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

Presentation by John ComrieNational Local Government Asset Management and Public Works Engineering

Conference 13 May 2010

Background

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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

PRE-FINANCIAL SUSTAINABILITY INQUIRIES

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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

KEY TYPICAL INQUIRY RECOMMENDATIONSS

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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

Australian Infrastructure Financial Management Guidelines (AIFMG)

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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.

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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

Australian Infrastructure Financial Management Guidelines (AIFMG)

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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

Australian Infrastructure Financial Management Guidelines (AIFMG)

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Asset Management Objective - key message

from AIFMG

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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

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

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OutlaysEquivalent Annualised Cost

Year

$

Accrual Accounting- key message from

AIFMG

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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

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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

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Long-term financial plans - key message from AIFMG

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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

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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)

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Use and management of borrowings- key message

from AIFMG

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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

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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)

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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

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Resolving Asset management funding gaps - key message from AIFMG

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1. Review range and level of services (community needs and preferences change over time)

2. Program of continuous efficiency improvement

3. Review projected renewal needs/use ‘optimum’ (eg low cost) renewal methods

4. Consider disposing of under-utilised assets

Resolving Asset management funding gaps

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5. Give priority to asset renewal over new asset (ie increase in service) proposals

6. Ensure new & upgraded asset/service level proposals are affordable long-term

7. Source additional income having regard to equity

8. 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)

Resolving Asset management funding gaps

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AIFMG – facts now widely accepted

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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

Facts now widely accepted

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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

Facts now widely accepted

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USING THE AUSTRALIAN INFRASTRUCTURE FINANCIAL MANAGEMENT GUIDELINES TO

OVERCOME AN ASSET MANAGEMENT FUNDING GAP

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Questions?

Email;john@jaccomrie.com.au