Local government – an untapped infrastructure financing market

Given the success of PPPs and privatisations at the Federal and State Government levels, why are local governments not in the spotlight?

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Public Private Partnerships (PPPs) have had such success at the State and Federal Government levels as a form of procuring infrastructure, yet Local Councils have rarely used this structure to develop greenfield infrastructure for their residents.

The NSW Government undertook a ‘Fit for the Future’ review of all Councils in NSW and many did not meet the criteria. The NSW government’s reasoning is desire for ‘stronger and more efficient Councils, which will free up money for important projects such as local roads, parks, playgrounds and footpaths’. The NSW State Government wants Local Councils to be more self-sufficient and wants to alleviate Councils of red tape, duplication and hopefully attract experienced and innovative managers to drive the future of Councils for their residents.

Councils have responsibilities to their residents to deliver local services such as community development programs, assessing development applications, collecting rubbish and recycling and processing rates, fees and other charges, running community facilities including libraries, seniors centres and swimming pools.

Lazy assets

In many cases, Councils have large landbanks and large balance sheets with ‘lazy assets’. That is, assets that are underutilised and undervalued and thus not delivering the best financial outcome for that Council. The Local Government Infrastructure Audit in June 2013 undertaken by the NSW Department of Local Government uncovered that Councils have some A$131 billion of assets in NSW alone, for which infrastructure comprises A$81 billion.

Infrastructure assets are the systems and networks that provide services to communities such as roads, buildings, water supply, sewer networks and stormwater drainage. There is also a backlog in NSW of some $8 billion of required infrastructure (as at June 2012). It is noted that many Councils are underspending on asset management and maintenance.

Funding options

Councils could use borrowings to reduce the backlog, as one option. NSW Treasury also offered interest subsidies through three rounds of the Local Infrastructure Renewal Scheme which was used to fund $818 million of infrastructure projects across 96 Councils for 166 individual projects. It was fully utilised

and now closed. Schemes such as this are useful, but they aren’t enduring sources of funding ongoing infrastructure needs.

Many Councils still rely heavily on s94 developer contributions as a core source of revenue (nearly 50% in some cases). This might seem sustainable during a property and construction boom like that seen in NSW at present, but may not be sustainable longer term. In the meantime, the Council has sold their valuable assets (land) and in many cases used the funds to pay expenses.

NAB recognises the need for evolving governments to employ new and innovative models of funding and procurement to deliver outcomes, or, in this case, where established models of funding and procurement are adapted to a new context.

PPPs

As such, NAB is actively meeting Councils with an initiative to better structure their infrastructure needs through the PPP methodology used at the State and Federal level. PPPs will give Councils a robust structure in which to procure infrastructure projects that they may otherwise delay or be unable to raise private sector financing for.

A PPP with a 25 or 30 year concession allows the private sector to bring innovation and design, cost rigour and bid competitiveness to the process with no upfront payments required from Council. The asset is then managed under a contracted performance regime which the private sector must meet, otherwise the concession may be abated.

The asset is then handed back to the Council at the end of the concession in an agreed handover condition, having been maintained adequately over the concession. The long concession period would allow the Council to raise a levy over this period to meet the service payments, rather than having to seek a once off upfront capital injection which they are often under pressure to repay within a short period. Cost overruns during construction and pricing of maintenance during operations are risks borne by the private sector.

The PPP model is enduring, remains active and has funded some of the largest infrastructure projects in Australia, including during the Global Financial Crisis (such as Victorian Desalination Plant PPP).

Whilst State Treasuries may be able to provide a cheaper cost of capital, projects procured on balance sheet miss many of the risk transfer benefits brought by PPPs.

 

Article adapted from Capital Financing 2016 Year in Review