It's too early to say if amalgamation is on the cards for the country's 78 councils, but the way New Zealand's towns and cities are run is poised for overhaul, to replace an under-pressure local government system.

An independent review has found a swathe of issues in the sector including not enough funding and capacity, poor cohesion and collaboration, low diversity, mistrust between local and central government, and high demands on iwi and Māori without wellbeing outcomes.

The Future for Local Government Review interim report, released publicly today, identifies the challenges facing local government over the next 30 years as climate change, environmental degradation, economic performance, poverty and inequity, housing, health, mental wellbeing, natural hazards, demographic change, pandemics and technology advances.

Sustainability and relationships were at the core of the issues and local government also needed to strengthen iwi and Māori partnerships under Te Tiriti o Waitangi.

Representation and low engagement were also areas of concern, along with information and communications technology, which was fragmented and in some cases not fit for purpose.

The review, to take a broad look at New Zealand's system of local democracy and governance, was established by Minister of Local Government Nanaia Mahuta in April and is a two-year project due to finish in April 2023.

Today's interim report, Ārewa ake te Kaupapa - Raising the Platform, asks a series of questions that the panel will now set about developing answers to over the next year.

The questions include how local governance should be reshaped, what functions and roles would be essential, and what funding and financing would be needed.

It comes as the government is also conducting resource management and Three Waters reforms, which the interim report said must be factored into any decisions about the future of local government.

The report said the main pressures on local government were the culture of mistrust between central and local government, the constant financial pressure to manage growing demand including infrastructure for housing, and overlapping and conflicting responsibilities because the sector operated under a "complex web of legislation", according to the Productivity Commission.

There was also varying capacity and capability between councils ranging from Auckland with a budget of $4.4 billion and a population of 1.7 million to the Chatham Islands with an $8 million budget for 760 people.

Mahuta told Local Democracy Reporting it was too early to say what size and number of councils would emerge after the review was complete, but there were no pre-determined outcomes.

She welcomed today's report and said the relationship between central and local government was a two-way street both parties needed to work at.

"We're going to be tested both ways but it is what it is. I would be more worried if councils started to close the doors on the most difficult conversations and were not calling to be engaged. I have not had that experience yet."

In rethinking local government the report said an agile and adaptive approach was preferable in a fast-paced and complex world.

It said any redesigned local governance would need to address current pressures including breaking down mistrust, clearly defining functions and roles and at the most appropriate scale, having sufficient capability and financial capacity including potentially moving some functions to central government, greater collaboration, and better reflecting all interests including iwi and Māori.

"Any future system of local governance will need to move beyond existing structures and silos and consider governance as a shared endeavour in which many players contribute and deserve a voice."

In the meantime the review panel of five, chaired by former Waimakariri District Council chief executive Jim Palmer, suggested early opportunities for change including:

• That regional and unitary councils temporarily host the committees intended to develop new resource management plans for each region;
• A joint central-local government steering committee be established with input into the design of the country's new public health service;
• A partnership funding model between central and local government to explore investment in unified ICT, including a stocktake of existing systems and a business case for transition;
• Using a portion of the planned Three Waters transitional funding to stimulate locally led collaborative and innovative approaches to wellbeing;
• Develop a national framework to build capacity for iwi and Māori to take part in the reforms;
• Use the Māori Committee of Local Government New Zealand or the Office for Māori-Crown Relations to provide national support to new Māori ward councillors at next year's elections;
• Jointly develop with central government statements that assess the impact of government decisions on local authorities.

Palmer said the review's second phase would now seek more input from a diverse range of people and communities including looking at overseas models.

Local Government New Zealand advisor to the panel and Selwyn mayor Sam Broughton said he was encouraged to see the panel had identified areas outside its scope such as health and education as being critical to thriving communities.