SUCCESSFULLY ADDRESSING ASSET AND FINANCIAL MANAGEMENT CHALLENGES

John Comrie 14 May 2015

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LG Asset and Financial Management Performance

Are we making progress?

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Glass half full?

Now widely recognised Roads & other

infrastructure are assets Asset intensiveness of LG

services LG asset stewardship

responsibilities Need for and value of

medium/longer term planning

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Glass half empty?

Reliability and robustness of plans

Scrutiny re affordable service levels

Mismatch between accounting & AM data, eg renewal needs/projections asset lives rates and patterns of

depreciation asset valuation & condition

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Verdict

Good progress Australia-wide in last decade

Room and need for further improvement

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Councils financial sustainability?

Many are in better position than they believe Need to focus on long-run accrual

accounting info rather than short-run cash costs/revenue Marathon not sprint

Many can be financially sustainable Incremental changes over time

Some need more help

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Key to financial sustainability Balancing long-run average annual cost of

service provision with long-run operating revenue

Involves actively managing both to ensure achievement of ongoing small underlying operating surplus (net of capital revenue) LG services come from long-lived

infrastructure Trade-offs needed

Balanced long-term financial plan and asset management plan

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Key indicator of financial sustainability

An ongoing underlying breakeven or better accrual accounting operating result net of capital revenues Means all costs (including asset

consumption) being offset by revenue Should then have capacity to renew assets

as and when required

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The Road Forward – Step 1

Reasonably reliable financial and asset management data, eg asset: Useful lives (is often a function of service

levels)

Replacement costs

Rate & pattern of consumption (depreciation)

Componentisation

Residual values

Is not hard – keep it simple! AMP & LTFP needs to be based on same

data & assumptions

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The Road Forward – Step 2

Use data to model various service/cost level scenarios to determine preferred, affordable service levels and relative to potential revenue raising capacity LTFP should be based on achieving

appropriate targets for appropriate indicators

‘focus further down the road’

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The Road Forward – Step 3

Build financial expertise the key to financial sustainability is being

committed to achieving and maintaining financial sustainability

Citizens invariably ask their governments to deliver more services than they wish to pay taxes to fund

More money in itself will not solve financial problems there will always be no shortage of opportunities

to upgrade service levels and acquire additional assets that will lead to higher long-run costs

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The Road Forward – Pitfalls

Think carefully re discretionary acquisition of new assets and upgrading of existing assets to higher levels of service even where opportunities exist to fund

such activity with grants Always focus on long-run impacts – adds

to operating costs‘put high beam on and focus further down the road’

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The Road Forward – Asset Renewal

Unlike acquiring additional assets, asset renewal does not add significantly to future operating costs

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Asset renewal backlogs?

Many councils that are in a satisfactory financial position claim that they have significant asset renewal backlogs Incongruous? Why haven’t assets been renewed?

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Why does below par asset management occur in LG?

Lack of info re asset performance & associated costs? Eg optimal renewal timing

Not convinced it’s a priority relative to other options?

Preference for new additional assets / service upgrades

Lack of forward planning re future revenue needs & affordability of service level proposals? Eg focus on short-term and cash accounting info?

Not convinced they have the financial capacity to do this work? Eg reluctance to utilise additional debt where warranted?

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The Road Forward - more debt?

Councils Australia-wide generally have extraordinarily low levels of debt relative to nature of responsibilities and security of income

Many Councils; Averse to debt Have capacity to better serve communities

by making greater use of debt Providing they are committed to strategies

that ensure financial sustainability and have good long-term financial planning

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Need for debt?

If operating sustainably over long-run then should generally on average be enough cash for asset renewal but

Would still (on average) need to raise debt as a result of purchasing new or upgraded assets – this is equitable

Debt aversion is a major reason for perceived asset renewal backlogs

Councils often try to finance new new works by deferring asset renewal in order to avoid raising debt

The Road Forward – cost control

Review range and level of services

Possible disposal of under-performing assets

Efficiency of service delivery Eg why are costs

increasing at rate above cpi?

Pursuing economy of scale opportunities

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The Road Forward - effective use of revenue raising powers

Council rates are a sound base for raising a large share of most local governments’ revenue needs

Structure of rating system needs to have regard to equity

Many councils have potential to generate more revenue from property taxes Often without impacting on all ratepayers

Councils should not shy away from applying for increases beyond any specified cap – if have evidence it’s needed, equitable and has community acceptance

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Not just self help

Other governments need to do more too: Additional financial support for

disadvantaged councils Eg Review of FAGs distribution

Better targeting of exemptions & concessions

Other legislative/guidance reforms Simplify reporting – emphasise strategic

accrual accounting info Refine financial indicators/targets Encourage better use of debt / treasury

management More consistent auditing

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Conclusion

Financial performance needs to continue improve if warranted asset management expenditure and affordable service levels are to be accommodated

Some councils need additional support but many have greater capacity than they realise Key is commitment to ongoing incremental

improvement and not just on short-term focus

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References

ACELG, Rural Councils Sustainability Project (for Rural Councils Victoria), Stage 1 Final Report, Feb 2015, ACELG, Sydney.

ACELG & IPWEA, 2012, ‘Long-term Financial Planning, Practice Note 6’, IPWEA, Sydney.

Comrie, J., 2013, ‘Roadmap to Financial Sustainability for Local Governments in NSW, NSW Independent LG Review Panel.

Comrie, J., 2013, ‘In Our Hands, Strengthening Local Government Revenue for the 21st Century’, Working Paper, Australian Centre of Excellence for Local Government, University of Technology, Sydney.

Comrie J., 2014, ‘Debt is not a Dirty Word’, Australian Centre of Excellence for Local Government, University of Technology, Sydney.

IPWEA, 2009, ‘Australian Infrastructure Financial Management Guidelines’, IPWEA, Sydney. (New edition soon)

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Thank You