2.6 Costs Including Capital Expenditure
The LGAA emphasises that the allocation of costs, for the purposes of preparing a funding policy, must match the benefits derived. The process of allocating cost in accordance with benefits derived is the foundation and fundamental driving mechanism from which funding policy can be developed. There is a requirement to recognise where the costs originate from and there is a need for transparency in the links between costs allocated and expenditure needs to which those costs relate. In complying with the requirements of LGAA, Council is required to do so in such manner and include such detail as considered reasonable having regard to the significance of the matter, the cost and difficulty of obtaining information and the scale of Council’s operations.
To satisfy these requirements, Council has subdivided annualised scheme expenditure into three major service activities - river management, flood protection and soil conservation - and has subdivided the catchment into six different management zones. Council considers that this subdivision recognises the various communities of interest within Project Watershed. When appropriate, these costs are then further separated into management sub zones and service activities. The Asset Management Plans or proposals for new works for each separate scheme are the formal documents upon which the subdivision of expenditure is based.
Approximately 65 percent of the costs included in Project Watershed relate to assets already in existence, such as annual operating and maintenance expenditure, or replacement and refurbishment. The remaining costs relate to the construction and maintenance of new work.
The capital programme for the next 15 years of approximately $30m equates to less than 30 percent of the value of Project Watershed’s current assets. Capital expenditure includes both new work and the ongoing refurbishment and replacement of existing assets.
Council’s procedures for considering the need for new works include:
- Obligations and expectations relating to existing work
- Technical and operational needs for new work, i.e. upgrades, requirement to meet certain standards etc
- Community requests/demands for new work
- Strategic requirements
- Cost/benefit of proposed work.
Council will maintain its established policy that requires the landowner(s) to fund 75 percent of the capital expenditure for flood protection and river management works and 65 percent of soil conservation works. This reflects that these are primarily of local benefit and are not considered to be essential to protect or benefit the wider community. The basis of this policy is that the construction of local flood protection schemes, river management or soil conservation works provides significant economic benefits to the landowner that will increase the capital value of the landowner’s property.
Project Watershed capital requirements will be funded from landowner contributions, and interest and depreciation allowances incorporated into annual expenditure flows. A 10 year projection has been made to take account of this aspect.
Consistent with the need to ensure intergenerational equity, Council’s practice is to smooth the rating burden over the life of the assets through the use of reserves.
The phasing of capital works discussed in this document may be affected by the availability of capital from the above sources in any one year, and consequently some reprioritisation of capital works may be necessary to minimise interest costs.
The Lower Waikato Waipa Control Scheme operating reserve currently has an accumulated debt of $1.8m.
Council has resolved that the accumulated debt should be identified to the major work areas of the scheme and serviced by the rating revenue collected for that area. It is intended that the debt will be recovered over the first 10 years of the Funding Policy. This is consistent with the principle of recovering those costs from the persons or categories of persons in a manner that matches the extent of the benefit accruing those persons or categories of persons in accordance with S122 F(c) of the LGAA.
The debt has been incurred for a number of reasons. These include:
- Flood response and damage ($545,000)
- Lack of consistent funding for some elements of the scheme, such as community gates ($378,000)
- Project Watershed classification costs ($226,000)
- Asset Management Plan Establishment ($218,000)
- Disposal of assets surplus to scheme requirements ($175,000).
Council agreed to allow the scheme to move into debt on a temporary basis until a sustainable funding path could be provided.
Council has also noted that it does not consider that its Investment Fund should be used to fund existing debt. Income from the Fund is used to fund the general rate. Diverting this income to deficit reduction would reduce the income available for the general rate and would mean that all ratepayers were effectively funding the deficit.
Existing Asset Management Plans and works programmes make provision for responding to and addressing damage that may occur as a consequence of storm events, such as those with up to approximately a 20 year return period. Council also has reserves and insurance cover for existing assets to provide funding for responding to more significant events.
Significant effects on existing assets of events of 50 year return period or greater are partly covered by reserves and insurance under the Local Authority Protection Plan scheme (LAPP), but would be likely to require changes to work programmes.
Such events may also activate new sites requiring immediate attention. This may require further reprioritisation of works, particularly in the short term.
Government assistance may be available in very extreme events under the National Recovery Plan, but it is very limited under current criteria.
Environment Waikato estimates that administration costs amount to approximately 10 percent of the total programme. Of this, four percent is attributable to rate collection and six percent to internal administration.
Forecast annual costs as estimated for the next five years, assuming no major disasters or substantial increases in inflation, and as set out in sections 11 to 15 are:
|Management Zone||Proposed Annual Expenditure|
The capital programme for the next 15 years, assuming no major disasters or substantial increases in inflation, and as set out in sections 11 to 15 is:
|Management Zone||Proposed Capital Expenditure
All costs set out and discussed in this document are exclusive of GST unless otherwise stated. Lakeshore Protection Costs for Lake Taupo have been included under flood protection. Costs for the Tunawaea landslide and associated river management have been allocated to Soil Conservation and River Management.
The costs above are based on:
- The cost requirements set out in the Asset Management Plans prepared for Project Watershed’s existing assets
- The cost of undertaking and maintaining new works that the community, through the liaison subcommittees, supports as being required.
Not withstanding the comments made above regarding unforeseen damage arising from significant storm events, Council provides assurance that work additional to that outlined in this document will not be undertaken without prior consideration through appropriate Council processes. For existing assets that process will be the Asset Management Plan review process.
Significant new works (in particular, for new flood protection and river improvement projects) will not begin without first preparing a more comprehensive analysis of the works, including justification and a more site specific funding policy than the indicative policies in this document. These analyses would be presented to the community for consideration, and to appropriate subcommittees for recommendation to Council for approval.
Other less significant works would also be presented to the appropriate subcommittees and the Council annually for consideration. This process would not however delay work of an urgent nature.
The accounting policies stating the underlying accounting practices adopted by Environment Waikato in preparing Project Watershed budgets and forecasts are shown in Appendix 4.