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NZ Education Ministry faces smaller bill than feared for leaky schools, as Carter suit looms

By Pattrick Smellie, Wed 7 Jan 2015
FYI, this story is more than a year old

New Zealand's Ministry of Education has cut its estimate for the total cost of fixing leaky schools by as much as $400 million, with a damages suit against Carter Holt Harvey one of the last remaining variables.

The cost of fixing buildings that had more serious leaks will be between $1.1 billion and $1.3 billion, down from a previous estimate of $1.5 billion, acting head of education infrastructure service Rob Campbell said. The reduced estimate was due to "programme experience and remediation costs to date," he said in written answers to questions.

The estimated cost is down from a $1.3 billion to $1.79 billion range given to Associate Education Minister Nikki Kaye in 2013. About 90 percent of the cost covers replacement of defective cladding.

The ministry embarked on court proceedings against cladding manufacturers in 2013, and has since settled with building materials makers James Hardie Industries and CSR.

Prior to the settlement, James Hardie, which had been involved in a number of leaky building cases in New Zealand, took a provision of US$20.4 million, net of any third-party recoveries, over the liability claims as at Sept. 30, 2013, including the ministry's suit, and said uncertainties that existed at the time meant the cost could rise by a further US$12 million.

It later reduced that provision, with a net US$9.1 million as at Sept. 30, 2014. The accounts for its New Zealand unit, James Hardie NZ Holdings, showed a current provision of $10.2 million and a non-current provision of $5.6 million as at June 30, 2014, compared to $17.4 million and $19.7 million a year earlier, though it's unclear whether that includes the settlement.

CSR's settlement with the ministry was recognised a portion of a $9.5 million provision in the 2014 accounts for its New Zealand unit.

Both of those settlements contained confidentiality clauses, and an appendix to the March 2013 report cited as a key message that arrangements were entered into to help address the risk of weather-tightness failure in existing school property, support future school property developments across the country, and maintain continuity of building supplies manufactured in New Zealand.

Campbell declined to release reports written in April 2013 and January 2014 providing updates on the liability claim, saying "there is a greater public interest in the ministry getting the best outcomes from negotiations and legal action," and that talks are still continuing with Carter Holt Harvey, the remaining defendant in the product liability claim.

As at November 2014, the ministry's remediation recovery programme covered 1,792 buildings, of which 343 were active, 1,346 were discontinued, 91 had settlements in place and 12 were on hold. In addition to the existing settlements in place, a further 57 buildings have settlements agreed in principle, Campbell said.

The cost of leaky schools was first recognised in the education ministry's accounts in 2010 when it took a $930.4 million impairment charge on the $8.12 billion carrying value of its school building portfolio, made up of 16,981 buildings across 2,143 schools. As at June 30, 2014, that provision was $828 million, and was recalculated after 211 buildings had undergone remediation costs, prompting a reduction of $103 million from a year earlier. As at June 30, 20214, the building stock was valued at $8.32 billion.

The ministry flagged more than $2 billion of capital spending on school buildings between 2013/14 and 2016/17 financial years, according to its 2013/14 statement of intent, which included earthquake strengthening, repairing leaky buildings and upgrading school infrastructure to link the nation's education network with ultrafast broadband.

Because of the number of buildings that required remediation, the ministry couldn't afford to fund the programme through its baselines, and since June 2012 has redirected part of affected schools' Five Year Agreement (5YA) funding based on the area needing remediation, the March 2013 report said.

"When a leaky building has been fixed or replaced, this effectively modernises buildings and extends their economic life. The need for further modernisation of the building is therefore reduced," the report said. "To continue providing affected schools with their full entitlement of 5YA funding based on area would mean funding allocation is not equitable."

Schools that are more than 10 years old where the average building age is more than 10 years are entitled to $30 per square metre plus a catch up rate if they've been short-changed, multiplied the lesser of actual square metres of the school's buildings or its entitlement under the School Property Guide, plus other adjustments. The result is then multiplied by five years.

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