Productivity Commission report reveals the Government is forcing regulative responsibilities on to councils.

If there is a tendency for businesspeople's eyes to narrow and lips to curl at the very sight of their local council offices, the reaction may be unfair or at least misdirected.

As part of its inquiry into local regulation the Productivity Commission commissioned a survey of 1500 businesses.

Nearly three-quarters reported having at least some contact with local government's regulatory processes, and among them 39 per cent said it placed a significant financial burden on their business.

Nearly half thought the time and effort involved in complying with local authority regulation was too large and 70 per cent were unhappy with the fees charged.


And nearly two-thirds considered the compliance costs arising from local body regulation exceeded those of the tax system.

The greatest cost impact came from planning, land use and water consents, or from building and construction consents - both areas, the commission notes, typically associated with expanding or building something from scratch.

But the Productivity Commission's draft report Towards Better Local Regulation, released this week says that, contrary to common perceptions, almost all the regulations made or administered by local authorities are undertaken on the direction of central government or are necessary for carrying out their duties under acts of Parliament.

It has identified 30 pieces of primary legislation which impose regulatory functions on local authorities, it struggled to find any they have initiated themselves.

An obvious and growing tension exists between central and local government, the commission says.

"There is a tendency in central government to [incorrectly] view councils as simply operational arms of central agencies - subservient organisations that must be responsive to the instructions of the minister," it says.

"Local authorities, on the other hand, view themselves as largely autonomous organisations that have their own funding base and whose leaders are elected by, and accountable to, their local constituents."

The degree of discretion local authorities have in administering regulations varies from one piece of legislation to another.

Highly prescriptive measures can have very uneven cost impacts across the country and can be misaligned with local priorities.

The Clutha District Council told the commission it was spending $6 million to meet national drinking water quality standards.

"If Council had been able to make its own choices there could have been much better uses of $6 million, for example road safety, where a similar investment could have saved many lives instead of simply reducing the incidence of stomach upsets," it said.

Local Government New Zealand argues for greater involvement by local government during the design stage of regulation so that the practicalities of implementation are taken into account.

Astonishingly, it says in its submission to the Productivity Commission that the current review of the Resource Management Act is being undertaken with no local government input at the most senior level.

The commission itself is struck by the fact that fewer than 1 per cent of resource consents are declined.

Does this mean that applications unlikely to succeed are not put forward in the first place?

Or that some are improved or helped to comply during the consenting process?

Or does it mean too many low-risk activities need consents?

The commission is not sure. It seeks feedback on the question.

It also notes that a higher proportion of consent applications get appealed to the Environment Court than get declined by the councils. It detects perverse incentives at work.

As hearings by court are de novo (start from scratch) appellants may have opted to "keep their powder dry and not presented their full case at the council hearing".

Local Government NZ says the court's de novo role is extremely costly to business and communities and "extraordinarily undemocratic".

"Appeals to the Environment Court have been used for what we see as frivolous and vexatious attempts to create costs to competitors by delaying approvals."

It remains to be seen , it says, whether changes to the RMA introduced by the previous Government to reduce the ability to make such appeals will work.

Some lawyers - hardly disinterested parties - argue that the wide ambit of Environment Court review provides an incentive for councils to take a more responsible approach to their decision-making.

"An alternative view is that it encourages local authorities to hurry through their decision-making processes as they know they are going to court anyway," the commission says.

At this stage the commission is non-committal on whether it would be feasible to narrow the legal scope of appeals, merely putting the question to the next round of submissions.

Nearly half the councils surveyed by the commission said building and construction consents are the regulatory function which takes the most staff time.

The joint and several liability rule - under review by the Law Commission - has left some councils holding the bag over leaky homes. That is seen as underlying a degree of risk aversion and delay in the building consents process.

As for the costs of councils' regulatory functions, the commission found that to the extent they are a charge on ratepayers - rather than recovered through user charges and fees - they represent on average around 6 per cent of councils' operating expenditure.

"The local government sector has a strongly held view that central government passes regulatory functions onto local government without sufficient consideration of the funding implications for councils."

Unfunded mandates, where central government imposes additional responsibilities and costs on to local government without the necessary funding, weakens the discipline to make sure that the benefits of regulation outweigh the costs, the commission says. Its view is that if the benefits of regulation accrue locally, then the associated costs should be managed locally.

If taxpayer funding were to be made available, as some local authorities propose, it would come with strong accountability requirements.

Unfunded mandates is another of the issues on which the commission is seeking further submissions.

The closing date for submissions on the draft report is March 6, 2013. The commission's final report is due two months later.