Auditor-General's overview

E ngā mana, e ngā reo, e ngā karangarangatanga maha o te motu, tēnā koutou.

At the time the content of this report was prepared, Covid-19 had not reached New Zealand. Covid-19 has severely disrupted our way of life. The pandemic is a stark reminder of how quickly risk can appear. Although the response to Covid-19 has, quite rightly, been a national one, communities will be looking for local leadership more than ever as we move from response to recovery.

The effects of Covid-19 will create financial stress for many in the community and for the councils that serve them. The full implications are still unclear. However, what is known is that many of the previous assumptions councils made about the future will no longer be reasonable.

Therefore, the need for long-term planning has never been more important than it is now. The recovery from Covid-19 is likely to take many years. Councils will need to be clear with their communities about their revised plans, and the implications of these plans, during this recovery. To do this will require strong governance and an appropriate focus on risk management.

Ongoing and new risks and challenges

Before Covid-19, councils were already facing many complex and difficult issues and risks. Natural hazard events were increasing in frequency and severity, with the effects of climate change becoming more evident. Growth pressures were becoming common throughout the country, not just in the main centres. In some instances, historical underinvestment in core infrastructure, which is often combined with a lack of a full appreciation of the current state of infrastructure, has resulted in asset failures and service disruptions.

Covid-19 has added a significant additional challenge, with several implications for councils. Effective risk management policies and practices are now more vital than ever. The knowledge, governance, and dialogue needed to effectively manage risk have not changed, but have now taken on more significance. To continue to achieve their strategic objectives, I expect councils to:

• understand the expectations central government, ratepayers, and communities have for the services they provide;
• understand the current and predicted asset condition and performance of their assets, as well as future asset needs, particularly for critical assets;
• be properly informed about risks and opportunities to service delivery in order to make relevant decisions and manage the trade-offs of risks with cost and level of service;
• discuss risks, opportunities, and trade-offs with their communities. To do this effectively, priorities, assumptions, and trade-offs need to be transparent and understandable to communities; and
• make evidence-based decisions to address ongoing and future work programmes.

Councils will need to re-visit their assumptions for each of these areas in the light of Covid-19. Central government also has a role in actively working with councils about matters of shared national interest and risk, such as climate change and Covid-19. However, we have seen strained relationships between central and local government. In our work on water management, we found there was no clear agreement across central and local government about the priorities for water management. Without this agreement, there is increased risk that efforts are not being directed to achieving the same outcomes. The Productivity Commission also made the observation recently that there is a lack of appreciation of each other's roles. This will need to change to support councils in providing essential services to their communities.

This report discusses several trends and developments in 2019 and gives some insights into how councils were managing risks before Covid-19.

What we saw in 2018/19

I remain concerned that councils might not be adequately reinvesting in their critical assets. For some time, my Office has reported that annual renewals spending on assets has been less than the annual depreciation of assets. This is commonly referred to as the renewals gap. This trend continued in 2018/19. Without adequate reinvestment, there is an increasing risk of asset failures and service disruption. I expect each council to turn its mind to the robustness of the renewals gap in its context and the funding implications arising. My auditors will be particularly focusing on that as they consider councils' 2021-31 long-term plans. This is not an issue for only asset managers to resolve – it requires input from others, such as finance and strategic planning staff. More importantly, it requires leadership from councillors. Strategic asset management is complex and needs a council-wide response based on good information.

This report provides an example of good practice by Ōpōtiki District Council, which, aware of the climate-related risks facing its community, worked systematically towards getting better information about its wastewater assets to deliver a cost-effective programme. Many councils already work closely together and learn from each other's experiences. Ōpōtiki District Council's experience is one I hope other councils learn from.

In the 2019 calendar year, 16 councils declared a climate emergency, and most councils focused on aspects of climate-related activity in their 2018/19 annual reports. Increased climate-related events pose significant risks to service delivery and solutions often come with significant costs. Major decisions to address the risks of climate change are required, and there is more to do to get better information to inform those decisions. It is important that councils are transparent with their communities about their current understanding of the risks from climate change, what they are doing already in the areas of mitigation and adaptation, and what other action they propose on behalf of their communities. There is also the need for national leadership.

Audit and risk committees help councils better understand their strategic risks and what they can do to eliminate or mitigate them. I am pleased that almost every council now has an audit and risk committee and more than half of councils have, or are planning to appoint, an independent chairperson. I encourage this because having independent committee members and chairpersons ensures that councils receive impartial advice from people who are not involved in decision-making. We have observed increasingly effective working practices of many audit and risk committees. It has been particularly pleasing to see the way that some councils, notably Auckland Council, have used their audit and risk committees during the Covid-19 pandemic.

The costs, risks, and other effects from Covid-19 will be important considerations for councils now and for the future when preparing their 2021-31 long-term plans. Active, integrated, and honest conversations about risks need to involve councillors, staff, management, communities, and stakeholders. The 2021-31 long-term plans are an opportunity for these conversations to occur. Responding to the risks created by Covid-19 will be a significant challenge, but this disruption will also create new opportunities for councils as they consider ways to innovate and promote the well-being of their communities.

My Office will continue to support councils as they plan for the future, build their resilience, and respond to ongoing and new risks and challenges, including the effects of Covid-19 for their communities.

Nāku noa, nā,

John Ryan
Controller and Auditor-General

10 June 2020