12 December 2014

15-20 years to repay costs of Wellington merger

Analysis of the Local Government Commission’s plan to amalgamate the Wellington region into a single council shows it could take up to 20 years to pay back the costs of the merger, and if the costs blow out as they have in Auckland, they will never be recovered.

Analysis for the Local Democracy Coalition by economic analysts TDB Advisory, show that underestimating the costs of information technology or salaries quickly blows out the pay back period to over 15 years. In fact, if the costs rise to the levels experienced in Auckland, the merger will never recover its costs.

'Corporate support personnel savings’ are almost half of total estimated savings, so any part of these savings not realised has a significant impact. Even if 50% of just the personnel savings are not achieved the entire project has a negative Net Present Value (NPV).

Even the Commission's own figures indicate it will take eight years before there are any net benefits. Moreover, that blows out to twelve years when calculated on the basis of the present value of the money, rather than the undiscounted rate.

Coalition spokesperson Ray Wallace said the risks of amalgamation far outweighed the claimed benefits.

“Our analysis shows that it is much more likely that it will take over 15 years to pay back the costs of the merger. The worst case scenario is that it will never recover costs. It's just not worth it.” Mr Wallace said.

The Commission's own numbers estimate $184 million would be spent on transition costs and that it would take eight years before any financial gains were realised.

“We’re being told a merger will save money, yet the savings haven’t happened in Auckland, nor in any other amalgamation we can find overseas – they are more expensive than planned, and the benefits are less.

“That's a high price to pay for the dubious and unstated advantages of having "one voice".

"Given the low debt levels some Councils in the region enjoy, this risk is not something that ratepayers should be saddled with.”

Mr Wallace said there were far better options. He said the Commission inexplicably backed an amalgamation option well down its own list in terms of its own estimates of net financial benefit – it chose the fifth-ranked option.

“The top-ranked option – Stronger Regional Delivery – is the clear favourite in terms of the LGC’s own financial cost and benefit projections.”

This option involves transferring some capital-intensive council functions to a regional level while retaining local councils to manage local areas.

“It would cost $55 million less than the LGC’s preferred option, involve less costly structural change and come with less risk,” said Mr Wallace. “Why this option was ignored in favour of one that clearly doesn’t stack up is beyond us.”

About the LDC: The Coalition was formed in March this year to give voice to concerns over amalgamation proposals from the Local Government Commission, and the Commission’s approach to its task. It believes in people self-organising their local governance: www.localdemocracy.org.nz

ENDS

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