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.
at 8:40 AM