Agenda of Special City Infrastructure Committee, City Planning Committee, Finance Committee, Community, Culture and Events Committee and Parks and Recreation Committee Meeting

Item No. 3.1

Agenda (Open Portion)

Special Joint City Infrastructure Committee, City Planning Committee, Finance Committee, Community, Culture and Events Committee and Parks and Recreation Committee Meeting

Page 7

11/4/2017

REPORT TITLE: Capital Works Program 2017-2018 and 10 Year Plan

REPORT PROVIDED BY: Director City Infrastructure

Director Financial Services

1. Report Purpose and Community Benefit

1.1. In June 2015, the Council adopted a resolution relating to how the future year’s capital program was to be presented and prepared. This included the requirement to prepare the following documentation for endorsement:

1.1.1. Draft Capital Works Program for the next year, to allow officers to commence scoping and costing work for all projects on the draft program at which point the draft program be resubmitted to the Council for further consideration.

1.1.2. Presentation of a forward 10 year Capital Works Program, to seek the Council’s endorsement for the projects, with focus on the first three years of the program.

1.2. This approach was adopted for the 2016/2017 capital program, and the above process was undertaken in March 2016 with the endorsement of a 10 year Capital Works Program.

1.3. This year the full Capital Works program has been branded as “Transforming Hobart” due to the extent and variety of projects within this significant program.

1.4. The program is made up of 2 key components as follows:

(i) Projects, which include a combination of new, upgrade and renewal aspects associated with individual projects; and

(ii) Underlying renewal of existing assets.

1.5. This report presents similar information as provided last year for an updated 2017/2018 Capital Works Program. In addition to the above information, a comparison against the endorsed program from March 2016 has been provided to show the changes that have been made over the past 12 months to the proposed 2017/2018 program.

2. Report Summary

2.1. This report details the proposed 2017/2018 Capital Works Program, the associated forward 10 Year Capital Works Program, and the financial implications to the Council.

2.2. The Council has committed to a 10 year Transforming Hobart Capital Works program just in excess of $300 million for the next 10 years.

2.3. This is made up of just over $100 million in new asset and upgrade projects, as well as just over $200 million in underlying asset renewals.

2.4. Throughout this 10 year program, the Council has committed to maintaining its underlying asset renewal program in the order of $22.2 million per year in order to fund its ongoing renewal requirements as highlighted in Asset Management Plans.

2.5. In terms of the Council’s capacity to undertake a works program, the value of capital projects completed over each of the past four years has increased from $23 million several years ago to over $38 million in 2016/2017. Both internal and external resource levels will need to be monitored and regularly reviewed to ensure the delivery of the program.

2.6. Formal approval is sought for the first year of the proposed program, namely 2017/2018. This will enable project design and documentation work to proceed ahead of the coming financial year and will enable resourcing needs to be determined and construction programming to commence.

2.7. In principle approval is sought for the following two years of the program to enable preliminary stages of planning to commence and for long term financial planning purposes.

2.8. The program will need to be part funded by debt, or an increase in revenue, or a combination of both. Based upon the current long term financial plan, debt will not be required until approximately the 2018/2019 financial year. The funding will be reviewed in the preparation of the 2017/2018 budget and Long Term Financial Management Plan (LTFMP), noting that this year there is an 11% increase to the 20 Year program, due to refined asset renewal forecasts.

2.9. The Capital Works Program as proposed addresses the current backlog identified in asset renewals. Further modelling and analysis is required to determine the impact of future asset renewal funding scenarios that will inform updates to the Asset Management Plans and the LTFMP.

3. Recommendation

That:

1. The Council endorse the draft Capital Works Program for 2017/2018 as shown in Attachment A.

2. Officers to begin programming the design and delivery of the program for the next financial year.

3. The Council endorse the draft 3 and 10 year Capital Works Program for 2017/2018 to 2026/2027, as shown in Attachments B and C, as a guide for officers to prioritise project development work, with a specific focus on the next 3 financial years.

4. Background

4.1. In March 2016 the Council endorsed a 10 Year Capital Works Program called “Transforming Hobart” to deliver a specific program of works totalling $100 million over the next 10 years, as well as underlying asset renewals. This has replaced the New Asset Program and includes major asset renewal and upgrade, as well as some new asset projects.

4.1.1. It is now proposed to badge the whole project as Transforming Hobart.

4.2. A major component of the new asset and upgrades program includes the Inner City Action Plan (ICAP), which was continued in 2015/2016 with the upgrade of Liverpool Street in the vicinity of Myer, and in the current year with Morrison Street Upgrade Stage 2.

4.3. Key programs within over the coming years include:

(i) ICAP – Future Projects;

(ii) Local Retail Precinct Plans;

(iii) Public Toilet Strategy 2015-2025;

(iv) Wellington Park – One Mountain;

(v) Queens Domain Program;

(vi) Other Projects; and

(vii) Underlying Asset Renewals.

4.4. The Council has also historically approved an Asset Replacement budget that has ranged between $18 million and $21.1 million over the past four years. This amount has increased due to increased renewal demand arising from updated condition data and service requirements, along with rising unit costs.

4.5. In the 2016 endorsed 10 Year Capital Program, the Council committed to retain asset renewal funding at current levels and add $100 million in service driven projects on top of the underlying asset renewals program. This ensured that existing infrastructure to be sustainably managed in accordance with the City’s Asset Management Plans and Asset Management Strategy requirements.

4.6. The delivery of the 10 Year Transforming Hobart program has increased the annual capital works delivered by the City from about $23 million to around $41 million in 2017/2018, and this level will be sustained for at least the next 3 years with the currently proposed program.

4.7. External funding sources are now consistently noted against individual projects, and all project budget allocations have been listed as the total project cost including these funding sources e.g Roads to Recovery, Program grants, other grants and levies, or land sales. The City’s funding requirement excluding these external one-off funding sources can be clearly determined and applied across the entire capital program.

4.8. Officers have scoped each of the identified projects and determined a projected timeframe for the delivery.

4.9. Compared to last year’s endorsed 2017/2018 program, some projects have been added, amended, deferred, or brought forward where it has been identified that the Council has made a resolution or other commitment in regard to the project.

5. Proposal and Implementation

Proposed 2017/2018 Program Summary

5.1. The approval of Year One (2017/2018) of the Capital Works Program by Council will provide certainty to the City’s officers in regard to proceeding with project design and documentation work ahead of the coming financial year and it will enable resourcing needs to be determined and construction programming to commence.

5.2. The proposed total capital works program for 2017/2018 is summarised below:

New assets and upgrades $ 20,361,000

Underlying asset renewals $ 21,379,530

TOTAL $ 41,740,530

5.2.1. This includes external funding of $ $2,667,853, made up from Roads to Recovery ($1,027,853) and the final grant payment for the Tasman Highway Shared footpath ($1,640,000).

5.2.2. The own source funding commitment by the City for 2017/2018 is therefore $39,072,667.

5.3. The complete proposed 2017/2018 capital works program is included in Attachment A to this report.

5.4. Some significant new asset/upgrade projects proposed within the 2017/2018 program include:

(i) Tasman Highway Shared Bridge - $8.7 million, which includes a total of $7.28 million in Federal Government grants received over the last 3 years to fund this project.

(ii) Lenah Valley Retail Precinct Plan - $2 million.

(iii) Public Toilets - $1.7 million, across 8 different sites as identified in the Public Toilet Strategy 2015-2025.

(iv) Wellington Park Tracks - $1.42 million, across 3 different track projects, along the Pinnacle, Springs and Pipeline trails.

(v) TCA Ground playing surface replacement - $1.276 million.

(vi) Project Phoenix - $1.29 million.

(vii) Kemp St Upgrade - $1.55 million, which includes $600,000 funding from a land sale associated with the project, and expenditure of $450,000 for the Commercial Waste & Recycling Receiving Facility.

(viii) Street Light Upgrades with TasNetworks - $500,000.

(ix) Implementation of Transport Strategy - $300,000.

(x) Tolman Hill playground - $300,000.

5.5. Some significant projects and programs proposed in 2017/2018 for underlying asset renewals include:

(i) Road Pavement renewals and reconstructions - $5.918 million, including the following key projects:

(a) Carlton Street, Augusta Road to Forster Street - $1.377 million, with $1.027 million funded from Federal Government Roads to Recovery grant.

(b) King Street, Regent Street to Sandy Bay Road and Pedestrian improvements - $600,000.

(c) Renewal contributions to ICAP projects in Kemp Street and the Bathurst Street end of the Brooker shared bridge - $440,000.

(ii) Road spray seals, slurry seals and overlays - $3.289 million.

(iii) Plant, Vehicles and Equipment - $2.136 million.

(iv) Footpath renewals - $1.04 million.

(v) DKHAC Plant and other minor renewals - $1.02 million, with these works required regardless of the proposed DKHAC major refurbishment and upgrade.

(vi) Plant and equipment - $944,028, with some minor plant and equipment previously funded from the operating budget now being included in the capital budget.

(vii) Information and Communication Technology (ICT) Renewals - $733,074.

(viii) Pinnacle Road guardrail renewal - $500,000.

(ix) Soldiers Memorial Flood lighting replacement - $250,000.

5.6. A complete summary of changes to the draft 2017/2018 capital program compared to the March 2016 endorsed program is included in Attachment D to this report.

Proposed 3 and 10 Year Program

5.7. The 10 year program expenditure is summarised in the graph below:

5.8. The proposed 3 year (Attachment B) and 10 year (Attachment C) are appended to this report.

5.9. The in principle approval of the 2018/2019 and 2019/2020 programs will provide direction for officers to proceed with the preliminary planning, initial community engagement, the seeking of grant funding and other early stages of these projects.

5.10. Further, approval will be sought later in 2017 for the second year of the program, namely 2018/2019, to enable project planning and design work to be commenced well in advance of the 2018/2019 financial year.

5.11. The 10 year program is based on the following assumptions:

5.11.1. That underlying asset renewal funding is based on the average renewal demand (including backlog), to ensure the currently identified renewal projects are constructed, as well as addressing backlog renewals over time. In addition to this, financial modelling has been done for 100% of the asset renewals program.

5.11.2. All new asset and upgrade projects have been reviewed and reassessed to confirm that appropriate years and funding requirements are in place for the remaining 9 years of the initial $100 million program.

5.12. The 10 year program has been reviewed by all Divisions and asset portfolio managers with the aim of smoothing the program over 10 years to keep it around a maximum annual value of $40 million, in line with the City’s capacity to deliver the program. The draft 2018/2019 program is slightly higher due to the inclusion of the $7.5 million for the DKHAC major upgrade in that year, with the remaining $1 million expenditure in 2019/2020.

5.13. Some additions have been made to the new asset/upgrade projects in the program which have increased the 10 year program when compared to the March 2016 endorsed plan as detailed below:

5.13.1. $3.5 million for the Battery Point walkway Stage 2 design and construction, up to a total of $6.8 million for the entire project.

5.13.2. $500,000 extra for the DKHAC major refurbishment and upgrade.

5.13.3. $450,000 for the Kemp Street Commercial Waste and recycling receiving facility to be installed at the same time as the Kemp Street upgrade.

Timing changes have also been made to key projects as noted below:

5.13.4. A funding increase in 2018/2019, and corresponding reduction in 2019/2020 due to the DKHAC major upgrade and refurbishment project being brought forward one year, and this accounts for $8.5 million in changes over these 2 years.

5.13.5. Increased expenditure in 2020/2021 to 2022/2023 due to ICAP projects being moved further out in the program, namely the Elizabeth Street / Wellington Court connection, and the Hunter Street / Evans Street redevelopment.

6. Strategic Planning and Policy Considerations

The following goals from the Capital City Strategic Plan 2015-2025 are relevant in considering this proposal: Goal 1 – Economic Development, vibrancy and Culture, Strategic Objectives 1.3, 1.4 and their strategies, namely:

“1.3.1 - Develop and implement a program of city improvements supporting the major retail, commercial and hospitality precincts and small business.”

“1.4.1 – Ensure Council owned assets reflect visitor requirements.”

6.1. Goal 2 – Urban Management, Strategic Objective 2.1, 2.2 and their strategies, namely:

“2.1.3 – Identify and implement infrastructure improvements to enhance road safety.”

“2.2.2 – Develop, manage and maintain the city’s urban spaces and infrastructure.”

6.2. Goal 4 – Strong, Safe and Healthy Communities, Strategic Objective 4.2:

“4.2 - City facilities, infrastructure and open spaces support healthy lifestyles.”

6.3. Goal 5 – Governance, Strategic Objectives 5.1 and 5.3:

“5.1 - The organisation is relevant to the community and provides good governance and transparent decision making.”

“5.3 – Quality services are delivered in a safe, cost effective and efficient way.”

7. Financial Implications

7.1. Funding Source and Impact on Current Year Operating Result

7.1.1. The proposed capital works budget for 2017/2018 is $41,740,530 which is $785,857 (or 1.88%) higher than the $40,954,673 value proposed in the March 2016 three year plan. The proposed budget is therefore at the same level as expected since the Local Government Civil Construction Index (LG CCI) is 1.87% for the past 12 months.

7.2. Impact on Future Years’ Financial Result

7.2.1. When considering the expanded capital works program last year, the Council considered a range of funding options. These included asset sales, grant funding, rate increases, cost savings and borrowings.

7.2.2. The Council considered these options, and resolved “the Council provide in-principle approval, subject to the completion of the 2016/2017 Budget, to proceed with the funding of the Ten Year Capital Works Program, with debt currently forecast at $52M and a rate increase currently estimated at 2.5% per annum”. It was further resolved “the Ten Year Capital Works Program and funding strategy be reviewed annually”.

7.2.3. With the updated capital works program presented in this report, it is appropriate the funding strategy be reviewed.

7.2.4. The updated forecast capital works program, across the life of the long term financial plan, represents an increase of 11% over the prior year program, largely due to the refinement of asset renewal forecasts. This represents a significant change to the funding considerations.

7.2.5. This is because the current funding strategy already forecasts the Council running down its cash balances and entering into a debt program to provide the necessary funds to fund the program.

7.2.6. It is recommended that this additional funding required be provided by a combination of increased debt, and rate increases.

7.2.7. Initial modelling has been performed that shows funding the increased requirement with debt only would require a doubling, at least, of the currently forecast debt program. This is not considered desirable because it may place the Council outside of State Treasury loan approval guidelines. In the long run, it also has a negative impact on the Council’s cash position due to the interest cost associated with the debt.

7.2.8. Initial modelling shows that additional revenue generation would be desirable to partly fund the works program and lessen the reliance on debt. In conjunction with the preparation of Council’s 2017/2018 budget preparation, more modelling needs to be done and this can be presented to the Council budget and long term financial briefing in May.

7.3. Asset Related Implications

7.3.1. The impact of new asset/upgrade projects has not currently been modelled in the asset management system. However, some broad assumptions have been made in the financial model to determine the level of expensed items, expected write-offs, and depreciation etc. After the $100 million in new, upgrade and renewals projects are entered at an individual asset level when they are completed and handed over, they will increase the following:

(i) Value of our assets across all asset classes;

(ii) Annual depreciation;

(iii) Long term renewal demand;

(iv) Ongoing operating and maintenance costs;

(v) Asset write off values, since most projects are service level driven rather than asset renewal driven meaning many assets are replaced earlier rather than reaching their full standard life.

7.3.2. The estimate of asset write offs, asset upgrade percentages and impact on the long term renewal demand (LTRD) are becoming more difficult. This is due to the large number of individual and often complex projects the Council is currently now delivering.

7.3.3. Modelling from our asset register data shows a large renewal requirement in 2020/2021 (Year 4) amounting to approximately $31 million. Not all of this will be able to be funded in that year, thus creating a backlog to be carried into subsequent years. The backlog is based on the following data:

7.3.3.1. Condition inspections of the City’s assets which determine remaining life.

7.3.3.2. All assets highlighted for renewal or replacement based on the fact that the end of their life has been reached by 2020/2021, and they have not been included in a renewal program.

7.3.3.3. Individual projects identified by asset portfolio managers entered into the asset management information system.

7.3.4. The current backlog of $31 million can be cleared in the forward program at a funding level of $22.2 million per annum as shown below. Additional financial modelling has also been done for 100% of the asset renewals program to include the entire backlog over the next 22 years.

7.3.5. Further analysis is required to determine the impact of future asset renewal funding scenarios. As mentioned in Section 7.2, financial modelling has been done for 100% of the expected asset renewals program, and it impact on funding sources.

7.3.6. One of the key sustainability indicators in local government is the ability to fund the replacement of assets as they expire, as per asset management plans, with funding allocated in long term financial plans.

7.3.7. This City has consistently shown an ability to fund 100% of its renewal requirement, however this may not continue depending on further financial modelling and decision by the Council on funding sources. 100% asset renewal funding continues to be forecast, however this is dependent on the issues highlighted in clause 7.2 above. The impact of this, once determined, will need to be addressed in future Asset Management Plans as well as the Long Term Financial Management Plan.

8. Consultation

8.1. Consultation has occurred with the Executive Leadership Team, individual asset portfolio manager, individual project managers and other relevant officers from within the organisation to put together this capital program.

9. Delegation

9.1. This is a matter for the Council to determine.

As signatory to this report, I certify that, pursuant to Section 55(1) of the Local Government Act 1993, I hold no interest, as referred to in Section 49 of the Local Government Act 1993, in matters contained in this report.

Mark Painter

Director City Infrastructure

David Spinks

Director Financial Services

Date: 7 April 2017

File Reference: F17/23439; 16/295

Attachment a: Capital Works Program - Transforming Hobart 2017-2018 ⇩

Attachment b: 3 Year Capital Works Program ⇩

Attachment c: 10 Year Capital Works Program ⇩

Attachment d: 2017-2018 Capital Works Program - Comparison to Endorsed Program March 2016 ⇩

about people	We value people – our community, our customers and colleagues.
professional	We take pride in our work.
enterprising	We look for ways to create value.
responsive	We’re accessible and focused on service.
inclusive	We respect diversity in people and ideas.
making a difference	We recognise that everything we do shapes Hobart’s future.