1. SUCCESSFULLY ADDRESSING ASSET AND FINANCIAL MANAGEMENT CHALLENGES John Comrie 14 May 2015

2. LG Asset and Financial Management Performance 2  Are we making progress?

3. 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 3

4. 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 4

5. Verdict 5  Good progress Australia-wide in last decade  Room and need for further improvement

6. 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 6

7. 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 7

8. 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 8

9. 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 9

10. 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 10 ‘focus further down the road’

11. 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 11

12. 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 12 ‘put high beam on and focus further down the road’

13. The Road Forward – Asset Renewal  Unlike acquiring additional assets, asset renewal does not add significantly to future operating costs 13

14. 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? 14

15. 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? 15

16. 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 16

17. 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 17

18. 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 18

19. 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 19

20. 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 20

21. 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 21

22. 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 21 st 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) 22

23. Thank You 23