USING THE AUSTRALIAN INFRASTRUCTURE FINANCIAL MANAGEMENT GUIDELINES TO OVERCOME AN ASSET MANAGEMENT FUNDING GAP

1. USING THE AUSTRALIAN INFRASTRUCTURE FINANCIAL MANAGEMENT GUIDELINES TO OVERCOME AN ASSET MANAGEMENT FUNDING GAP Presentation by John Comrie National Local Government Asset Management and Public Works Engineering Conference 13 May 2010

2. Background

3. PRE-FINANCIAL SUSTAINABILITY INQUIRIES • 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

4. KEY TYPICAL INQUIRY RECOMMENDATIONSS • 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

5. Australian Infrastructure Financial Management Guidelines (AIFMG) • 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

6. AIFMG National Steering Committee • 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.

7. Australian Infrastructure Financial Management Guidelines (AIFMG) • Highlights; • Financial sustainability issues and strategies • Five steps in infrastructure financial management • Service planning • Asset management planning • Financial planning • Reviewing a service/funding gap • Financial reporting

8. Australian Infrastructure Financial Management Guidelines (AIFMG) • 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

9. Asset Management Objective - key message from AIFMG

10. Asset Management Planning • 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

11. Annual outlays associated with acquiring and operating an asset will vary – in considering affordability and charging focus on annualised impact on operating costs

12. Accrual Accounting- key message from AIFMG

13. Asset management and accounting • 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

14. Accrual Accounting • 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

15. Long-term financial plans - key message from AIFMG

16. Long-term financial plans • 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

17. Key performance indicators 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)

18. Use and management of borrowings- key message from AIFMG

19. Use of borrowings • 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

20. Use of borrowings • 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)

21. Use of borrowings • 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

22. Resolving Asset management funding gaps - key message from AIFMG

23. Resolving Asset management funding gaps • 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

24. Resolving Asset management funding gaps • 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)

25. AIFMG – facts now widely accepted

26. Facts now widely accepted • 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

27. Facts now widely accepted • 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

28. USING THE AUSTRALIAN INFRASTRUCTURE FINANCIAL MANAGEMENT GUIDELINES TO OVERCOME AN ASSET MANAGEMENT FUNDING GAP • Questions? • Email; john@jaccomrie.com.au