successfully addressing asset and financial management challenges john comrie 14 may 2015
TRANSCRIPT
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