Transcript Successfully addressing asset and financial management

SUCCESSFULLY ADDRESSING ASSET
AND FINANCIAL MANAGEMENT
CHALLENGES
John Comrie 14 May 2015
LG Asset and Financial Management
Performance
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Are we making progress?
Glass half full?
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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
Glass half empty?
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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

Verdict
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
Good progress Australia-wide in last decade

Room and need for further improvement
Councils financial sustainability?
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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
 Many
not sprint
can be financially sustainable
 Incremental

changes over time
Some need more help
Key to financial sustainability
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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
 Balanced
plan
needed
long-term financial plan and asset management
Key indicator of financial sustainability
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
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
The Road Forward – Step 1
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Reasonably reliable financial and asset
management data, eg asset:
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Useful lives (is often a function of service levels)
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Replacement costs
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Rate & pattern of consumption (depreciation)
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Componentisation
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Residual values
Is not hard – keep it simple!
AMP & LTFP needs to be based on same data &
assumptions
The Road Forward – Step 2
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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’
The Road Forward – Step 3
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Build financial expertise
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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
The Road Forward – Pitfalls
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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’
The Road Forward – Asset Renewal
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
Unlike acquiring additional assets, asset renewal
does not add significantly to future operating costs
Asset renewal backlogs?
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Many councils that are in a satisfactory financial
position claim that they have significant asset renewal
backlogs
 Incongruous?
 Why
haven’t assets been renewed?
Why does below par asset
management occur in LG?
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Lack of info re asset performance & associated costs?
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 Eg optimal renewal timing
Not convinced it’s a priority relative to other options?
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Preference for new additional assets / service upgrades
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Lack of forward planning re future revenue needs & affordability
of service level proposals?
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Eg focus on short-term and cash accounting info?
Not convinced they have the financial capacity to do this work?
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Eg reluctance to utilise additional debt where warranted?
The Road Forward - more debt?
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Councils Australia-wide generally have extraordinarily low
levels of debt relative to nature of responsibilities and
security of income
Many Councils;
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Averse to debt
Have capacity to better serve communities by making
greater use of debt
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Providing they are committed to strategies that ensure
financial sustainability and have good long-term financial
planning
Need for debt?
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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
deferring asset renewal
new works by
in order to avoid raising debt
The Road Forward – cost control
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Review range and level of
services
Possible disposal of underperforming 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
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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
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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
Not just self help
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Other governments need to do more too:
 Additional
 Eg
financial support for disadvantaged councils
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
Conclusion
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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
References
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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