The mounting infrastructure challenge facing local government. ALGA speeches: 2004.

Speeches: 2004

The mounting infrastructure challenge facing local government

Local government continues to perform its traditional roles. It collects rates, builds and maintains roads, bridges, libraries and other community amenties. It undertakes planning and building regulation. It also takes care of the rats - enforcing environmental health regulations and food standards, collecting and recycling waste and keeping our streets and footpaths clean. But the focus of local government has been shifting - and shifting fast.

Address to National Infrastructure Summit

Councillor Mike Montgomery
President, Australian Local Government Association

16 August 2004: Melbourne

Thank you, Chairman

Local government today is a rapidly changing, but troubled beast. Thirty years ago, councils in this country still had all the hall marks of the 19th century. They were largely preoccupied with the delivery of property-based services and the maintenance of basic community amenities and facilities. The focus was - to use a well worn phrase - rates, roads and rubbish. Or - as I saw misquoted the other day - rats, roads and rubbish. But - over the past 20 years - councils have undergone a period of profound change.

There is now less emphasis on traditional services - important though they still are - and a greater focus on a range of new and emerging human services. Local government will have a baby capsule ready the day you're born - and burial plot ready the day you die. And it will provide around 100 different services to keep you happy in between.

In recent years, councils have acquired new responsibilities including management of health, alcohol and drug problems, community safety and accessible transport. And we're playing a growing regulatory role in areas such as development and planning, public health, and environmental management. Like a hungry caterpillar, these new services are now gobbling up the expenditure once reserved almost exclusively for traditional services and infrastrucutre maintenance.

In the 1960s, around 50% of local government expenditure was allocated to the maintenance of roads. By the 1990s, this had fallen to just over 25%. In the early 1960s, just 4% of expenditure was allocate to education, health, welfare and public safety activities. By the late 1990s, this had risen to 12% - a threefold increase. Spending on recreation and culture has grown to around 20% of local government outlays, and a similar amount is now spent on housing and community amenity. These changes have been partly driven by community demand and partly by a range of other factors beyond the control of local government. Significantly, these factors have not only added to the range of services required of local government - they've also come largely without new or adequate sources of revenue.

Local government has also been the victim of cost shifting, with state governments - and to a lesser extent - the Federal Government, passing functions to local government with inadequate or no off-setting revenue source. The Federal Government, for example, transferred responsibility for a large number of regional airports to local government in the early 1990s. And while some initial funding was made available, councils have been subtantially out of pocket in their efforts to maintain and upgrade these important economic assets.

In the case of Flinders Island, for example, $750,000 was provided to rebuild the terminal building and upgrade safety facilities. But the council now needs to find $3 million to seal the second runway. That's a tall order for a council with a rate base of just 650 people. Councils have also had to step in and pick up services that have been axed or wound back by our colleagues in the other two spheres of government.

In many communities, local government is the last man standing. Once the federal or state governments withdraw services, if local government doesn't step in, no one will. That's why we are seeing more and more councils buying doctors' surgeries and accommodation - even entire hosptials - in a bid to keep medical services available to people in rural communities. This change in focus for local government has had major consequences on its ability to maintain, let alone expand, its large and ageing asset base. And it is a large and ageing range of assets.

Local government infrastructure is valued at 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 need of replacement or renewal.

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. Councils on the fringe of major cities face particular difficulties. The rapid expansion of suburbia into the rural fringe has increased demand for public infrastructure.

Coastal councils also face dramatic demographic change. But their problems are compounded by the fact that their popultions are rapidly ageing. 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. We have to meet the demands of 21st century communities with a 19th century funding base.

Our ability to invest in new infrastrucutre, and even engage in innovative solutions to the emerging infrastructure crisis, is dependent on solving our revenue problems. Local government spending as a proportion of total government outlays is far smaller in Australia than in other countires with similar federal systems. In the United States, central government is responsible for 52% of expenditure, state governments 22% and local government 26%. In Canada, central government spends 40%, state government 42% and local government 18%. But in Australia, central governemnt is responsible for 54% of expenditure, state governments 40% and local government just 6%. That partly reflects the fact that local government in Australia does not undertake the same level of service provision as elsewhere. But it also reflects the fact that local government in this country continues to be under-funded, under-valued and under-resourced.

Let me quickly demonstrate what has happened to loal government finances and then explore some solutions to - first - our revenue problems - and second - our infrastructure crisis. Total local government expenditure today is around $17 billion a year. The average council will spend around $250 million a year. But spending varies enormously depending - mostly - on the size of population served. The Brisbane City Council, for example, serves the needs of 900,000 residents and will spend around $1.2 billion a year. In turn, a small remote coucil may spend as little as $2 million a year, but cover an area the size of Holland.

Local government desperately needs to increase expenditure, but to do so we must increase revenue. Revenue comes from three principal sources. Rates income accounts for around $7 billion, or 40%, of council revenue. It is local government's sole means of taxation. But unlike the GST, rates - essentially a property tax - is no growth tax. Community sensitivity, an ageing population and state government controls, such as rate pegging in NSW - prevent rates from doing anything much more than limp along with marginal annual increases.

Local government also raises around one third of its revenue from the sale of goods and services. And, again, some states impose constraints on the fees and charges councils are allowed to levy. Grants from federal and state governments makes up the third largest surce of revenue, accounting for about 12% of revenue, though this increases to around 50% or more for rural and remote concils with small rate bases. The Federal Government provides around $1.5 billion a year through untied financial assistance grants and a further $500 million through specific purpose payments. The state governments collectively provide around $1.2 billion.

Local government in most OECD countries relies on inter-government transfers of tax revenue or grants for a substantial proportion revenue. But Australian local government has the lowest level of grants of all OECD countries. Well, where do we go from here? 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 finacial 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 when the 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 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, which are pegged to annual increases in inflation and population. 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 now time to make sure local government is also placed on a secure financial footing through access to a Fair Share of national taxation revenue. An initial move to an amount the equivalent of around 5% of GST would initially cost no more than the current arrangements, but offer real growth over time.

The case for change has been made by local government and backed by a landmark report tabled in Federal Parliament last year - the Fair Share report on cost shifting and local government financing. The Federal Government and the Opposition are expected to respond to that report in the near future. We hope that their responses will pave the way forward to a better deal for local government that will enhance our capacity to provide services, fund infrastructure and facilitate additional borrowings that can be comfortably serviced from an expanded revenue base.

My message to the major parties today is simple - treat the cause of the problem, and you'll clear up the symptoms. There are, of course, a number of ways we can address the specific infrastructure needs of local government. These include:

targeted assistance through programs like the highly effective Roads to Recovery initiative;
enhanced private sector involvement and investment
adopting a whole-of-government approach to infrastructure funding
access further borrowings
engage in effective asset management and financial performance

Roads to Recovery

The Roads to Recovery program 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.

As a result, a review of the program last year found it was producing very real and tangible results for Australian communities the length and breadth of the country. It is replacing dangerous bridges and upgrading intersections. It is repairing roads and improving traffic flows. It is boosting economic development, creating employment and improving the lives of countless Australians through 12,000 projects from our city centres to remote communities.

Earlier this year, after a strong campaign by local government to highlight the benefits of the program, the Government decided to renew Roads to Recovery for a further four years. Another $1.2 billion will be invested directly with local government. There will, however, be one important change to the renewed program.

One third of the funds - $400 million - will be pooled to provide a strategic component to allow for regional local government road projects to be funded. This use of funds has caused some angst for local government, particularly if nominal allocations are not made at a regional - or at least - a state level. We are - however - optimistic the Federal Government will address this concern in the near future and have been encouraged by remarks made by former Local Government and Roads Minister Ian Campbell and his successor, Jim Lloyd.

I must say that local government is profoundly grateful to the Commonwealth for the Roads to Recovery program. While the additional funding will not fix our road infrastructure problem, it has helped to reduce the rate at which our roads are deteriorating. Without it, the state of local roads would be in a significantly worse position. I might add that we have also been encouraged by the commitments made by the previous speaker, Labor's transport spokesman, Martin Ferguson. Labor has promised to renew the Roads to Recovery program and will allocate the same level of funding to the program, should they win government at the coming federal election.

The importance of the Roads to Recovery program may well go beyond the funds it is pouring into the $75 billion local road asset. Roads to Recovery has been held up as a shinning example of how federal funds can make a substantial impact on infrastructure at the local level. Senator Campbell, speaking in the Senate recently, indicated that the Government was indeed looking at how it might fund other services or facilities through the good offices of local government. He said the Government was - and I quote - 'keen, as far as we possibly can, to create a more constructive relationship, to make sure local governments can service their communities effectively and to give them more security in terms of their financial support'.

A case could well be made for a Roads to Recovery-style program for non-road infrastructure. Investing in local government assets will provide a material return to the community through improved productivity and social amenity.

Public Private Partnerships

Public Private Partnerships have been with us for some time now and have often been mentioned as an appropriate vehicle for innovative financing of local government infrastructure projects.

Local government has long participated in out-sourcing arrangements but has yet to embrace PPPs in a substantial way. A study commissioned by ALGA and state local government ministers found that, while the private sector had been involved with provision of local government infrastructure for decades, it 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.

The difficulties faced by local government involved the definition of contracts and the lack of private sector competition. There are a number of issues here. Firstly, PPPs do have the potential to provide councils with more opportunities to acquire facilities that may not otherwise be possible. I think there is plenty of scope for growth in this area. But local government and financing institutions will need to get to know each other a lot better than we do at the moment. Financing institutions will need to have a much better understanding of the nature and workings of local government. For example, unlike state parliaments, councils rarely have a 'government' that can enter into arrangements with their financing bodies. Financing bodies need to think more in terms of engaging the whole council, rather than look for a governing group.

For our part, councils will need to acquire very specific skills to ensure they get the best possible arrangements from their private sector partners. There also needs to be 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. We should also be encouraging the development of a competitive PPP market to drive down any excess returns. The key issue is, and will remain, the ability of councils to get the right balance between risk and return and making sure that risk is appropriately transferred to the private sector commensurate with its level of participation.

At the end of the day, 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.

Whole-of-government approach

The need for additional infrastructure investment by all governments - federal, state and local - is widely accepted. There is a strong view that infrastructure, particularly public infrastructure, should be seen as a collective responsibility of all three spheres of government. As a consequence, it should be jointly funded. Those with the largest capacity to pay should make the biggest contribution. A genuine partnership between all three sectors could offer benefits to all. In particular, it would enable the three sectors to set approrpate priorities that would benefit Australia economically and socially. It could also ensure regional areas were not missing out in the way they are today. Establishing a whole of government approach would clearly require unprecedented levels of co-operation between the Commonwealth, the states and local government. This may make the task difficult, but not impossible.

Labor's proposal for a National Infrastructure Advisory Council has been around for some time. Importantly, it would involve local government as well as the states, territories and the Commonwealth. This is an interesting concept and we look forward to hearing more about it during the course of the election.

I might add that AusLink held out some promise of following this whole-of-government model, with a national advisory body to be established to advise transport ministers on priorities for national infrastructure investment and reforms to support inter-modal integration and infrastructure pricing.

I think we will have to wait until the dust of the election dies down to see how far this concept is adopted. A whole-of-government approach is one thing. But it will do little more than prioritise projects unless we are prepared to lift our overall investment in infrastructure. It would be wrong to say we are not making progress in Australia. We are. But, overall, we could be doing better.

Access to borrowings

I am sometimes asked, why doesn't local government simply borrow more to fund its infrastructure needs. It's true that local government has relatively low levels of debt. It is also true that borrowing to fund capital spending is not common practice. But, as Access Economics has pointed out, there is limited scope for additional net borrowings by local government. This is partly because a great deal of local government infrastructure does not have significant revenue generating capacity.

The trouble for local government is that, despite low debt levels, there is severe pressure on the recurrent budget. Therefore, any additional demand to fund higher debt ratios will impact on the ability to deliver current levels of service. Cautious use of increased borrowings could ease the infrastructure crisis if - and it's a big if - it is accompanied by increased revenue to service the debt. Which, of course, brings us back to the need to grow local government revenue. As I said before, it's Catch-22 for local government.

Financial performance, asset management

There's one further issue I'd like to mention and that's the performance of local government in general and improvements in asset management in particular. There is now an increasing focus on asset management at an increasingly sophisticated level.

ALGA, for example, has commissioned consultants Jeff Roorda and Associates to undertake work that would lead to a road asset database that would also provide a basis for better decision-making on national local roads policy and infrastructure management programs.

Stage Two of the project will develop a business case for a national approach to local roads data collection; outline the costs and benefits which would accrue to all sectors of local government; and suggest an implementation strategy to complement existing local government asset management initiatives. Local government is moving to manage its assets in an efficient and effective manner. Overall, local government has come a long way over the past few years, particularly when it comes to financial reform. As Dollery and Marshall point out in their new work, Reshaping Australian Local Government, one of the most conspicuous achievements over the past decade is financial performance.

Leaders of local government have 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. We have been dramatically changing the way we do business, moving away from traditional administrative hierarchies to improve service delivery.

We have also embraced a renewed focus on our constituents. We have embraced the service culture to the extent that we spend a great deal of time and effort listening to, and responding to, the specific needs of our communities. Nowhere is this more evident than the way we are embracing technology. The partnership we have formed with the Australian Government through the Networking the Nation program, is producing real results for councils and the communities we serve.

Local government has also made its mark over the past decade in areas like community leadership, regional cooperation and its ability to see the bigger picture and provide vision to guide the growth and development of our communities.

Local government has the capacity to over come the financial and infrastructure problems it confronts. But it needs a more solid, financial foundation to let it do what it does best - serve the needs of its communities.

I have one final point that we all need to make loud and clear. Spending on infrastructure must be seen as an investment in communities, and investment in appropriate infrastructure builds upon a community's productive capacity. It gives the community an initial boost to the economy, but has lasting economic and social impacts.

Australia has the capacity and ability to invest more in infrastructure. By doing so - and doing so wisely - we will be enhancing our international competitiveness and our ability to generate future earnings. Local government may not always offer the sexy infrastructure opportunity of an Olympic Games or an Alice to Darwin railway. But it plays an important part in oiling the working wheels of the nation, day in and day out.

So, let's invest in infrastucture - and let's invest in local government.

Thank you.

Mike Montgomery
Melbourne
16 August 2004

Australian Local Government Association

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