Thursday, 7 December 2017

Be careful what you wish for: Havelock Nth edition

At first I thought the Inquiry into Havelock North Water had missed the mark in its second report. Media reports indicate the report is highly critical of the Ministry of Health. I would have been more critical of the performance of the local DHB but, of course, DHB's are the Ministry of Health. It is specious to pretend otherwise when the majority of their boards are government appointed.

What really caught my attention was RNZ's interview with Dr Stewart Jessamine, currently New Zealand's top public health official. During the interview Dr Jessamine blamed a "distributed" system where responsibilities for drinking water safety are spread between the Ministry itself, DHB's, and territorial authorities (technically water suppliers as there are many suppliers who are not councils). Jessamine could have also included regional councils.

Why do we have a "distributed" system? Because the Ministry of Health asked for it and Minister of Health, Pete Hodgson, saw the change through Parliament in 2007. I would call it more than disingenuous for Dr Jessamine to blame a system that was created by his own division of the Ministry of Health.

Prior to this time responsibility rested solely with the water suppliers. These water suppliers could voluntarily sign up for a grading system overseen by the MoH but it was not compulsory. Prior to 2008, the MoH had issued drinking water standards for many years. What was been good about the standards was that they were primarily performance based. Councils could be deemed to comply if the quality of tested water continuously met certain specific measures. Councils were free to set their own direction as to how they met these standards as long as contaminants stayed within specified limits.

The changes to the Health Act made in 2007 inserted the MoH (via DHB's) into a role of approving the plans by which councils delivered safe water. An examination of Cabinet papers from the time should show a recommendation from the Ministry of Health for it to be granted greater regulatory powers. And these powers did show up in the amended Health Act. Bearing in mind that the MoH has no capability at all in environmental engineering, the chances of the new regulatory system going off the rails increased quite markedly once the responsibilities for drinking water safety got spread out.

Just to be clear: DHB's (foot soldiers for the Ministry of Health) have the absolute power to control whether a council is a registered water supplier or not. Part of that power includes approval of how a council delivers safe drinking water even though neither the MoH nor DHB's have environmental engineering capability. But, if it fails to gain registration and continues to supply water, a council can be liable for fines of up to $10,000 and a further $1,000 per day that the offence continues. Councils have no choice but to do what the DHB (MoH) asks them to do.

In this context the Inquiry is fully justified in criticising the Ministry of Health for not taking the new responsibilities - responsibilities that it had sought for itself - seriously enough.

Tuesday, 8 August 2017

Depreciation pt 2: what happens to the money

In Pt 1 I outlined that calculating and funding depreciation is a mechanical accounting process that is common to just about every enterprise. I also mentioned that depreciation generates cash, so let's move on to what happens to the cash.

It's worth noting that what a ratepayer is paying for in depreciation is not really connected in any direct way to how the cash generated by depreciation is spent. Rates pay for service on a daily basis. Not wildly different to a mobile phone plan. When someone pays a water rate they pay for safe water flowing reliably out of the tap. As it happens part of the cost of making that possible is the wear and tear (depreciation) on the current physical assets in the water network. The cost of the wear and tear is added to all the other expenses when a council calculates its water rate. But what happens to that money after it is collected is not relevant to why ratepayers are asked to pay the money in the first place.

I labour this point because many people are convinced that rates "pay for" infrastructure and that it therefore follows that residents who have been paying rates for many years have some prior claim over newcomers. Nothing could be further from the truth: the ratepayer of 1 day and the ratepayer of 10 years have exactly the same claim (i.e. none at all).

Funding replacement assets

The first and best use for the funds that accumulate from charging depreciation is to pay for replacement assets. After many years use roads, pipes, buildings, plant etc will wear out and need to be replaced. If a council has been dutifully collecting the funds generated by depreciation it should have pretty much enough cash on hand for replacing aged assets.

In theory, once a council has all the assets in place to provide services to its public it can sustainably offer those services forever just through the cycle of charging depreciation and using those funds for asset replacement.

While the process of calculating depreciation may be pretty mechanical the application of the funds it generates requires judgement and some prudence. Adding new infrastructure to service growth or upgrading infrastructure to deliver higher levels of service (performance quality) does not qualify as replacement. Many modern projects actually end up combining aspects of all three and councils have to exercise judgement as to how much to allocate to each purpose for undertaking a project. The council must think very carefully about how much they will need for replacing worn assets in the future and make sure they don't dip too far into the reserves today.

Paying down debt

Surplus funds can also be used to pay down debt. So if some assets are debt-funded then the depreciation charged against them can be used to pay down the debt principal. In a simple model a council would have just finished paying off their asset when it was time to replace it. Actually there is nothing particularly wrong with renting infrastructure like this; it is easily the best way to allocate costs fairly across generations. It just costs more.

And there is no double dipping here. Unless a council has a compelling reason to do otherwise it will charge the same depreciation on an asset whether it is equity or debt funded. So ratepayers pay the same regardless. Although with debt funding ratepayers will also have to pay finance charges there is no need for any special rates or charges to pay off the loan principal.

As a bonus, inflation works in councils favour so that they can pay off debt and still build up some replacement reserves. Under current settings (finance charges=3.5% p.a., civil construction price index running at about 2% p.a.) an asset with a book life of 75 years will be paid off in about 45 years and will still attract depreciation for another 30 odd years which will help pay for replacement at a later date. And that is without doing anything special.

And in practice...?

Well that's the theory. Let's take another look at Hamilton City's books and see what they do in real life.

From their Ten Year Plan 2015-25 I am having a look at their Sewerage numbers. It's not that obvious but for the 2015-16 year they were budgeting for $9.9m operating surplus which was transferred immediately into the capital budget. Miles away in the footnotes they show depreciation for that activity at $8.1m so they purposefully collected $1.8m in surplus via rates and charges. Their Funding Policy declares that they may use rates income to pay off debt principal so that may be one reason for the surplus. But without having the real budget (enormous spreadsheets showing the real financials) it's pretty hard to see what's going on. There will almost certainly be recoveries for overheads like IT, HR and accounting built into these numbers but we can't tell how from the TYP.

Still, the point is that the vast majority of the surplus is depreciation. And what happens to that money? The primary source of funding for growth projects should be development and financial contributions but HCC's numbers show $5.5m being allocated to growth projects but only $2.9m of funding from those sources. Essentially some of the depreciation money is being used to fund new assets. This will be OK under a couple of circumstances:

1. HCC haven't split projects into growth and replacement components when they calculate how much they are spending on growth and how much on replacement. Most growth projects have an element of replacement as well.
2. There is no immediate need for replacement (i.e. the network is relatively young) so the capital can be put to better use now ( as long as they have done their homework and know when there needs to be money in the pot).


In real life funding capital projects is a bit messy. Hamilton City have chosen not to rely only on the designated funding stream for growth (financial and development contributions) and has dipped into some of their replacement funding. Bear in mind that there is no legal or accounting problem with that but they do have to think long-term about whether they will collect enough capital for replacing worn-out assets when the time comes. And, in places they have simply raised capital by rating for it.

Tuesday, 25 July 2017

Housing Infrastructure Fund

Will the government's Housing Infrastructure Fund finally make a dent in New Zealand's housing crisis? Probably not. It has elements of being a step in the right direction but, overall, it is way too tentative and doesn't solve the real problem anyway.

The underlying problem

If houses in Auckland were as affordable as they are in the Greater Tokyo Area (the world's largest metropolis and one of a handful of truly global cities) then the median house price would be in the region of $450k - $500k.

The main reason that they are actually double that price boils down to insufficient land being made available for development. What little is available has been bid up to astronomical levels reflecting the incredibly short supply. Unfortunately a speculation bubble has also formed on top of the normal price rise in response to the short supply.

Without going into all the ins and outs, any policy response to the high price of residential housing has to deal with two, inter-related problems: (i) there aren't enough dwellings to house the population of the country and (ii) speculators will keep bidding land and dwellings up out of the reach of normal people as long as they are convinced that authorities cannot or will not make it possible for enough dwellings to be built.

If building restrictions are just lines on maps then why don't councils simply allow more building? That was the theory behind Special Housing Areas. But fast-tracking permission to develop land for housing means nothing when there is no supporting infrastructure. You simply are not allowed to even start building a house in New Zealand unless you can demonstrate that basic services can be supplied.

The fact is that councils cannot find enough funding through normal channels to build enough basic infrastructure to get ahead of the demand curve for development. This is well known to the land bankers who can rely on council funding constraints when assessing the risks of land speculation.

The Housing Infrastructure Fund

Will the HIF break this log jam? Unlikely. Some of the reasons why:

Monday, 17 July 2017

Depreciation pt 1: the mechanics and revaluations

OK depreciation is a pretty dull topic. But it's not widely understood and it is a crucial component in the council funding model. We can't have a sensible discussion about the merits of Municipal Utility Districts or infrastructure bonds without a working knowledge of depreciation. This post aims to show that the mysterious world of depreciation and asset revaluation is really quite mechanical. A planned later post will discuss the "so what?" aspects of depreciation.

We are all familiar with the decline in value over time of the stuff we own. Our cars, computers, furniture etc are worth less this year than they were a year ago. In business, both private and public, this decline in asset value is formally tracked and accounted for in financial statements. So each year the value of fixed assets (cars, computers, plant) in the books is written down by some fixed percentage. Eventually, for accounting purposes, individual assets are deemed to be worthless and are no longer depreciated.

But there is a useful accounting practice that makes up for the loss of value. All private, public and not-for-profit businesses count that loss of value as an expense. As these organisations take in money they also have to pay operating expenses such as staff costs, power, insurance, raw materials and so on. Depreciation is counted as another expense except that there is no bill to pay so the money stays inside the business. That bit of cash can be put aside before any income or company taxes are calculated and paid.

For example if you buy a computer for a business for $900 that has a nominal life of three years then each year you depreciate the value of the computer by $300 and "put aside" $300 in cash. You can do whatever you like with the cash but if you did hold onto it, after three years your computer would be valued at $0 and you would have $900 in the bank. So you could go out and buy a replacement computer if you wanted to without having to put any more of your own money into the business.

Councils do the same thing with the value of their physical assets. But, because they are capital intensive industries the sums of money are comparatively eye-watering.

A simple example

Let's say a council builds a new bridge for $20m and the bridge's accounting life is 100 years. (Of course there are Roman bridges still standing after 2,000 years but for the purposes of managing money you have to draw a line somewhere).

The calculations are pretty straight forward at first. For accounting purposes the bridge will be worth $0 after 100 years so each year the council depreciates the bridge by $200,000. After one year the bridge is valued down to $19.8m and there are cash reserves of $200k. That process could continue each year for 100 years until the bridge was valued at $0 and there was $20m in cash in the bank.

That $200,000 cash still has to physically come from somewhere and it mostly comes from rates. In this example, building a new bridge automatically added $200,000 p.a. to the total rates take. If that seems a little strange I plan to clarify rating for depreciation in a later post.

Inflation and revaluation

Inflation (even super-low inflation) will savage that $20m over 100 years. The council could invest the money and chances are they could preserve its spending power. But, for a number of reasons, councils don't do that (they pretty much spend the money straight away). Instead, they revalue their assets periodically and, as a result, adjust the amount of depreciation they charge to keep in line with cost inflation.

Councils base their depreciation calculations on what it would cost to replace their assets today not what they originally spent. In the example of the bridge, after three years of owning it the council would get it revalued and recalculate the depreciation charge. The Civil Construction Price Index is currently running at about 3% p.a. (i.e. double the rate of consumer price inflation). At 3% annual price inflation the same $20m bridge would cost about $21.855m to build three years later.

Since the bridge is already three years old it only has 97 years of accounting life left, therefore the book value is set at $21.2m (97/100* replacement cost). The bridge is still going to be depreciated to a value of $0 over its remaining life so the new annual depreciation charge is 1/97 * book value or $218,545 p.a..

By revaluing the bridge every three years the council can keep lifting the depreciation charge to stay in line with current construction costs. Effectively it inflation-proofs its depreciation.


To Takeaway

Sure this stuff is as dry as dust but that is the whole point. The actual process of calculating and funding depreciation is orthodox accounting practised by private and non-private organisations all over the world. From time to time I see people convincing themselves that depreciation and revaluation is some kind of double-dipping or shady money practice. Nothing could be further from the truth.

Revaluation is a normal practice too. Listed property companies would not survive an audit if they didn't revalue their buildings every few years.

The only interesting part is what happens to the money that does collect via depreciation. And that topic is for another day.

Thursday, 29 June 2017

Wellington City's inducement to Singapore Air

I'm not surprised the Auditor-General has declined to investigate Wellington City Council's underwriting Singapore Airline's extension of its routes into Wellington. There was a trail of decision-making stretching back 9 years that supported the actions of WCC CEO Kevin Lavery when he wrote SIA a big cheque in secret. Morally the whole process is pretty shabby but legally it is OK.

I guess many Wellingtonians were a bit stunned when they found out that the CEO of their council had paid Singapore Air a lot of (ratepayer) money to extend their Singapore-Canberra route through to Wellington. This payment would underwrite the commercial risk SIA were taking to trial this new route. There was no consultation, no public council meeting, and so no opportunity for the public or the majority of elected members to be involved.

Although it looked bad Lavery's action was perfectly legal. Council staff can spend money without recourse to elected members under certain conditions. In Lavery's case he was delegated to spend up to $1m in any one transaction as long as it was for an item in the already approved plan for the year. The main purpose for this delegation is to allow contracts for approved works to be accepted without all the delays formal council approval would require. But a delegation is a delegation. So, as long as the payment to SIA was pre-approved, Lavery was entitled to negotiate and sign the deal. In February 2016 Dave Armstrong wondered whether the tail was wagging the dog at WCC. He may have been right but the CEO's delegation also allowed a small group of elected members to bypass their colleagues as long as the CEO went along with them. It's not clear who was wagging what.

Elected members (mayor and councillors) have no executive power. Even Wellington's mayor could not have signed this deal alone. But, by dragging the CEO along, a small group of councillors could strike a deal and get the CEO to use his delegation to sign it. As I say the only stipulation is that the deal had to have already been approved in a Ten Year Plan or Annual Plan.

I couldn't find any reference to this plan in Wellington's 2015-25 Ten Year Plan. It turns out they consulted on it in the 2012-22 Ten Year Plan. There was no attempt to hide it then. This from the Strategic Direction section of the plan:

The Council has also made provision to support long-haul flights to Wellington by retaining funding of $200,000 (for the Council to administer for this purpose) and identifying a funding mechanism to rapidly respond to an opportunity should it arise.

Once this plan was approved by the Wellington City Council after public consultation in 2012 this deal was on the work plan and only required implementation. The only thing I would note is that this $200k is per annum and probably budgeted for in every year of the TYP. In a city the size of Wellington no-one would raise an eyebrow over a one-off payment of $200k but $2m over ten years? As for the funding mechanism for "rapidly respond[ing]", it could be anything but a guaranteed stream of revenue in perpetuity for this purpose would enable WCC to secure a credit line with any lender should they need it.

And there is a little more detail down in the Economic Development activity description:

Long-Haul Airline Attraction – we will continue to support the attraction of a long haul carrier to Wellington in the near future at a level of $200,000 per year. The Council will oversee the budget and work with the Wellington International Airport and Positively Wellington Tourism to achieve our long-haul objectives. Any costs associated with establishing a longhaul attraction fund as part of an agreement with an airline to provide long-haul services to Wellington, will in 2012/13 be met by retaining a portion of the Wellington International Airport Limited dividend, with future funding decided through the annual plan process.

What does "continue to support" mean? It turns out that the idea was first consulted on in the 2006-16 Long-Term Council and Community Plan. And the $200k ratepayer contribution started in the 2006/7 year. Their goals:

Positively Wellington Tourism and Wellington International Airport Ltd have developed a strategy aimed at attracting at least one daily longhaul air service to Wellington from a south-east Asian market. In the past, Wellington’s development as an international visitor market has been restricted because long-haul aircraft couldn’t land on the airport’s relatively short runway. From 2008, that will change. New Boeing and Airbus aircraft will be able to provide long-haul services from the existing runway

And the performance measure was having daily long-haul services to Wellington by 2008/9. As we know they never met their promise (flights to Australia don't count as long-haul) but WCC continued with the line item in each year's budget anyway.

By 2011 the idea got a new lease of life as a crucial (if not the most crucial) component of the Wellington City Economic Development Strategy:

Improving long haul air services, especially with Asia, is critical to improving Wellington’s access to international markets and to attracting talented people, international students and investors
 Once that strategy was adopted the idea of attracting long-haul flights into Wellington had morphed from a plausible idea that failed when tried into a sine qua non without which Wellington City would enter into a death spiral. And within a few months the proposal got that second airing in the 2012-22 LTP.

By the time recent immigrant Kevin Lavery got invited to the party the accumulated funds totalled millions and the proposal had the same orthodoxy as building an ocean outfall to improve sewage disposal. So in a legal sense Lavery was only doing his job.

The only legal quibble would be that consultation was conducted on the basis that direct flights to Asia were the goal. I doubt that a two-step flight via Canberra would comply given that existing trans-Tasman carriers serving Wellington such as Qantas could supply equivalent services already.

Personally I think the processes that lead to the deal were questionable given that they start a decade beforehand with some vague concepts and only tiny (but perpetual) funding. Without much public involvement the proposal initially fails then, rather than being canned, it gets incrementally changed from direct flights to SE Asia to long-haul flights to anywhere with the right to find emergency extra funding if necessary to make it happen. Promises were made in the Economic Development Strategy to providing business cases and further justification if extra funding was needed. If those analyses were ever carried out they have not been published by WCC.

There is a very good case for a joint investigation by the Auditor-General and the Ombudsman to determine whether (i) the overall decision-making process complied with the Local Government Act and (ii) whether the payment when it was made represented a good use of public money. It would be useful for the whole country to have light shone on the process as this incremental changing of goals is common enough in the public sector. Too often there is a gap between what was initially proposed and what was delivered. Our government and councils need to start over if they cannot deliver on their initial proposals. We shouldn't have to shake our heads and wonder how we got to some strange place.



Thursday, 22 June 2017

LG Funding: Capital Funding Overview

If rates are almost always used to fund daily operating expenses where does the money come from to build or buy the big assets like pipes, roads and buildings? The answer depends largely on what the reason for the project is.

Councils carry out capital projects for a number of reasons but all projects will fit into one or more of three categories: new, upgrade or replacement. When we talk about how councils fund capital works we need to use these terms precisely since different funding streams attach to the three categories.

Replacement projects

All major assets will wear out eventually. The lifetime of pipes, roads and buildings is measured in decades but there will still come a point where, even with regular maintenance, an asset has to be replaced rather than patched up.

There is an existing funding stream for replacement via depreciation charges. The vital thing to remember is that the amount of funds collected assumes that assets will be replaced on a like-for-like basis. A narrow bridge attracts depreciation at "narrow bridge" levels not "4 lane motorway bridge" levels.

Over decades circumstances change so it is rare to see a pure replacement project except for some components like a water pump that has a much shorter life. We expect better quality buildings than the ones we built 80 years ago; and we expect better quality roads, water systems etc. For example Dunedin's covered stadium is technically a replacement project since the city was replacing the old Carisbrook facility. But no-one would tear down Carisbrook and simply rebuild it as was, so the new stadium has a lot of upgrade components to it to bring the sporting venue to modern standards (and a bit beyond). However, as the on-going saga of how to fund that stadium shows, depreciation doesn't pay for the new goodies, only for replacing the worn-out components.


New Assets

New means genuinely new. Either a new asset extends or enlarges an existing network or it provides a completely new service. So putting in new pipes in a subdivision creates new assets as does building a new pump station to service that development. Building a water activity pool next to a swimming pool adds a new asset.

When a project adds capacity to an existing service to cater for growth (as in the former example above) then councils can ask the creators of new properties (usually developers) to make a capital contribution to pay for new assets. These capital contributions can be either or both of financial contributions under the Resource Management Act or development contributions under the Local Government Act.

When councils simply want to do something new (as in the latter example) there is no dedicated funding stream and councils have to find new money themselves.


Upgrade projects

A pure upgrade project simply lifts the quality of an asset without changing its function or its capacity. A simple example would be replacing older windows in building with double-glazed units. The building has the same capacity and does the same job, it just does it better.

Upgrade projects should not be confused with life-extending capital works. Many assets will survive long past their design life if, from time time, some major money is spent on them to maintain their integrity. In this case it is normal to use accumulated depreciation to fund this type of work.

A reasonably common example of an upgrade project is re-aligning a road or intersection for safety reasons. A corner may be rebuilt or a road straightened but at the end of the project the road is still doing the same job for the same number of users albeit with a lower probability of a serious accident occurring there.

Most upgrade projects have no dedicated funding available. The safety upgrade I mentioned above might attract funding from NZTA under certain circumstances and from time to time there may be some nation-wide subsidy schemes operated by government that councils can take advantage of. But, in general, they have to find the money themselves for these sorts of projects.


Real Life Jumble

In practice capital projects rarely fall into those simple categories and many are funded from multiple sources. So councils have to exercise considerable judgement in deciding how much to fund a specific project from capital reserves (depreciation), how much from development contributions, and how much from debt or other sources. We have to hope they exercise good judgement because their mistakes may take decades to become obvious.



How well does the system work?

We can keep council assets going in their current state indefinitely under current arrangements. The Shand Inquiry was confident that councils would have no significant problems replacing assets over time. Their assessment was backed up by the Auditor-General who also saw no looming problem.

In theory we can also grow our cities using existing funding mechanisms but the system definitely works best when growing out rather than up. It is also a clunky and inflexible system that tends to lock councils into ten or eleven years of commitment that assumes a fixed and predictable rate of growth. As Auckland found out over the last decade assuming steady rates of growth is unwise.

If councils want to avoid levying capital via rates (and they should avoid that practice as it is manifestly unfair) then upgrading existing assets is always going to be difficult. The major source of funds for upgrades is debt. Once a council has reached its practical limit for carrying debt then it is in a difficult place if some new must-do project comes along.

The system works adequately as long as the following conditions apply:

  • population growth is low-medium
  • population growth is predictable
  • the urban form and infrastructure allows for outwards expansion in preference to intensifying existing built areas
  • there aren't too many external drivers of change at once
You will note that none of these conditions apply to Auckland.


Some specific problem areas


Intensification

Upgrading infrastructure to support higher density populations causes all sorts of financial problems. Working in a built environment is more costly than in open fields. But, worse, upgrading often means throwing away serviceable assets in favour of new assets with greater capacity. For councils there will almost certainly be a funding gap that can only be plugged through debt even though they will be able to use both depreciation and development contributions. Again, once a council has reached its debt ceiling it can't intensify any further until some of the debt is paid off. 

Stormwater

Councils have a huge off balance sheet liability staring them in the face right now: climate change. Stormwater and drainage systems have been designed for lower intensity rainfall events. They can't handle every event but most common ones they can. But we are already experiencing more frequent events at higher intensity levels and that will be the new normal. Dunedin is the most high-profile drainage failure but we have also had problems in Auckland, Edgcumbe, Hutt Valley and we can expect flooding problems to be more widespread around the country in the future. 

Councils have some accumulated depreciation to use to upgrade their systems but that's it. Who knows where the rest is going to come from.

Others

There are other problems heading our way: drinking water (in the aftermath of the Havelock North gastro outbreak), disaster resilience, tourism infrastructure are a few that leap to mind.

There will be funding problems for all of the capital projects that the public may expect or the government may mandate to deal with problems in these areas.






Tuesday, 13 June 2017

Funding tourism infrastructure

Paula Bennett has just announced funding for tourism-related projects in our smaller councils. A typical example is the Hurunui District's proposal to build toilets and a dump station for motorhomes at Culverden for $250k. The government is funding the construction with Hurunui District owning and operating the facility afterwards.

This contribution is certainly not nothing but it isn't totally generous either. There's an old saying that buying a car is the cheapest thing you ever do and that is certainly true of infrastructure like this. Taking advantage of the cash contribution of the government could well end up costing Hurunui ratepayers twice as much over the lifetime of the asset. In present value terms it's about half the lifetime cost of the asset. Not nothing but why isn't the government funding 100% of the lifetime cost?

Once Hurunui District have built their toilets they will immediately incur a whole bunch of operating costs which will have to be funded by ratepayers. Depreciation alone will rack up, say, $5k every year assuming a 50 year lifetime. Cleaning, carting away sewage, general maintenance, insurance, power, supervision etc will add at least another $5k p.a. Over 50 years that's about $500k. The present value of that cash flow is about $200k.

The figures will vary lots between projects but these representative figures indicate the government is contributing just over half the real cost. In practice I would assume that the contribution is less than half because the operational costs of looking after high use facilities is higher than the average for normal assets. There's more damage, more cleaning, more signage, more inspecting.

For a small district like Hurunui all these little costs add up and, while it would be nice to pass on those costs just to those local businesses that benefit from tourism it isn't practical to do so. All the ratepayers will have to share in these costs because there is no way to charge the tourists themselves.

In general I am not a fan of revenue-sharing but this is one situation where it is merited. Dr Eric Crampton recently:
International tourists currently contribute over a billion dollars in GST. If more of the tourists’ contribution to the government’s coffers turned into better facilities in the places tourists go, pressure on those places would ease, making a better experience for locals and tourists alike.
Where does the $1bn go? Good question. The two main contributions the government makes towards tourism is (i) funding Tourism New Zealand ($110m odd) and (ii) funding the Department of Conservation ($465m) The DoC funding benefits tourists and locals alike and covers activities that appeal to tourists and many that have no relevance to tourists. When you strip out the components of the funding that do not directly service international tourism you would be very generous to assume tourists benefit from any more than $300m of the taxes they pay. So maybe $400m all up is used by the government to support international tourism. Which leaves $600m profit per annum for the government to spend on other things. Needless to say private sector operations do not enjoy a 150% contribution toward profit from their expenditure. And small councils get nothing at all from their expenditure.

There is certainly a moral case for the government to hand over more of their tax take to councils to support tourism. It doesn't have to be huge. Bigger centres can handle the current number of tourists without noticeable distortions in their budgets. Auckland and Christchurch especially profit from their ownership stakes in busy international airports. But the smaller councils could do with more help. And that help should be annual operating support not just occasional capital contributions.

There is nothing new in the concept of targeting capital and operating funding to councils. The NZ Transport Agency has been doing it for years for roading. The government just needs to copy the method and apply it to tourism.

Ironically the Minister for Tourism, herself, has articulated the best case for revenue sharing. She recently rejected allowing councils to charge bed taxes on the basis that tourists already pay enough in GST. Fair enough. Now all she has to do is see that our international tourists benefit fully from the taxes they pay by handing over some of it to councils to build and operate better tourist facilities.