Preparing long-term financial plans tips and traps. John Comrie IPWEA National Conference August 2011

Transcription

1 Preparing long-term financial plans tips and traps John Comrie IPWEA National Conference August 2011

2 Long-term financial plans Irrespective of legislative requirements, LTFP needed by every organisation with significant longlived infrastructure Otherwise impossible to effectively and equitably plan and manage service level, asset management and revenue raising decisions This is because cash outlays associated with managing these assets can vary widely between years 2

3 Preparing a long-term financial plan Develop financial projections (revenue, expenditure etc) based on existing service levels anticipated changes (discretionary and imposed) asset management needs other relevant assumptions Evaluate affordability Revise as necessary 3

4 Preparing long-term financial plans Every LTFP needs to be framed within a clear, responsible financial strategy Objective typically should be to maintain (or as warranted improve) financial sustainability Best/simplest way is to ensure achievement of appropriate targets for financial indicators 4

5 Long-term financial plan key summary level financial data $Y1 $Y2 $Y3 $Y10 Revenue x 1 x 2 x 3 x 10 Expenses y 1 y 2 y 3 y 10 Capital Works z 1 z 2 z 3 z 10 Avail/needed cash a 1 a 2 a 3 a 10 Financial Perf Indicators b 1 b 2 b 3 b 10 Financial Perf targets c 1 c 2 c 3 c 10 where targeted performance is not projected to be achieved the plan should be revised 5

6 AIFMG Financial Sustainability Indicators IPWEA has developed Australian Infrastructure Financial Management Guidelines (AIFMG) Recommends councils monitor financial performance against targets for 8 financial indicators 6

7 AIFMG Financial Sustainability Indicators 1. Operating surplus 2. Operating surplus ratio 3. Net financial liabilities 4. Net financial liabilities ratio 5. Interest cover ratio 6. Asset sustainability ratio 7. Asset consumption ratio 8. Asset renewal funding ratio Most value indicators shown in red 7

8 Financial strategy Should be based on accrual accounting information not cash accounting info Because accrual accounting recognises asset consumption (depreciation) it is superior guide for decision-making re service affordability and equitable revenue raising measuring performance Should not base service level decisions on short-run cash costs 8

9 Service level affordability the only simple, practical way of assessing is by looking at an under-lying trend accrual accounting projected operating result and other financial indicator results over at least a 5 year and preferably a 10 year period 9

10 Operating Result Generally basing revenue raising and service level/expenditure decisions on achieving small under-lying operating surplus on average over time is key to ongoing financial sustainability Operating result = operating revenue less operating expenses Operating expenses include depreciation but not capital outlays 10

11 Operating Result If generate small under-lying surplus over medium/longer term then likely that existing service levels sustainable Also likely on average (but not necessarily each year) will have approx enough cash to finance required asset renewal without additional borrowings 11

12 Financial Sustainability Implications of significant ongoing operating deficits; existing net asset stock is being run down current policy settings & service levels unlikely to be sustainable 12

13 Operating Sustainably A decision to renew or replace assets that have reached end of economic life is likely to add very little to operating costs in future years; depreciation will not increase significantly some financing costs operating & maintenance costs may fall Acquiring additional assets will add significantly to future operating costs 13

14 Asset Management LTFP should allow for asset renewal and asset maintenance outlays that are based on projected needs identified in asset management plan, ie based on; minimising whole of life cost of service from assets Affordable preferred long-run service levels 14

15 How much should be spent on asset replacement? If not possible to; accommodate proposed asset management outlays in asset management plan and achieve financial strategy target, then; Proposed service levels unaffordable Need to consider reducing service levels in a way that causes least long-run impact (including from risks and costs of premature asset failure) 15

16 Need for debt? Even If operating sustainably over long-run would still (on average) need to raise debt as a result of purchasing new or upgraded assets this is equitable May also need to borrow for peaks in asset renewal LTFP helps understand capacity to borrow and implications 16

17 Key Assumptions 1. Rate of growth Will growth bring increase in; Operating revenue Operating expenses 17

18 Key Assumptions 2. Changes in mandated & discretionary service levels (and impact on operating revenue and operating expenses) 18

19 Key Assumptions 3. Price/relative price variations (revenue and outlays) over time Future absolute/relative price movements are uncertain, use trend estimates, particularly for longer-term Short-term large increases often not sustained in longer-term No need to worry re relative price movements for factors that represent modest proportion of total outlays 19

20 Key Assumptions 4. Use of real (net of inflation) or nominal (actual $ s of the day) values Likely no material impact on financial indicator results either way Real has advantage of making inter-year comparison of absolute values more meaningful Asset management plans commonly expressed in real values If use real need to discount future debt levels/loan repayments by forecast inflation rate If use nominal don t forget to adjust asset values and depreciation expenses for inflation 20

21 Key Assumptions 5. Changes in revenues beyond organisation s control, eg government grants 21

22 LTFP Format Aim to be Easy to read (ideally less than 20 pages) Include narrative overview State assumptions Strategic (focus on key issues) 22

23 LTFP Format Include sensitivity analysis (impact of variation in key assumptions/input factors) Graph financial indicator trend data 23

24 Summary Overview To achieve objectives need to focus on Longer-term needs/priorities Not just shorter term wants LTFP helps ensure long-run financial sustainability by ensuring proposed service levels are affordable LTFP critical for organisations with large stock of long-lived assets 24

25 Summary Preparing LTFP 1. Estimate future financial variations based on forecasts and preferences identified in other strategic planning documents 2. Develop financial strategy (targets) 3. Analyse financial projections against targets adjust content as appropriate 6. Undertake sensitivity analysis 7. Use LTFP as guide re service level, revenue & borrowing decisions 25

26 References Australian Infrastructure Financial Management Guidelines (available from IPWEA ) Long-term Financial Planning Practice Note (available shortly from IPWEA) 26

27 Thank You