Australia’s capital-constrained local governments are facing an array of challenges, from growing populations, to ageing infrastructure. Leasing assets rather than acquiring them outright could be the key to unlocking billions of dollars in funding for community priorities.
Local governments in Australia own and operate infrastructure with an estimated gross replacement value of $438 billion. Eleven per cent of this, or $47 billion worth of assets, are said to be in poor or very poor condition. In addition, 7 per cent, or $31 billion, of these assets are functioning poorly, with a further seven per cent also functioning below the capacity required to meet their projected growth in usage, according to the Australian Local Government Association (ALGA).
With tens of billions of dollars’ worth of assets in desperate need of repair, replacement or upgrade, and an increasingly large funding burden being passed on by federal, state and territory governments, local councils need alternative capital solutions.
Council funding constraints tighten
Local governments generate 90 per cent of their funding through their own means, such as rates and service charges. In comparison state governments earn around 50 per cent of their own revenue.
In response, the ALGA has called for a renegotiated intergovernmental agreement to prevent further cost shifting. However, without the cooperation of higher authorities, local governments will continue to be largely self-sufficient, despite being responsible for many of the local services constituents depend upon.
While grants from other levels of government make up the remaining 10 per cent of local government funding, in regions with a low rates base or rapidly growing populations and infrastructure needs, this can often prove insufficient. This is particularly the case when taxes on property constitute the sole source of taxation revenue.
In addition to funding constraints, rapid technological change and the need to equip communities with infrastructure to combat climate change and adapt to its consequences, is a major issue for councils. Population growth will also increase the pressure on local government infrastructure, decreasing the lifespan of many critical assets.
The ALGA has called for a national strategic asset management plan, focusing on proactive rather than reactive asset investment. Its “State of the Assets 2015” report calls for greater investment in the earlier stages of an asset’s lifecycle to circumvent greater costs later on, citing improved value and greater community outcomes.
This idea is already being implemented by some government agencies through leveraging existing assets to obtain finance. Local governments can quickly obtain replacement assets without incurring a large cash flow burden. This approach frees up funds to invest in asset upgrades and repairs, circumventing the need for later replacements or critical low-value repairs.
By avoiding large capital outlays on infrastructure, local governments are also able to improve the quality of community services without needing to compromise, thereby delivering better outcomes for constituents, and increasing the likelihood of re-election.
A study by the Queensland Treasury and the Office of the Auditor General (WA) found that leasing assets offered a range of benefits over outright purchases, including avoiding the risks associated with ownership, and offering a cheaper method of acquisition.
With $438 billion tied up in assets, freeing up precious funds for community services should be high on the priority for councils. By leasing rather than acquiring assets outright, Australia’s local government sector has can maximise community benefits while minimising the overall tax burden.
Contact us to find out how we can help you plan for, and manage, your council assets.