that is considered high by international standards, and quite possibly unsustainable.

The KDC has a whopping $84 million in forecast debt against annual income of $44.75 million, or 188%. In 2008 their debt was just $18.1 million, or 53% of the then revenue of $34.2 million. The speed of their deterioration is staggering.

But unlike the EU, there is no imperative for Whangarei to bail out its neighbour. Why on earth would the WDC even entertain such a thought? The last thing the WDC needs is another $84 million of debt added to the wrong side of its balance sheet.

The proper place for Kaipara to confess their errors and plead poverty is at the doors of central government. It is they and their agencies that have sat on their hands and watched Kaipara go deeper down the drain. Indeed the failings of central government to adequately oversee local government goes back as far as 2002 when it assumed councils were competent to handle the greater powers given to them with the reform of the Local Government Act in 2002.

The simple truth is local councils are not competent when it comes to running large enterprises. Local councillors are very good at guest attendances at the local gardening club or drawing the raffle at the school gala. Asking them to make hard-nosed million-dollar business decisions does take them out of their comfort zone and they are far too keen to please whoever is next in line pleading for funding to be responsible with ratepayer money. Their lack of general competency has been blindingly obvious for many years now, yet politicians have not reversed their ill-conceived policy.

Unfortunately Kaipara is not the only “Greece” within local government. Others will follow Kaipara down the same vortex, and that includes the WDC as it escalates its debt towards $200 million. Kaipara is an early warning bell of what is to come.

The Minister of Local Government, Nick Smith, should heed the warning and stop the imminent disaster by imposing regulatory debt restrictions on councils – just as they have now done, belatedly, on finance companies. Local councils are as reckless if not more reckless than finance companies were. I think even the Minister knows that he is well off the mark if he thinks making council bigger will solve the problem – it will simply delay the problem and make it bigger when it arrives. He needs to acknowledge that it’s the lack of competence within councils that the problem, not their size. He needs to impose regulation to require councils to be responsible with others people's money.

7 comments:

Liberty for Shore said...

But what to do about the super debt of Auckland. The now member for Epsom racked up a huge debt in Old Auckland. Debt that has now been inherited by the New Auckland none of whose members came along debt free. We now have a Mayor intent on even more debt for his train set and a council full of people who couldn't run a bath let alone a business. Thank you Rodney and your National Socialist mates.

Frank Newman said...

Exactly why I have called for central govt to impose prudential regulation.

Mudcrab of Pahi said...

Frank, the number comparison with Greece is un nerving.
It seems that debt is taken lightly by many in public office - as if debt has an almost mystical quality to solve the issues of life. I wonder where that notion arises?

The idea of an absolute debt ratio limit is an immensely compelling one that would force the level of consideration up a few notches.

I am of the absolute opinion that micro will always out perform macro management in terms of efficiency. Yes big things require big resources - but maybe even this is a flawed approach to finding solutions. There is no substitute for intimacy and the 'nearness' of responsibility and likely better solutions.

Oh, where has prudence gone???
Cheers, Paul

Anonymous said...

Regulatory Control...Local Government: I agree with Frank Newman’s comments - Local Government in financial terms has in reality sown the seeds of its own demise.

Our Local Council was “invited” (if that is the correct word) to join other Councils in building a large “International”? Veladrome, near Cambridge. A majority of ratepayers where not in favour of loading our annual rates with a $1 million contribution i.e.debt for an elite sport. I understand that the cost of using this venue will be probably our of the reach of most residents. No vote was allowed, so whatever the outcome the Council had the final say, the Bay of Plenty opted out of the scheme but like many other Councils the ratepayers now have a white elephant to cope with.

Since David Lange’s reform of Local Government and the Socialist Government’s 2002 Act which in effect, gave unbridled power into the hands of many councillors and therefore into the hands of CEO’s. There has been a step away from the core activities which Councils had to give to ratepayers, into the financing of social, sport and other entertainment.

This aphrodisiac of power without responsibility, reminds one of Rome’s Caesars, and the diminishing power of their Senate. But at least in those days when Caesar rode into Rome, they still retained the slave who constantly whispered in his ear. ##“Memor vos es tantum humanus” Remember you are only human?

However the example set by our Government and previous Governments in uncontrolled borrowing to finance a life style we cannot afford merely to retain power. Makes it virtually impossible for central government to point the finger at local government on the subject of finance without seeming hypocritical.

One other point stands out, that of remuneration of councillors. Here one must ask the question. “Have payment to Councillors reduced their duty to their community, and made them just another set of Officials (unqualified) with unlimited powers?” I am not comfortable with imposing regulations, just where do they end? Merely in more bureaucracy, but if that is the only way of reducing ill considered spending by Councils...so be it.

Brian.
## My Latin open to correction

WorkBoot said...

Thanks for your blog Frank.

I have found your conclusions to be correct through first hand experience this LG term. The fundamental flaw in LG representation is that there are no valid prerequisites for running for the position of Councillor or Mayor (read director). The election is a fickle local popularity contest and often the most well equipped ratepayers don't stand as they have better things to do with their skills.

Elected members often simply do not posess the skills or experience in commerce or law to prudently make the high level financial and policy decisions foisted upon them and consequently often 'rubber stamp' whatever is recommended by the executive. Thus the intended 'checks and measures' between management and the ratepayer 'shareholders' simply do not occur and as is emerging can result in excessive debt and legal non-compliance.

scrutator said...

Good article Frank. In the case of Kaipara the appalling activities of the council would, if practiced by any ordinery company directors result in a trip to court resulting in fines or worse. Along with them would be the Auditor General charged with at best gross deriliction of duty. For some years the audit office and the ombudsman have repeatedly been advised of the failure of KDC to pay even lip service to the requirements of the Local Government Act. They have continually chosen to take no action and their audit reports have just been a joke. The council, with the exception of one councillor, are totally incapable of providing the standard of governance required. The mayor and deputy should be stood aside and a manager put in place to guide the council. through the extraordinarally difficult decisoins that have to be made to get Kaipara under control

Anonymous said...

One of the many factors which are often left out of the equation is the undercurrent of politics within an organisation - the same applies here in terms of the dysfunctional collection of a council (Kaipara).The lemming-like pandering to an incompetent overseer - interferes with prudent decisions and the acceptance of valid collective input. As usual, the individuals with any spine, sense or moral backbone, resign. This sick malaise is ever-present in corporate as well as organisations like councils. As long as there is nobody to stand up to the local bully, things just go from bad to worse unaddressed.