Speeches: 2005
Tackling local government's infrastructure crisis
There has been a rapid change in demand for services - but no rapid change to the way local government acquires revenue.
Address to the Building and financing local government infrastructure conference
Cr Paul Bell
President, Australian Local Government Association
7 April 2005, Sydney
Thank you, Chairman
First up, thank you to Hallmark for conducting this conference on building and financing local government infrastructure.
Over the next two days, a broad range of speakers will cover important case studies that will provide evidence of two things. First, they will demonstrate the strength of local government innovation and ingenuity. Councils are developing new ways to finance and deliver much needed infrastructure to meet the growing needs of our commuities. As we shall see, local government is rich in ideas when it comes to addressing the infrastructure pressures facing our nation.
Second, by showcasing their work, they will also be demonstrating the enormity of the task that lies ahead. Local government maintains assets worth more than $150 billion. Of this, $110 billion comprises built infrastructure, plant and equipment. Roads, bridges and related assets are the largest single component, worth around $75 billion. A great deal of this infrastructure dates from the post-war period and was built in the Fifties and Sixties with the help of state or federal funds.
These assets are now reaching the end of their useful life and are in desperate need of replacement, renewal and augmentation. The state of local roads tells the story. Local government is responsible for around 680,000 km - or nearly 85 per cent - of all Autralian roads. Of this, 400,000 km is unsealed and requires frequent maintenance.
Local government is also responsible for 29,000 timber bridges across the country, 14,000 of which are on heavy vehicle routes. But one third of these bridges are now more than 50 years old and beyond their useful life. The demand for new infrastructure grows by the day.
Councils in outer metropolitan areas face particular difficulties. The rapid expansion of suburbia into the rural fringe has increased demand for public infrastructure.
The latest population figures show that in Melbourne, Casey increased by 8,700 people in 2003-04 and Wyndham by 8,400. In Sydney, Blacktown increased by 5,500 and Baulkham Hills by 3,500. The largest increase in WA occurred in the Perth local government area of Wanneroo, which gained 6,700 new residents. Coastal councils also face dramatic demographic change. But their problems are compounded by the fact that their populations are not only growing - but ageing as well. And while the demand for infrastructure and human services increases, older residents will demand rate and fee concessions that erode a councils revenue base and their ability to respond to these demands.
It's a Catch 22 for councils. There has been a rapid change in demand for services - but no rapid change to the way local government acquires revenue. Councils are expected to meet the demands of 21st century communities with a 19th century funding base. There are, of course, a number of ways we can address the specific infrastructure needs of local government. These include:
- Reforming federal-local government financial relations to secure access to growth funding
- Targeted assistance through programs like the highly effective Road to Recovery program
- Adopting a whole-of-government approach to infrastructure funding
- Enhanced private sector involvement and investment
- Engaging in effective asset management and financial performance.
Our ability to invest in new infrastructure, and even engage in innovative solutions to the emerging infrastructure crisis, is dependent on solving our revenue problems. ALGA is pressing the Australian Government for action on three fronts.
Fair share of taxation revenue
First and foremost, we are arguing for a fair share of national taxation revenue.
Local government in most OECD countries relies on inter-government transfers of tax revenue or grants for a substantial proportion of its revenue. But Australian local government has the lowest level of grants of all OECD countries.
ALGA has argued long and hard that - as a nation - we are in desperate need of reform to federal/local government financial relations. We need to do away with the archaic system of financial assistance grants and get local government finances back on track with a fair allocation of national taxation revenue.
This is, in fact, the situation that prevailed in the late 1970s. That's when then Coalition Government shared personal income tax revenue between the three spheres of government. Local government transfers amounted to 1.5% of income tax in 1976-77 rising to a full 2% in 1980-81. These tax sharing arrangements with state and local governments were scrapped in the mid-1980s and replaced with financial assistance grants. These were then pegged to annual increases in inflation and population, a situation which endures today.
The state governments have since returned to tax sharing arrangements - they got their cut with the GST. In fact, by 2007-08, they'll be $9 billion better off than under the old grants scheme. It's time to make sure local government is also placed on a secure financial footing through access to a fair share of national taxation revenue. ALGA is pressing the case for a one per cent share of national taxation revenue. Such a move would increase council revenue by $400 million in the first year, and would grow as the economy grows. More secure recurrent funding would allow local government greater flexibility in its infrastructure options.
R2R style partnerships
ALGA is also pressing for the Roads to Recovery program to be used as a model for other funding programs to address specific areas of need, including non-transport infrastructure. Roads to Recovery has been an outstanding example of an effective Commonwealth - local government partnership.
Local government identified the growing gap between what local government could afford to spend on its extensive network of local roads and the amount required to bring them up to an acceptable standard. The Federal Government came to the party in 2001 with $1.2 billion over four years for local road maintenance and renewal. Roads to Recovery funds are paid directly to councils. Councils determine priorities. Red tape is kept to a minimum.
Last year, after a strong campaign led by ALGA to highlight the benefits of the program, the Australian Government decided to renew Roads to Recovery for a further four years. As a result, another $1.2 billion will be invested directly with local government from July 1 this year. It's not solving all our road maintenance funding problems, but it's making a substantial difference. We want to develop further partnerships with the Australian Government to address other areas of need. I know this proposal has some sympathy in Canberra.
Federal, state support for council loans
The third string to our bow is a whole-of-government approach to support local government borrowings. ALGA would like to see the development of a new funding model for regional infrastructure combining finance from all three spheres of government. Such a model would reduce the risk and cost of borrowing capital for councils through additional financing provided by our federal and state counterparts. A flexible repayment schedule incorporating short and medium-term loans from the federal and state governments would reduce the need for long-term loans.
ALGA is seeking $200 million over four years from the federal government to initiate a new mechanism for funding regional infrastructure and leveraging contributions from state, territory and local government. This would be provided in addition to existing grants and programs that finance council infrastructure.
Public Private Partnerships
I turn now to Public Private Partnerships. Local government has - of course - been participating in out-sourcing arrangements for more than two decades. But it has yet to embrace PPPs in a substantial way. This reflects the broader infrastructure financing environment, with PPPs still accounting for a relatively small percentage of infrastructure projects nationally. A study commissioned by ALGA and state and federal local government ministers found that local government's participation with the private sector was mainly through outsourcing and leasing rather than innovative risk-sharing arrangements.
More intensive styles of private sector financing such as build-own-operate-transfer schemes, franchise concession agreements and full privatisation were very rare in local government circles. There are a number of barriers that need to be overcome.
The private sector does not take a great deal of interest in local government infrastructure projects often because of scale. Many of our projects are not large and lack critical mass to make them attractive for private sector investment. The small market also limits opportunities for local government. We - as a nation - should be encouraging the development of a competitive PPP market in Australia to drive down any excess returns and increase opportunities for partnerships to develop and flourish.
Local government is also facing something of a skills shortage when it comes to developing these partnerships. The devil, of course, is in the detail. To make PPPs work for our communities requires skilled and experienced officers. Smaller councils in particular, may not have ready access to technical expertise and the necessary skills when it comes to developing projects, cost-benefit analysis, contract specification and so on.
Apart from skills shortages, we also need a high degree of regulatory certainty if we are to see substantial growth in PPP arrangements.
And that means getting good guidelines in place that ensure a high degree of transparency, probity and integrity. In particular, the cost of private sector participation must be made transparent.
Successful arrangements depend on getting the right balance between risk and return. We need to make sure that risk is appropriately transferred to the private sector commensurate with its level of participation. At the end of the day, however, local government needs to carefully consider all financing options. In many cases, debt financing may still be the most appropriate option in the current environment, particularly while interest rates remain relatively low.
Financial performance, asset management
There's two other issues I'd like to canvass briefly - improvements in asset management and the overall financial performance of local government.
Local government is taking an increasingly sophisticated approach to asset management. This is occurring at a local, state and national level. ALGA has - for example - commissioned consultants Jeff Roorda and Associates to establish a national road asset database that will provide a basis for better decision-making on national local roads policy and infrastructure management programs. This database should be operational by mid-2006 and, in conjunction with other initiatives by state local government associations, will clearly demonstrate that local government is moving to manage its assets in an efficient and effective manner.
Local government has also come a long way when it comes to financial reform. This is made abundantly clear in Dollery and Marshall's recent work - Reshaping Australian Local Government. One of the most conspicuous achievements over the past decade, they say, is in financial performance.
Local government has embraced and driven a reform process that has seen a much more effective and efficient sphere of government emerge into the 21st century.
Concepts such as performance management, competitive tendering, corporate management models and flexible work practices are now common place. Councils today also have a greater focus than ever before on community consultation and engagement. We are efficient and effective in what we do and we respond to community need in a way state and federal governments can never do. That's why it makes sense for state and federal governments to invest in community infrastructure by investing in local government.
Local government may not always offer the largest and most glamorous infrastructure opportunities. But we play an important part in oiling the working wheels of the nation, day in and day out. As the national debate on infrastructure intensifies, so must our call for local government to secure fair funding. It's only through access to fair funding that we will be able to sustain investment in local government infrastructure - infrastructure that is - collectively - just as critical to the nation's economic and social well-being as an Alice-to-Darwin Railway or a Sydney Opera House.
Thank you.
Councillor Paul Bell AM
President, Australian Local Government Association
7 April 2005
Sydney
