August 10, 2016

New financial strategy builds infrastructure rewards for council

North Sydney Council has turned to some different financial strategies to create a more flexible funding structure that’s helped drive a series of multi-million dollar infrastructure projects.

While typically seen as conservative and risk averse, some of today’s councils are seeking financial structures that give them more freedom and flexibility to fund valuable new infrastructure deals.

Getting maximum value for their finite funds has long been the modus operandi for Australia’s local authorities

In addition to responsibility for the traditional three Rs – roads, rates and rubbish – they’re charged with maintaining an array of infrastructure and services for ratepayers who are routinely resistant to the notion of more than minor increases to the quarterly bill.

For North Sydney Council, the use of a revolving line of credit facility has given flexible access to funding for a series of multi-million dollar infrastructure projects to benefit the 71,000 residents it serves.

The council’s patch takes in the Sydney CBD, the harbour-hugging suburbs of Cremorne, Kirribilli, Lavender and Neutral Bays, McMahons and Milsons Points, Waverton and Wollstonecraft, and the inner northern suburbs of Cammeray, Crows Nest and St Leonards.

Strategy for long-term financial success

The credit facility represents a considerable departure for the authority which until 2013 had operated debt free for more than two decades.

Prudent certainly, but sitting on a growing stockpile of cash – courtesy of developer contributions, in large part – was deemed not in the interests of ratepayers and the Council’s long-term financial wellbeing, according to North Sydney’s Financial Services Manager Garry Ross.

“Back in 2012, Treasury Corp, the NSW government’s Treasury arm, commissioned an independent assessment of the financials of all the councils in New South Wales,” Ross explains.

“They analysed them all in terms of the financial reports they submitted and came back to the government with a score card.

“At North Sydney we’d been debt free for a long time which our community considered a strength, but in terms of financial sustainability indicators, being debt free wasn’t wholly desirable. In the current environment of low interest rates, it was thought to be pretty pertinent for councils to have a debt policy and a debt regimen.

“The auditors also indicated North Sydney had one of the lowest levels of residential rates in Sydney – so the capacity was also there to increase rates to cover necessary capital works.”

Projecting future revenue and determining a series of initiatives on which accumulated and borrowed funds should be spent was the next step for the council. Capital expenditure was budgeted at $50 million for both 2015 and 2016, up from just $13 million in 2013, says Ross.

Following a tender process in early 2015, the council secured a $30 million loan from NAB. Almost a third has been committed to major projects: $5 million to a Public Private Partnership to redevelop a site in Crows Nest that provided the council with a much larger carpark and five specialty retail stores; and $4.5 million to upgrade the council’s parking management system and install in-ground sensors.

“According to the policy we developed, in order for us to take on debt, it has to be for long-term projects of a capital nature, so these two initiatives both ticked the box for that,” Ross says.

Funding projects that provide returns

Also planned is a $20 million project to replace the council’s aging baby health centre in Cremorne with an enlarged facility incorporating an underground carpark and a 20-unit affordable housing development.

“There are plenty of places that the money can be spent,” Ross says. “One of our concerns in local government is generational equity. Delaying essential capital works can burden future generations with large bills if infrastructure fails.

“At the same time, we need to ensure that future generations don’t inherit large debt for infrastructure that is tired and in need of upgrading before it has been fully paid off. Properly used, a debt facility lets us deal with projects in a strategic and orderly way, ideally using loans to fund projects that provide returns.”

“We felt it would be advantageous to have a debt facility whereby we could vary the projects we wanted to fund. The line of credit has a 24-hour turnaround so if something came up which ticked all the boxes for our debt policy, we could source the funds, within the facility limit, quickly and easily.

“It also gives us the option to pay out the loan, or part of the loan, or switch to a fixed term – there is a lot more flexibility, if we, say, sell an asset.”

Ross believes having tightly defined and rigorously enforced rules around the use of debt has been key to North Sydney embracing and taking full advantage of its finance arrangement.

“You need to have a pretty robust debt policy in place, because if anything were to go wrong, you need to be accountable to ratepayers for spending decisions and the rationale that led to them being made,” he says.

Independent advice can be invaluable when new policies and arrangements are being implemented, Ross adds. “The arrangements that we’ve put in place for North Sydney work well for us but they may not suit all circumstances and councils – external advisers can help by providing additional perspective on the options available.”

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