Linking Financial Sustainability to Asset Management in Local Government

Transcription

1 Linking Financial Sustainability to Asset Management in Local Government Kym Williams Business + Risk Solutions

2 Kym Williams Prior to establishing Business + Risk Solutions, Kym was General Manager of SA and WA for an international engineering and environmental firm. Kym also held senior management roles in Local Government across two councils in Adelaide, where he managed a range of commercial and governance portfolios. R Areas of focus Commercial Training Strategic and Project Commercial Advice Corporate Governance Leadership and Team Development Alliancing and Relationship Contracting

3 Session Focus Context Financial Sustainability in Local Government Asset Management Planning Long Term Financial Planning Integrating Financial and Asset Management Plans Monitoring Performance Against the Plan - Financial Performance Indicators Summary

4 Context Asset Management: Setting out the optimal schedule of proposed asset maintenance, renewal and replacement necessary to achieve specified service levels while minimising asset life cycle costs Critical in local government - councils are asset intensive (very large $ value of assets relative to income)

5 Financial Sustainability in Local Government Reasons why Councils operate at unsustainable long term deficit Council rates/income less than cost incurred in providing existing levels of service Short term cash costs and cash availability drive decisions Reluctant to borrow for new or replacement assets and asset maintenance programs which compromises their finances and services long term

6 Building a Sustainable Council Operating at Breakeven or Surplus Generate Savings wherever possible Equitable and appropriate revenue raising Raise Debt where warranted Manage to appropriate financial indicator targets Strategic seeking and use of grants Ensuring the long term financial plan is linked to a quality long term asset management plan Sustainable Council Service levels match with community needs and expectation Assets responsibly managed Service levels match community willingness to pay Be wary re: increasing asset base Sound treasury management practices Non reactive remedial action

7 Asset Management Planning The quality of the long term asset management plan is critical. Councils needs to identify: Assets they are responsible for Affordable service levels sought from assets Condition of existing assets Additional assets to be acquired and existing assets to be renewed/upgraded to enable achievement of desired service levels Maintenance levels necessary to minimise whole of life asset costs and achieve desired service level Define expenditure projections and cashflow needs

8 Long Term Financial Planning Iterative plan for generating, spending and saving future income and raising and repaying borrowings over next 5 10 years Identify and prioritise the services Council will provide in the future Financial impact from proposals variations in asset stock, service levels, operating costs and cashflow Tailored to the operating environment, business needs and capacity of each council Design should be guided by the asset management plan and other service and strategic plans

9 Integrating Financial and Asset Management Plans Long Term Asset Management Plan Long Term Financial Plan Integration results in better decisions around Mix and timing of financial outlays for assets Sustainable service levels Affordable asset stockholding strategies Appropriate revenue targets Optimal treasury management

10 A Long Term Financial Planning Process Assess future projected operating environment, community needs, priorities, growth projections, current & projected financial capacity, & all asset requirements / timeframes Review and adjust the range and level of existing services in light of above Pursue continuous improvement in the efficiency of service delivery Prioritise asset renewals over asset upgrade and new services/assets

11 A Long Term Financial Planning Process Fund life cycle costs for all new service and asset proposals Identify idle or surplus assets for sale, disposal, conversion to more effective or profitable use Source additional income (e.g. from rates/charges) and raise additional borrowings / repay borrowings as cashflow warrants Review above as necessary to ensure financial targets are achieved

12 Key Considerations for Planning Process Start with existing financial data (previous year financial statements and current year budget) Consider what might change in future Keep financial data at high level Be careful not to mix real and nominal price values Be wary of assuming recent significant financial trends (eg relative price changes, interest rate movements, growth rates etc) will continue long-term Publish key assumptions Undertake sensitivity analysis and include results

13 Long Term Financial Plan Example Key Outputs $Y1 $Y2 $Y3...$Y10 Operating Revenue X X X X Operating Expenses X X X X Capital Works X X X X Available/needed cash X X X X Financial Performance Indicators X X X X Financial Performance Targets X X X X Where targeted performance is not projected to be achieved the plan should be revised

14 Monitoring Performance Against the Plan - Financial Performance Indicators Operating Result Ratio Net Financial Liabilities Ratio Asset Renewal Funding Ratio

15 Operating Ratio Operating revenue less operating expenses as % of operating revenue (or sometimes rate revenue) Maintaining positive operating ratio on average is key to financial sustainability Also helps ensure intergenerational equity Generally should aim to achieve small (eg 0-15%) surplus on average over any 5 year period (annual result can often vary best to focus on average result) Councils with significant deficit generally should aim for progressive incremental improvement

16 Net Financial Liabilities Ratio Expresses liabilities less financial assets as % of operating income Is a more meaningful indicator than debt levels or net debt levels but a low ratio not critical for achieving financial sustainability Should be no higher than needed but generally should not be negative. Many councils with growth might find ratio of 50 to 150% or higher warranted particularly if can maintain satisfactory operating ratio

17 Asset Renewal Funding Ratio Expresses asset renewal accommodated in the long term financial plan relative to that identified in asset management plan Also sometimes known as asset sustainability ratio Should aim to achieve approximately 100% pa If target not materially achieved on ongoing basis then there is likely to be implications for future service standards and financial sustainability. Is dependent on reliable forecast of future renewal needs

18 Summary Linking the long term asset management plan to the long term financial plan is a critical, and often overlooked, factor in building a sustainable Council The asset management plan should shape the long term financial plan and be considered during the development of the financial plan Asset management plans need to be accurate and comprehensive to be of benefit Critical that Council uses key financial performance indicators to track progress against the plan and make necessary adjustments

19 Questions