Part 3: Be alert to challenges and opportunities

Reflections from our audits: Investment and asset management.

The environment in which public entities operate is diverse and constantly changing. As a country, New Zealand has experienced significant economic shocks in the last 10 years, including the global financial crisis, the Canterbury earthquakes, and several severe weather events.

We have previously highlighted the need for decision-makers to understand the risks in managing physical assets and ensure that these risks are actively managed.6 Risks are not just presented when experiencing significant shocks. The public sector needs to think carefully about the risks presented by changing demographics, as our population ages and becomes more urbanised, and the risks presented by historical investment choices.

Risks present both challenges and opportunities that public entities need to consider in making their investment decisions. New Zealand does not have the economies of scale of many other countries. Therefore, careful thought is needed about where and how to invest to optimise services for New Zealanders, and to build resilience.

New Zealand has invested significantly in financial assets to help respond to the challenges. However, the challenges come into sharper focus with our physical assets – especially given the age of much of New Zealand's infrastructure.

There are opportunities presented that should be considered, including the increasing advances in technology.

Natural hazards and extreme weather

Although the long-term effects of climate change are uncertain, it is becoming increasingly apparent that parts of New Zealand are, and will continue to be, affected by changes in weather patterns and rising sea levels. New Zealand is also seismically active, and physical assets need to be designed with these risks in mind.

We have seen a number of recent examples of natural hazards and extreme weather events that have overwhelmed flood defences, storm water systems, and water supply systems. Although it is not possible to avoid the effects of natural hazards or extreme weather, they should be anticipated, prepared for, and mitigated where possible. We have found that public entities plan mainly for likely events. They also need to deliberately and sensibly plan, as appropriate, for more unlikely events that would have significant consequences.7

For example, one of Waimakariri District Council's long-term plan strategies for managing its infrastructure is to provide potential extra financial "headroom", so that it can raise debt to help pay for infrastructure repairs in the wake of another natural disaster. Wellington City Council made a point in its 2015-25 long-term plan to emphasise issues and options for addressing the Capital's earthquake-prone buildings.8

Ageing, more urbanised population

The different regions of New Zealand have divergent futures. For some regions, such as Auckland, Waikato, and the Bay of Plenty, the future will be dominated by a sharp growth in population. Other areas face a steady decline in population.

Accommodating increases in population brings significant challenges for those public entities trying to meet the needs of their growing communities. For example, they will need to provide for increased transport needs and a greater demand for health and education services. Such challenges should not be underestimated: Auckland currently has 800 new vehicles registered every week.

The regions facing a decline in population that are unable to stop the decline need to consider the possibility of abandoning assets or decreasing the level of service that is currently provided. Rangitikei District Council, for example, has a declining and ageing population. The Council presented information about the implications of those changes in an effective way to engage its community.

Rangitikei District Council was up-front about what it could afford, and the need to seriously consider abandoning some assets. It started a conversation with its community about a financially sustainable solution for dealing with wastewater in Mangaweka that did not involve replacing the existing plant, due to the cost of doing so.9

Most regions are likely to experience an ageing population. As a community ages, its need for community services will change. The community's infrastructure needs will also change – there might be a higher demand for footpaths that can accommodate mobility scooters, and green spaces that have a passive recreational use, and greater demand for particular health services. With more people moving to fixed incomes in their retirement, affordability will become an increasing challenge to meet and respond to the changing demands of communities.

Infrastructure replacement coming in waves

Groups of assets that have been built around the same time will need replacing, upgrading, or require major repairs around the same time. For example, more than one third of school buildings are between 40 and 60 years old. These buildings are not only ageing and tired, but were not designed for modern teaching practices. Also, many school buildings built between 1997 and 2006 have weathertightness problems.

Similarly, there was extensive investment in road infrastructure throughout New Zealand during the 1920s and early 1930s, (and a reasonable level of investment since the mid-1950s). Many roads were built before developments in safety and sustainability, and before heavy trucks and trailers and buses came along. The roads may need upgrading to deliver the services that New Zealanders need from their transport networks today.

In local government, a lot of the water-related infrastructure (water supply, wastewater, and storm water) was built around the same time. It is likely that much of that infrastructure will need to be repaired or replaced between 2040 and 2060.10

These are examples of the replacement "waves" that are coming. With good planning, these replacement waves will be able to be discussed with the community, and their financial implications considered and planned for.

Limited resources and constrained budgets

Central government is focused on reducing net debt to 20% of the country's gross domestic product by 2020 and to 10-15% by 2025.11 Local authorities are conscious of, and in many cases are responding to, community calls to manage debt and reduce rate rises.

Restraints such as these can have the consequence of limiting the amount spent on maintaining and renewing assets, given the competing demands for the funding that is available to public entities. Greater transparency of asset condition and maintenance can help to show where insufficient spending on assets threatens long-term asset management.

New Zealand is a small country with limited resources, including a limited number of people with specialised skills to manage some types of assets. These resources need to be used wisely if public sector assets are going to continue to deliver essential services over the long term.

Advances in technology

Technology is changing the way that services are delivered, how people communicate and interact with public entities, and how those entities interact with them.

Infrastructure assets have long lives. Although the future demand for services needs to be considered when planning new physical assets, so too does any change in how services are likely to be delivered, particularly through increased use of technology.

In the health sector, district health boards are responding to changes in how healthcare is to be delivered, with increasing use of new and emerging technologies. These types of changes have implications for the assets that will be needed to deliver improved health services.

Tertiary education institutions are facing pressures from new technology, such as delivering education outside of lecture theatres. This, combined with ageing assets and demographic changes resulting in declining numbers of domestic students, means tertiary education institutions need to reconsider the assets that will be used to deliver education in future, and plan the changes accordingly.

No public entity is immune from the influence of technology. Although it brings challenges, there are also many opportunities that can be embraced.

Do you clearly understand, and have you considered, the challenges and opportunities you face?
Do you regularly review challenges and opportunities to inform your investment and asset management decisions?

6: Office of the Auditor-General (2013), Managing public assets.

7: Office of the Auditor-General (2014), Reflections from our audits: Our future needs – is the public sector ready?, page 20.

8: Office of the Auditor-General (2015), Matters arising from the 2015-25 local authority long-term plans, page 47.

9: Rangitikei District Council (2015), 2015-25 Long-Term Plan, page 71.

10: Office of the Auditor-General (2014), Water and roads: Funding and management challenges.

11: New Zealand Government, 2017 Budget, Budget at a glance: Delivering for New Zealanders, page 1.