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

Presentation by John Comrie
National Local Government Asset Management and Public Works Engineering
Conference
13 May 2010
2



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;
www.ipwea.org.au/AIFMG
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
9



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
$
Outlays
Equivalent Annualised Cost
Year
11
12



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
15




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
18


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
22
1.
2.
3.
4.
Review range and level of services
(community needs and preferences change
over time)
Program of continuous efficiency
improvement
Review projected renewal needs/use
‘optimum’ (eg low cost) renewal methods
Consider disposing of under-utilised assets
23
5.
6.
7.
8.
Give priority to asset renewal over new asset
(ie increase in service) proposals
Ensure new & upgraded asset/service level
proposals are affordable long-term
Source additional income having regard to
equity
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
25



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
 Questions?

Email;
[email protected]
28