The following is an abridged version of a paper delivered recently by Chris Champion, CEO of the Institute of Public Works Engineering Australia, at the Civil Engineering Conference for Asian Region in Taipei, Taiwan.
Local Government needs to make long term financial planning based on sound asset management planning an organisation wide priority. Sustainable management of infrastructure has to be an essential part of doing business. Community decision makers need to comprehend the whole of life cost of infrastructure. As professionals we need to ensure that information is available to allow informed decision making. We need to adequately plan for the maintenance, renewal and ongoing operating costs of infrastructure. Local Government, and other levels of government, must move from annual budgeting to decisions that take into account long term consequences of resource allocation. The way forward will be closer integration of the technical, the financial, the political and community.
Financial sustainability studies
The financial sustainability of Local Government in Australia has recently been under the microscope. Financial sustainability studies have now been conducted in most States. Access Economics and Municipal Association of Victoria reports covering 441 Councils found that the average infrastructure renewal backlog per council is $20.8 million. This represents a national backlog of some $14.5 billion across some 700 Councils. The funding gap to clear this backlog and cover underspends on renewals is estimated at A$3.1 million per Council per annum.
The Australian Local Government Association (ALGA) also commissioned PriceWaterhouseCoopers (PwC) to complete a national study of the financial sustainability of Local Government. Released in November 2006, this study identified that Local Government is responding to ever rising community expectations by providing a growing range of services and infrastructure. Rising costs exceeding revenue growth is seeing a significant number of Councils develop financial operating deficits. A common response to ‘balance the budget’ is to defer or reduce expenditure on the renewal of community infrastructure. The PwC study concludes that major reforms are required in the way Local Government is funded and the way it operates.
The study correctly states that in the absence of major reforms, Australian Local Governments will have to cut back on services, reduce their asset base or obtain additional revenue if they are to be sustainable in the longer term. The various sustainability reports highlight how significant infrastructure is a core function, responsibility and even a liability of Australian Local Government. Infrastructure is the very foundation of our communities. Most of it was built in the 1950s and 1960s and is nearing the end of its economic life.
Caught in the cost squeeze
The PwC study sums it up perfectly. Councils are caught in a cost squeeze. Revenue growth is not keeping up with the cost of providing and maintaining services for the long term. The Local Government Association of Queensland (LGAQ) has developed a Local Government cost index, which identifies cost increases at about double the consumer price index (CPI). This is a significant financial burden for Councils.
The overall finding of the PwC study is that around 35 per cent of Councils are not financially sustainable. A common finding across all these studies is that sustainability issues result in growing infrastructure renewal backlogs. Councils will be unable to clear these backlogs unless the funding gap is closed.
PwC bases its reform recommendations on two approaches: improve financial sustainability through the pursuit of further internal efficiencies and seek changes to intergovernment funding.
Their recommendation to Government (State and Federal) is to establish a new Local Community Infrastructure Renewal Fund (LCIRF). The focus of this Fund would be on the renewal and replacement of existing assets rather than the development of new facilities. It also proposes a review of Commonwealth Financial Assistance Grants (FAGS) be undertaken to include a cost escalation formula that is better tailored to actual cost movements in providing Local Government services.
Actions Local Government can take
The ALGA PwC study also proposes actions that Local Government can take. Its recommendations to improve internal performance practices are fourfold:
- further improve efficiency, effectiveness and scale
- expand own source revenue
- set clear and appropriate policies
- deepen asset management and financial capacity.
Local Government in Australia has for too long willingly undertaken new and expanding services. It now needs to set clear priorities based on its own inherent responsibilities and what it can afford.
The report recommendation is that Councils establish robust long term service plans which define what Councils provide and how services will be undertaken. Local Government needs to apply caution prior to stepping in and attempting to resolve regional, state and national issues that are not its responsibility. It also needs to secure long term funding, not just the initial capital cost of new services and infrastructure.
The PwC studyt recommends that Councils should “use total asset management plans and systems to better manage asset renewals and replacement, and integrate into broader long term Council objectives”.
A national strategy
The Institute of Public Works Engineering Australia (IPWEA) has a National Asset Management Strategy (NAMS.AU) Committee that provides leadership in asset management in Australia. NAMS.AU, as it is known, has developed a national strategy to provide a sustainable framework for the management of community infrastructure.
It is based on three key elements.
Elected members have a critical part to play
First and foremost, Councillors need to acknowledge their responsibility as proud custodians of the community’s assets. They represent a sizeable investment in infrastructure by past, present and future generations. To help Elected Members understand their role as stewards of the community’s assets, IPWEA has developed a comprehensive awareness program including a DVD titled, ‘Sustainable Communities: Critical Insights’, and training resources.
Knowing your infrastructure gap
This begins with understanding what your community can afford and the potential long term impacts of decisions. Every year Council budgets get tighter, yet typically, discussion at budget time is about funding new projects, with limited consideration given to looking after what is already owned. Across the board there is a necessity for Local Government to adequately plan for the maintenance, disposal and ongoing operating costs of infrastructure, and in many cases an immediate need for increased funding for maintenance and renewals.
A plan is needed to sustainably manage your community – and it has to start now. Developing an Asset Management Plan is a logical four step process.
Step 1 means getting to know what you already own, and the service standards that are intended to be targeted. Costs need to be estimated to maintain community assets to meet that level or standard of service.
Step 2 needs to consider any increased demand and costs for services from development growth – or the impact of declining or other changes in population.
Step 3 involves preparing life cycle management plans for all the assets that are owned. Major asset classes such as roads are often the first to consider. Knowing where assets are in their life cycle diminishes the risk of hitting an unexpected wall of expenditure when assets start failing as they near the need of their life.
Step 4 requires risk and financial projections that become essential in determining which assets are most important to a community, its needs and safety.
By working through this process, there is a better understanding of what it costs to look after community assets that are already owned. Then and only then can informed decisions be made about additional assets a community might be able to afford. The resources required to sustainably manage existing assets into the future needs to be known. An essential step is the preparation of Asset Management Plans for all community infrastructure. IPWEA has developed comprehensive templates and guidelines to simplify drafting of asset management plans and their implementation.
An essential part of business
The issue of affordability brings us to the all important step of moving from annual budgeting to long term financial planning. A number of States are now legislating to require long term financial plans, but irrespective of legislation, it is sound business practice and something that should be done in the interests of making better, more informed decisions. The total cost that some assets can incur over their lifetime can be up to five times the initial capital cost so for every $200,000 spent on a new project, a Council can be committing another $300,000 to $800,000 in future budgets.
The long term has to become an essential part of doing business. Ten year financial strategies need to be founded on sound 20 year asset management plans. Asset management planning should not remain or be considered as a technical solution for engineers operating in isolation. It needs to be part of a loop that provides cash flow projection of renewal costs that input into robust long term financial management plans across the total organisation.
IPWEA is providing the tools for practitioners to implement a sustainable approach to the management of community infrastructure (refer www.nams.au.com).
