Presentation by John Comrie National Local Government Asset Management and Public Works Engineering Conference 13 May 2010

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Local governments Australia-wide struggling with financial pressures and demands Significant under-funding of asset management responsibilities Estimated 35% of councils nation-wide not financially sustainable under existing policy settings 3

Use accrual accounting for reporting and decision-making and focus on operating result Better asset management is key – local government is far more asset intensive than other spheres of government – asset management performance has much greater bearing on financial performance Long-term financial planning 4

Developed to assist asset intensive entities plan and manage responsibilities Released by Institute of Public Works Engineering Australia (IPWEA) in late 2009 See; 5

Professionals Engineers (NAMS.AU), Accountants (NLGFM Forum) Local Government Associations ALGA, LGAQ State Government Tas Audit Office NSW, Vic Local Government Department Qld Treasury Valuer-General Victoria Australian Government Dept of Finance and Deregulation Dept of Infrastructure, Transport, Regional Development & LG Aust Procurement and Construction Council Inc. 6

Highlights; Financial sustainability issues and strategies Five steps in infrastructure financial management 1.Service planning 2.Asset management planning 3.Financial planning 4.Reviewing a service/funding gap 5.Financial reporting 7

Includes; detail on accounting treatments, eg; When to capitalise or expense asset related outlays Accounting for assets by component Determination of useful life Depreciation Revaluation Impairment (reliable treatment improves information for decision-making) various how to guides 8

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Service levels from assets need to be based on long-term affordability Asset maintenance/rehabilitation should be based on minimising whole of life costs not short-term cash flow considerations Cash flow constraints should be resolved through long-term financial plan 10

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Are not the same – can have good asset management with cash accounting But good use of accrual accounting can tell accurate picture about infrastructure condition and performance Can therefore assist in achieving optimal asset management 13

Depreciation calculated to recognise gradual consumption of assets (spreads cost of asset over useful life) decrease in asset value reflected in balance sheet corresponding expense shown in income statement 14

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Needed by every organisation with significant long-lived infrastructure Otherwise impossible to effectively and equitably manage service level, asset management and revenue raising decisions Show financial impact and consequences over time from proposals re asset stocks, service levels and revenue etc A simple financial plan is much better than no plan 16

AIFMG (see Section 2.6) recommends; Use of 8 specifically developed performance indicators Are easy to measure and understand and based on accrual accounting information Financial strategy and long-term financial plan should be based on achieving appropriate targets of performance for these indicators on average over time As a consequence existing policy settings may warrant revision (eg rating, service levels and debt) 17

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Net debt levels in local government are very low In many instances decision-makers have allowed assets to prematurely fail or incur much higher maintenance costs even though it would have been more cost-effective over time to borrow to rehabilitate/replace 19

Public entity decision-makers & those they are accountable to often uncomfortable with idea of more debt Need to better demonstrate impacts Long-term financial planning enables assessment of implications of raising more debt (or not) 20

If operating sustainably then likely to generate approximately enough cash to fund asset replacement on average over time Would still (on average) need to raise debt as a result of purchasing new or upgraded assets – this is equitable and efficient Only way can avoid loans as a consequence of purchasing additional assets is by; Saving for assets (ie generating operating surpluses) and effectively charging people more than cost of service they currently get Delaying asset optimal asset renewal timing which will result in lower service standards and/or higher lifecycle costs 21

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1. Review range and level of services (community needs and preferences change over time) 2. Program of continuous efficiency improvement 3. Review projected renewal needs/use optimum (eg low cost) renewal methods 4. Consider disposing of under-utilised assets 23

5. Give priority to asset renewal over new asset (ie increase in service) proposals 6. Ensure new & upgraded asset/service level proposals are affordable long-term 7. Source additional income having regard to equity 8. Raise additional borrowings (can meet immediate cash flow needs and may be equitable but in future income will still need to increase relative to operating costs) 24

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Infrastructure is an asset and needs to be accounted for as such Operating result is important and financial sustainability depends on positive result (on average over medium term) Revenue raising and service level decisions need to have regard to future implications 26

Depreciation is legitimate expense, needs to be reliably measured and revenue raised to offset Need to be wary of adding to or upgrading stock of assets Accepting grants or free assets not always good thing Capital works program needs to accommodate asset renewal needs in order to minimise long-term cost of service 27

28 Questions? ;