Projects Insights

09 December 2008

PPP funding for local government infrastructure

By Stuart Cosgriff.

Key Points:
Using PPP models similar to those used by State Governments could enable local government to meet the requirements of the community for new and upgraded infrastructure within its funding constraints.

Local governments in Australia perform a range of functions which include providing infrastructure, delivering services as well as performing planning and regulatory roles. PPPs are a partnership between the public and private sector to deliver a project that otherwise would have been funded solely by the public sector, but they have traditionally not been widely used at the local government level.

While each local government performs a different range of functions, there has been a broad trend towards increasing service provision beyond local roads and other services to ratepayers' properties to include substantial involvement in delivering human services and regulatory functions. This has resulted in increased expenditure for local government.

A recent report issued by the Commonwealth Government Productivity Commission entitled "Assessing Local Government Revenue Raising Capacity" has highlighted the financial pressures upon local government in raising sufficient revenue to fund construction, operation and maintenance of infrastructure whilst still providing the level of services expected by ratepayers and residents.

Traditionally, local government (like its State and Federal counterparts) essentially has two options for funding the construction, operation and maintenance of essential community infrastructure:

  • directly from revenue received by the local government body (including, where relevant, from grants from other arms of government); and
  • raising debt (and servicing that debt from revenue).

Using PPP models similar to those used by State Governments could enable local government to meet the requirements of the community for new and upgraded infrastructure within its funding constraints.

Capacity of councils to raise revenue

The terms of reference of the research study leading to the Report examined the capacity of local government to raise revenue including:

  • how different types of councils (eg. capital city, metropolitan, regional, rural, remote and indigenous) can raise revenue and the factors contributing to capacity and changes over time
  • the impacts on individuals, organisations and businesses of various taxes, user charges and other revenue sources available to local government; and
  • the impact of any State regulatory limits on the revenue raising capacity of councils.

Sources of revenue

As the Report notes, there are essentially two sources of revenue available to local government:

  • "Own source" revenue, which local government has the authority and capacity to raise in its own right; and
  • grants received from State and Federal governments.

The authority of local government to raise own source revenue is a function of the legislative and regulatory framework within which local government sits in each State and Territory. The capacity, however, of local government to raise sufficient own source revenue to procure, operate and maintain infrastructure is influenced by a range of factors individual to each particular local government body. These include the number and financial capacity of ratepayers, the net revenues raised from providing services. and any legal or commercial restrictions on the raising of rates, service charges or developer contributions.

Key findings of the report

The Productivity Commission has found that a number of councils, particularly in capital city and urban developed areas, do have the means to recover additional revenue from their communities sufficient to cover their expenditures without relying on grants from other arms of government. However, a significant number of councils, particularly in rural and remote areas, will remain dependent on grants from other spheres of government to meet their current expenditure.

The Report identifies four key categories of local government expenditure which compete for funding (whether from annual revenue or from grants):

  • transport and communication
  • housing and community amenities
  • general public services; and
  • recreation and culture.

What are the implications of the findings?

If grants from the State and Federal governments do not cover the shortfall between the expenditure and "own source" revenue, local governments will struggle to prioritise large amounts of upfront capital expenditure on construction and maintenance of infrastructure while still incurring the ongoing operating expenditure required to provide expected levels of services to ratepayers and residents.

Is there a role for PPPs to play?

The private sector will almost certainly have an increasing role to play in assisting local government to make and meet ongoing commitments to the development of public infrastructure. There are a number of reasons why PPPs might become more attractive to local governments.

  • Capital cost reduction: PPPs enable the expenditure on the capital cost of the infrastructure to be incurred over time (typically over a term of 20 - 30 years) rather than on an upfront basis.
  • Reduced delivery costs: The use of private sector funding can be more expensive than government funding. However, the "whole of life" costing approach inherent in the risk allocation typical of PPPs can actually reduce and make more certain the overall costs of procurement, operation and maintenance of such infrastructure.
  • Reduced transaction costs: All tiers of government (through the National PPP Forum) are working towards reducing transaction costs associated with the implementation of PPPs. This could make PPPs more feasible for the projects of the scale carried out by local government, as could co-operation between local government bodies to achieve economies of scale.
  • Risk allocation: Under a PPP model the private sector will usually bear those risks that can be managed more effectively, and at a lower cost, by the private sector than they could by the government. The profit imperative provides motivation to control the costs of delivery by managing the risks appropriately.
  • Innovation: Extending capital repayments over a longer period and can encourage private sector innovation, such as opportunities to develop innovative design and other solutions so as to meet government's requirements at a lower cost or to offset costs by deriving additional revenues from third party use of infrastructure.
  • Legislative platform: Statutory and other regulatory and policy mechanisms are already in place, for example, recent amendments made to the Local Government Act 1993 (NSW) to facilitate PPPs.

A number of local government bodies in Australia have already either implemented PPPs or are considering their implementation. Recent examples include:

  • The City of Marion in South Australia is procuring a new State Aquatic Centre, which will include a range of facilities suitable for competition and recreational use, by way of a PPP. This project is currently at preferred proponent stage.
  • The Holroyd City Council in NSW has used a PPP structure for the installation and maintenance of electronic school zone signage.
  • The Parramatta City Council has implemented a PPP for the redevelopment of the Parramatta civic centre (including community facilities, retail, commercial and residential towers together with a car park) the total project value is estimated at $1.4 billion (2008).

These three projects alone illustrate the adaptability of the PPP procurement methodology and the range of projects to which it could be applied in the local government arena to assist local government to manage funding shortfalls for the procurement and upgrade of essential community infrastructure.

 

Thanks to Charbel Azzi for his help in writing this article.

For further information, please contact Stuart Cosgriff.

Disclaimer
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states or territories.