Capital programme doability

Asset management and long-term planning.

Capital programme doability refers to the likelihood of being able to deliver the planned capital programme. Effective long-term planning means setting an achievable and realistic capital programme that includes a best estimate of the cost and timing of works. Our audit work indicated that delivering all the work forecast in 2021-31 LTPs could be a challenge. In this chapter, we discuss the importance of having confidence that planned capital programmes are achievable.

Local Government Act 2002

Section 101B of the Act sets out the requirements of a local authority’s infrastructure strategy. Subsection (4) tells us:

(4) The infrastructure strategy must outline the most likely scenario for the management of the local authority’s infrastructure assets over the period of the strategy and, in that context, must — [paragraph (a) not quoted as not relevant to capital programme doability]

(b) identify —

  1. the significant decisions about capital expenditure the local authority expects it will be required to make; and
  2. when the local authority expects those decisions will be required; and
  3. for each decision, the principal options the local authority expects to have to consider; and
  4. the approximate scale or extent of the costs associated with each decision; and

(c) include the following assumptions on which the scenario is based:

  1. the assumptions of the local authority about the life cycle of significant infrastructure assets:
  2. the assumptions of the local authority about growth or decline in the demand for relevant services:
  3. the assumptions of the local authority about increases or decreases in relevant levels of service; and

(d) if assumptions referred to in paragraph (c) involve a high level of uncertainty, —

  1. identify the nature of that uncertainty; and
  2. include an outline of the potential effects of that uncertainty.

To meet this requirement, local authorities need to set an achievable and realistic capital programme that includes a best estimate of costs and timing of works.

There also needs to be clear disclosure to the local community. Schedule 10 of the Act covers LTPs, and clause 17 sets out the significant forecasting assumptions that need to be included:

A long-term plan must clearly identify —

(a) all the significant forecasting assumptions and risks underlying the financial estimates:

(b) without limiting the generality of paragraph (a), the following assumptions on which the financial estimates are based:

  1. the assumptions of the local authority concerning the life cycle of significant assets; and
  2. the assumptions of the local authority concerning sources of funds for the future replacement of significant assets:

(c) in any case where significant forecasting assumptions involve a high level of uncertainty, —

  1. the fact of that uncertainty; and
  2. an estimate of the potential effects of that uncertainty on the financial estimates provided.

The ability to deliver the capital programme is a significant assumption. Similarly, the factors that might mean the programme cannot be delivered are the kinds of uncertainty that the Act is referring to.

What are auditors looking for?

Capital programme doability was one of the Auditor- General’s main themes for the audit of 2021-31 LTPs. The Auditor-General had previously expressed concern that planned capital programmes were not being fully delivered in practice. In 2019, the Auditor-General reported that local authorities had, on average, only spent 77% of their capital expenditure budgets from 2012/13 to 2018/19, with most spending less than 80% of their capital expenditure budgets in each year.13

Local authorities’ capital expenditure forecasts were 42% higher overall in the 2021-31 LTPs compared to those for 2018-28.14 This is in the context of supply chain disruptions and high demand for construction services across Aotearoa New Zealand. Although some of the uplift was due to inflation, there was also an increase in the volume of work being planned. Auditors had to assess whether local authorities and their contractors had the capacity to deliver this increase in work, particularly given the history of underdelivery.

The impact on local communities of local authorities not meeting their capital programme could be significant. Underspending or delaying projects could lead to reduced levels of service, more frequent unplanned failures of assets, excess demand for assets in growth areas, and ratepayers paying for work (through rates set based on forecast works) that the local authority can’t complete.

To inform our assessment, auditors:

  • reviewed recent financial information for each local authority to understand past performance in delivering the capital programme, which provided context for thinking about future plans;
  • assessed the local authority’s assumptions (as capital programmes are always an estimate, auditors needed to understand the assumptions to assess whether they were reasonable and clearly communicated to the local community, as required by clause 17(c) of Schedule 10 of the Act); and
  • considered enablers put into place by the local authority to help them deliver the proposed programme, such as having sufficient project managers, a clear project management methodology, and scheduling that incorporated realistic time frames and contingency for potential delays (such as obtaining resource consents).

What are some of the indicators of capital programme doability?

Indicators that a local authority has an appropriate framework for successful delivery of its planned capital programme include:

  • having a good understanding of the pipeline of work and well-run procurement processes to engage contractors in plenty of time while achieving best public value – for example, allowing adequate time for thorough project planning and design, and to ensure that required capacity and capability is available from staff and the supplier market;
  • effectively managing contracts so that individual pieces of contracted work are on time, of expected quality, and within budget;
  • effectively managing projects across the portfolio – for example, if a local authority is planning a step change in the volume of its capital programme, there will be an impact on the workload of project managers, engineers, and others that should be considered and planned for;
  • realistic budgeting and forecasting to ensure that the capital programme is well costed and affordable, which is also helped by a good understanding of assets (see the chapter on asset information for more on this topic);
  • being clear on sources of funding – for example, a local authority may have commitment from central government to fund a significant amount of its capital programme;
  • having a track record of delivery against previous capital programmes, giving confidence that appropriate systems are in place, at least for the volumes achieved in the past;
  • being a customer of choice as a result of good relationships and communication already established with suppliers and the wider market – for example, a local authority could already have framework contracts in place for a programme of work or it could have completed research that indicates that there is sufficient market capacity; and
  • collaborating and co-ordinating procurement activity with neighbours – see the case study below.

How widespread were issues with capital doability in the consultation documents and long-term plans?

There are inherent uncertainties in future capital programmes from both the demand and supply perspectives. Disclosure about how the local authority considered these uncertainties and its proposed steps to manage them reduced the likelihood of receiving an emphasis of matter paragraph in the audit opinion.

Audit New Zealand issued audit opinions on the consultation documents and LTPs for 62 of the 78 local authorities around the country.15 There were a significant number of local authorities receiving emphases of matter relating to delivery of the capital programmes in their opinions.16

Eighteen (30%) consultation document opinions included an emphasis of matter paragraph highlighting to readers that there was uncertainty as to whether the local authority could actually deliver the planned capital programme. None of those local authorities had specifically consulted with its local community on delivery of the capital programme.

For LTPs, an even higher proportion of opinions (25 or 40%) included a similar emphasis of matter.

This position arose because planned capital programmes of many local authorities around the country far exceeded past delivery in a time of constrained supply of labour and materials. Auditors concluded that this led to significant uncertainty over whether the programme could likely be delivered in full. The potential impacts of not delivering against the capital programme are reduced levels of service, asset failures, or greater long-term costs.

Napier City Council: Collaboration to deliver across the region

Collaboration can enable local authorities to share expertise and capacity of staff and achieve economies of scale. Bundling works can also make contracts more attractive to suppliers.

It could mean longer-term and/or higher-value projects for suppliers, which can give them a level of certainty over their work plans. It can also help attract the bigger contractors into regional New Zealand.

An example of collaboration and co-ordinated working is provided by the Hawke’s Bay region.17 In the infrastructure strategy for Napier City Council, the Council recognised the benefits of collaborating with neighbouring local authorities to procure project works.

An example of collaboration and co-ordinated working is provided by the Hawke’s Bay region.

13: See Figure 1 of Offie of thce Auditor-General, Insights into local government: 2019, at https://oag.parliament.nz/2020/local-govt/part1.htm.

14: For more information on the increased capital programmes for councils in the 2021-31 LTPs, see paragraphs 4.2 to 4.8 of Office of the Auditor-General, Matters arising from our audits of the 2021-31 long-term plans, at oag.parliament.nz.

15: The other 16 councils are audited on behalf of the Auditor-General by other audit service providers.

16: A council can have more than one emphasis of matter included in each opinion.

17: Note that this example predates the impact of Cyclone Gabrielle on the region in February 2023.