WHAT POPULATION PROJECTIONS REALLY MEAN FOR YOUR ASSET MANAGEMENT PLANS

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1 WHAT POPULATION PROJECTIONS REALLY MEAN FOR YOUR ASSET MANAGEMENT PLANS Ralph Fouché, MWH Global Abstract In 2014 Natalie Jackson presented a Keynote presentation titled Understanding today s demography for tomorrow s infrastructure at the 2014 IPWEA NZ Conference. This presentation highlighted the aging and population movement trends in NZ and pointed out that already nearly a quarter of NZ territorial authorities have more elderly people than children living in their regions. The indications are that pretty soon there will be fewer labour market entrants than exits; less than 15% of the population will be in key reproductive ages (20 39 years); more deaths than births will occur which will result in an absolute decline in the population. NZ population decline is expected to occur before Given this, managing assets that are affordable to customers will be very challenging. Infrastructure is a long term asset, yet Asset Managers have to be creative to provide customers with the levels of service that they expect as well as can afford. This will require some demanding financial implications on managing assets. This paper will look at the implications of declining populations for Asset Managers and will look at solutions for Asset Managers to consider when facing this challenge. Keywords Asset renewals, population decline, demographic forecasts, aging population, affordability of infrastructure, sweating the assets, operational efficiencies. Introduction NZ and many other countries around the world face numerous infrastructure challenges however NZ currently has some very difficult asset management challenges ahead as we decide how to navigate the next fifty years of asset renewals and account for the growth and population decline in certain regions. Natalie Jackson from National Institute of Demographic and Economic Analysis (NIDEA) spoke at the IPWEA NZ Conference in 2014 and outlined some very thought provoking demographic forecasts for NZ. Amongst these trends was a decline in population for many regions across NZ and an overall aging of the population across the entire country. More recently the Office of the Auditor General (OAG) published reports which utilise data from the recent Long Term Plans prepared by Territorial Authorities (TAs) across NZ which suggest that there is a widening gap in asset renewals and increasing debt which makes for challenging times for Asset Managers in the coming decades. Demographic Trends in NZ Dr Natalie Jackson from Waikato University and NIDEA 1 presented a keynote address at the IPWEA NZ 2014 Conference and outlined some very thought provoking demographic forecasts for NZ. These forecasts were real indicators of why Asset Managers should be utilising this very important input into their decision making for forecasting renewals and affordability of infrastructure assets for the future. The three of particular concern for this paper are; 1 Dr Natalie Jackson is now Professor at Massey University and is Director of Natalie Jackson Demographics Ltd 1

2 Population declining in the regions. Population increasing in the metros. Population aging everywhere Population declining in regions Statistics NZ (Stats NZ) forecasts a consistently steady increase in population, but there is a significant matter that needs further explanation. Not all of NZ regions are experiencing the same growth rates; in fact there is significant variance in growth rates across the country. Stats NZ released a paper in February 2015 looking at population forecasts and demographic projections for the 67 territorial authority areas namely Subnational Population Projections 2013(base) This publication highlighted the projected population change during the period and these are reproduced below in the attached charts. The Projected Population Change in NZ during the Period Source: NZ Statistics, (February 2015) Subnational Population Projections: 2013(base) 2043 Despite the fact that there are areas of population growth of more concern to Asset Managers should be the declining or stagnant population forecasts for a vast majority of NZ regional population. In the North Island there is an obvious indication that population growth is limited to the Auckland Hamilton Tauranga triangle as well as the South Western ends of the island. A large number of district councils in central north island will experience less than 0.5% population growth in the next years. Similarly in the South Island the growth is concentrated around Canterbury, Queenstown and Nelson, while the remainder of the island can expect a population growth rate of less than 0.5%. Population increasing in the metropolitan centres During 2006 and 2013, 11 of New Zealand s 12 cities (Christchurch excluded) shared threequarters of NZ s growth. Auckland made up more than half this growth. The remaining growth was spread thinly across 36 districts, while 20 districts either declined or did not grow. According to NZ Stats, The Auckland region will account for three fifths of NZ s growth up to 2043 by which time it will be home to 40% of NZs population. 2

3 The National Institute of Demographic & Economic Analysis (NIDEA) produced a chart showing the population growth in percentages using the information from Stats NZ where it can be seen just how the growth is being dominated by the main metropolitan centres and Auckland s dominant share of this growth. NZ population aging Not unlike many countries around the world, NZ s population is aging. This is driven by a two main factors, 1. Narrowing gap between births and deaths and 2. Life expectancy is increasing as an increasing number of people reach older years Stats NZ projections forecast that 51 Territorial Authorities (TAs) will have fewer children in 2043 than in Approximately 24% of NZs population will be over 65 in Furthermore the NIDEA suggests that in twelve years time there will be more elderly than children in NZ, with approx. 21 TAs (31%) already experiencing this statistic. The effect of this change in these areas will mean the proportion of the working age population will decrease resulting in a decline in the economy in these regions. Overall this is likely to have a serious impact on the affordability of services in these areas as more and more rate payers start to rely on fixed incomes and the economy earners decline. Affordability 2020 and beyond There are three recently released reports that highlight a growing challenge for NZs infrastructure managers. These reports include; 1. Reflections for our audits Our future needs is the public sector ready? May 2014, OAG 3

4 2. Water & Roads : Funding and management challenges Nov 2014, OAG 3. Local Government Funding Review Jan 2015, LGNZ OAG in its Water & Roads: Funding and management challenges Nov 2014, considered the financial performance of all TAs. This report highlights a downward trend in asset re investment through renewals. Each of these reports highlights is a challenging affordability environment. The Forecast accumulated renewals expenditure and depreciation Source: OAG, Water & Roads: Funding and management challenges Nov As Asset Managers we know that there is an art to knowing the exact time to replace an asset. There are many variables to consider when planning to replace assets which include consideration of growth, other asset replacements in the same area, health and safety risks, etc. and so it may be that our Asset Managers are extending the renewal cycles of assets with better management. We may expect that depreciation funding is being deferred or held back for spending in future years. We would therefore expect to see an associated increase in forecast cash, reserves, or investments, and/or a forecast decrease in borrowing. However this is not the case as debt is forecast to also increase. One is left with the conclusion that the funds must therefore be used for other activities within council. As part of the AOG report, NZIER was commissioned to research and provide an historical perspective of TAs infrastructure investment trends. Two main points to consider from this are; 1. Collectively TAs certainty of forecasts reduces with time and actual investment runs below forecasts 2. There is a pending renewal cycle approaching. Roading assets are approaching their 2 nd or 3 rd renewal cycles, with bridges approaching a renewal cycle around 2025 and 3 waters expected to begin a significant renewal cycle around NZIER reported that between 2006 and 2013 employment growth in some regions declined. A cursory glance at these declining regions suggests that some of these regions are the 4

5 same as the declining population regions seen in section above (Population declining in Regions section). Fewer job prospects are driving people (particularly younger people) from the regions to the metropolitan centres. This is resulting in an aging population in these regions. When this is considered in the context of the demographic changes that NZ is forecast to experience we can conclude that many of NZs regions will experience a declining and aging population whilst also facing significant asset renewals which will need to be funded either through rates or debt neither of which will be easy to repay given the lower income growths of their ratepayers. Possible Solutions These are challenging times for Asset Managers to consider. There is no one solution fit for all regions as they all face different futures and have different renewal demands. Asset Managers and community leaders are going to have to be creative in finding solutions to these issues. Councils will need to consider solutions that will address the declining population in some regions, or the widening deferred renewals gap or the eventual affordability and funding issues for infrastructure. There are probably three main responses to this situation; 1. Do nothing 2. Counter the threat or 3. Accept and plan around it This paper will only consider the third point. Sweating the Assets Asset Managers worldwide have found that assets are lasting much longer than originally planned for. By maintaining and operating assets differently Asset Managers and operators are able to still provide for the desired level of service, sweating the asset well past its initial replacement date. New technology will no doubt provide a valuable tool in extending asset lives. New components for existing assets will extend lives and asset operators should embrace new technology in this regard and be open to innovation in operations and maintenance. 5

6 Operational Efficiencies Operators must consider non traditional approaches to managing assets. Effective monitoring of risks and better data management and forecast modelling must be utilised. It s no longer acceptable to conservatively manage an asset operators and asset managers must embrace a sophisticated approach to managing the service levels required. Changes in how an asset is operated has provided for a renewed wave of operational efficiencies and globalisation has allowed operators to be more globally networked to identify and implement operational efficiencies already working well in other parts of the world. We are not alone in trying to solve this problem and NZ can learn from this and share what works well in NZ with their surrounding TAs. Affordability This is most likely NZ s biggest challenge for some regions where the population is declining (and aging) and the economic outlook is deteriorating. The income and wealth of the businesses and individuals affect the ability of ratepayers to pay the rates and other charges. In other parts of the world user charges have been implemented to counteract the affordability issues, relying on unit rate charges for actual consumption to take cognisance of the fixed income of its customers. User charges already in action for electricity and gas in NZ and for water in some regions have had a positive influence on efficient use and therefore delays in major capital investment. Another solution that is already being utilised is the termination of responsibilities for a scheme/network by the public sector. The schemes become private schemes and are then maintained and operated by the very people that use the scheme under a body corporate style arrangement. When private companies face similar challenges to their future around their customer base shrinking and revenue declining, they take make use of a number of options to survive. One that is in favour currently given the positive economic outlook is the option of mergers and/or acquisitions. For some regions across NZ, where affordability of asset renewals with a declining population is a challenge, it may be necessary to consider a merger to survive (merger used loosely here considers any combined service provider but it has to be predicated on that community being able to afford the assets in their service area. A merger provides for a larger number of revenue earners which can then be used to spread the risk of asset failure and renewal. Already NZ is moving to district wide rating systems for assets to spread the cost amongst a wider ratepayer base. Successful organisations faced with challenging change and complex issues usually identify what they can control and plan to carry out a strategy to survive with the risks clearly identified. The Infrastructure Strategies being developed in NZ should clearly identify the very challenging renewal and affordability issues and make some robust assumptions around income which aligns with the ability of the TAs population to afford this service. Conclusion Asset Managers have some challenging times ahead. With declining populations forecast for many regions across NZ and an aging population combined with increasing debt and a looming asset renewal cycle, Asset Managers need to be very creative in finding sustainable solutions to these challenges. Asset Managers and engineers can identify and implement the very complex topic of sweating an asset and finding solutions to the challenging renewals cycle that is looming for all of NZs infrastructure assets. However this challenge requires leadership and teamwork from everyone. In the past affordability issues for infrastructure assets were always seen as the financial/accounting departments call. Affordability of infrastructure assets should be 6

7 a very real focus for everyone involved in providing the infrastructure service to ratepayers. Everyone involved in this sector has a very real chance of reinventing our future by embracing new technology and sharing our smarts. References Dr Jackson, N (2014). IPWEA Conference 2014, Keynote Address. Dr Jackson, N, NIDEA (March 2014) Briefs No. 3, Office of the Auditor General, (May 2014) Reflections from our audits: Our future needs is the public sector ready? Office of the Auditor General, (November 2014) Water and roads: Funding and management challenges. LGNZ, (January 2015) Local Government Funding Review. Statistics NZ, (February 2015) Subnational Population Projections 2013(base) Author Biography Ralph Fouché is MWH Global s ANZ New Business Director. Ralph has spent the last twenty years serving NZ local authorities, assisting them with their infrastructure asset management challenges. Ralph has over twenty seven years experience as a Civil Engineer and has worked on engineering projects across NZ as well as Australia, Pacific Islands, South Africa, the UK and Philippines. 7