Contributed by our partners at PwC.

Council-controlled organisations (CCOs) are an important part of the local government landscape. They provide a wide range of services and/or manage a spectrum of assets and activities for their Council parents. The relationships between Councils and their CCOs vary and can, in some instances, be challenging. In this article we provide an overview of the current trends and activities we are seeing in the CCO space across the country, as well as the driving factors behind these trends.

The key factors driving activity related to CCOs include:

Political cycles: Local government elections result in changes to the elected member composition every three years with new councillors bringing their own perspectives and priorities to Councils. This drives the need for a better understanding of CCOs and their activities by the newly formed elected member group. It also leads to different views on desired outcomes and expectations of CCOs.
Complexity and performance challenges: Many CCOs engage in a mix of commercial/profitable and community-focused activities that require a level of subsidisation. This creates complexity and can lead to challenges in assessing performance and value, and the return on investment for Councils.
Local government pressures: Increased investment needs, cost of living pressures, and funding/balance sheet constraints mean Councils are seeking efficiencies and looking to realise value from within the Council group. Increasing insurance costs and the impact of weather events further emphasise the need for resilience and self-insurance. This is leading to some Councils investigating the realisation of existing investments to create a more diversified investment portfolio.
Water reforms: The Local Government Water Services (Transitional Provisions) Bill confirmed that water CCOs should be considered for future water service delivery.

We cannot think of a time in the last 15 years when there has been so many requests for support from Councils and CCOs across a wide range of areas, with the following current trends:

CCO reviews and restructures: New councillors, the breakdown of trusted relationships, or the need for efficiencies/cash generation can trigger reviews and restructures within the Council group. Councils should consider CCO profitability and, importantly, the community outcomes it delivers, to determine the value it provides to the group. This may require looking at both at an entity and activity level. Consideration of governance arrangements and their effectiveness is also important – enhancements can be made, or structural change addressed, if required. Optimising group tax and treasury approaches should also be considered.
Asset divestments (and re-investment): Cash requirements and risk management are driving many Councils to review their asset holdings (including CCOs and CCO-owned strategic assets) and explore divestments. In some instances this includes re-investment into a more varied asset portfolio. Diversification (reducing financial and geographical concentration risk) and resilience/self-insurance are playing a significant role in the decision-making around this. These are often hotly debated in the Council chamber and require a robust case for change alongside options and scenario analysis. This can provide confidence that trade-offs are understood in making these important intergenerational decisions. Transaction mechanics and parameters need to be worked through as do governance and protection mechanisms following reinvestment.
Water-related considerations: The future of water services delivery is front of mind for almost every Council. Go solo? Join forces with other Councils? CCO or business as usual? Control, balance sheet implications, community voice, pricing, and investment prioritisation are key factors to be considered. Each Council must evaluate the CCO model’s suitability for their specific needs, their ability to deliver on these as well as upcoming regulatory requirements.
Property/social housing: Growing needs in the community and lack of access to government social housing subsidies is driving Councils to look at current service provision models and how these could be adapted. In addition, assessing the return on the existing property portfolio excluding social housing, whether it can enable economic regeneration or at least greater returns, is also becoming more of a focal point. This is leading to consideration of the opportunities a CCO can afford.

In conclusion, CCOs are a critical part of delivering outcomes for local communities in New Zealand. Water reform and the changing landscape for local government means they will continue to play a pivotal role going forward. The drivers and trends observed above are likely to continue for some time. Focusing on the relationship between councils and their CCOs can help navigate some of the challenges and leverage the opportunities presented by CCOs, ultimately leading to better outcomes.

If you’re looking at your CCOs, or are thinking of establishing a new CCO, we would be very happy to chat further and provide some further insights from our experience.

Antonia Robertson
Partner, PwC New Zealand
antonia.e.robertson@pwc.com

Natalie McClew
Partner, PwC New Zealand
natalie.f.mcclew@pwc.co

Phil Fisher
PwC New Zealand
phil.j.fisher@pwc.com