Waipā headwinds

Peter Nicholl

Waipā District Council recently adopted their 2022-23 Annual Report.

They said: “Waipā is bracing itself for financial headwinds in the wake of high inflation, soaring interest costs and a need to fund more depreciation.”

I went through Waipā’s Annual Report and Financial Statements. I found a few things I could criticise. But I found more things I could praise.

The Annual Report is a well-presented document. But it is too long. As a consequence, I don’t think many people will actually read it and that’s a pity.

There are long sections in the report on Waipā’s policies for risk management and performance assessment. They are impressive. I hope councillors have enough time at meetings to discuss these issues thoroughly. The council agendas are long so I’m not sure this is the case.

That would also be a pity as they are great governance tools – if they are used on a regular basis and not just presented in pretty tables in the Annual Report.

Waipā’s surplus in 2021-22 was $31 million and they had budgeted for a surplus of $45 million in 2022-23.

The surplus turned out to be just $1.1 million as ‘growth-related income was significantly down and costs had escalated’.

The main areas that were significantly different to the budget were fees and charges income ((21% below budget), development contributions (71% below budget) and ‘other expenses’ (36% above budget.)

Shouldn’t some of these impacts have been expected and built into the budget?

New Zealand has a major infrastructure problem.

Infometrics recently estimated that there was an ‘infrastructure abyss of $200 billion’.

Waipā’s Annual Report says ‘our infrastructure is in good shape’. They don’t see this as one of the headwinds they will be buffeted by.

I hope Waipā’s confidence that their infrastructure is in good shape is well-placed.

Waipā also said that ‘we continue to have plenty of headroom for planned and prudent borrowing’.

They need to be cautious.

Waipā’s aggregate debt at June, 2023 was $226 million. That is only 10% of their total assets, which is a relatively low level. But it had risen from $149.5 million a year earlier – a rise of just over 50%.

One of the headwinds identified was ‘soaring interest costs’.

This headwind is just starting for the Waipā.

The average interest rate on the bulk of their external debt rose from only 1.06% in 2022 to 2.46% in 2023.  While that is more than double, 2.46% is still well below current interest rates.

As Waipā’s existing debt is rolled over, interest rates on its debt are likely to double again in the next two to three years.  I do not think that interest rates will start falling for some time as central banks find that inflation is harder than they expect to get out of the system now that they have let it return.

Waipā may have to rethink their ‘plenty of headroom’ comment on future borrowing.

One of the things in their accounts that caused me some concern was that almost all of their ‘Total Comprehensive Revenue’ for the year of $263.3 million came from property, plant and equipment revaluations.

Only $1 million of it was from operations.

The revaluation figure was 10% of total assets. That appears to be a large increase in asset values over the last year. I thought it could have been a catch-up on increases in values from previous years that had not been booked. But there had been upward revaluations in each of the previous three years, though relatively small ones in 2020 and 2021.

Waipā won’t be able to rely on this source of comprehensive income year after year.

See: Financial headwinds as costs rise

  • Peter William Ernest Nicholl QSO (born 1944) is a New Zealand economist.Nicholl joined the Reserve Bank of New Zealand where he worked for 22 years. He was chief economist for five years and deputy governor and deputy chief executive from 1990 to 1995.

    In 1995, he became an executive director on the World Bank board representing New Zealand, Australia, Korea, Cambodia, Mongolia and seven Pacific island nations.

    Nicholl was a member of the governing board at the Central Bank of Bosnia and Herzegovina (CBBH). He was Governor of the CBBH from 1997 to 2004, during which time the central bank introduced its own currency and was established as an institution across the whole country.

 

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