Agenda of Special Finance Committee Meeting

Item No. 4.1

Agenda (Open Portion)

Special Finance Committee Meeting

Page 7

21/8/2017

REPORT TITLE: State Government Accelerated Local Government Capital Program

REPORT PROVIDED BY: Acting General Manager

1. Report Purpose and Community Benefit

1.1. The purpose of this report is to consider potential applications for funding through the State Government Accelerated Local Government Capital Program.

2. Report Summary

2.1. The State Government rolled out the Accelerated Local Government Capital Program (ALGCP) across the State as part of the 2017-18 budget.

2.1.1. The purpose of the ALGCP is to support expanded investment in infrastructure by local government authorities through targeted loan interest rebates.

2.2. Assistance for eligible projects is provided through:

· the provision of loan interest rebates in the form of a grant for the eligible period of each loan, with a five year maximum rebate; and

· access to borrowing to finance projects under the Program through the Tasmanian Public Finance Corporation.

2.3. The period of the rebate will be the amount of time for which the project has been brought forward, capped at a maximum of five years. For example a project scheduled for June 2020 which under the Program is being undertaken in June 2018 will receive a subsidy for a two year period to June 2020.

2.4. In light of the roll out of the ALGCP officers have considered some of the significant capital works projects to see if they may be eligible for the funding. The projects considered include:

2.4.1. The component two of the redevelopment of the Doone Kennedy Hobart Aquatic Centre;

2.4.2. The Brooker Bridge; and

2.4.3. Pinnacle Road Guardrails.

3. Recommendation

That given the financial implications of increasing Council’s borrowing it is recommended that the Council does not nominate any projects from the capital works program for the State Government Accelerated Local Government Program.

4. Background

Capital Works Program

4.1. The City of Hobart ten year capital works program was approved by Council on 18 July 2017 with the budget estimates.

4.1.1. The capital works program was reviewed by the Executive Leadership Team (ELT) following the Finance Committee resolution of 27 June 2017 that:

The matter be deferred to a Special Finance Committee meeting to be held on Monday 3 July 2017 prior to the Council meeting. The General Manager to provide additional information on capital expenditure and specifically the Council’s ability to expend projects contained in the 2017/18 financial year as well as any other efficiency savings.

4.2. ELT undertook a ‘smoothing’ exercise to ensure that the Council could achieve and expend the capital projects in the 2017/18 program.

4.3. This exercise resulted in projects being time based on organisational capacity to deliver and complexity of the projects. It also resulted in a reduction in borrowings.

4.4. The capital works program remains weighted at the front end with significant projects such as the Brooker and Tasman Highway Bridges, Doone Kennedy Aquatic Centre upgrade and public toilet upgrades being listed in the early years of the program.

Accelerated Local Government Capital Program

4.5. The State Government rolled out the Accelerated Local Government Capital Program (ALGCP) across the State as part of the 2017-18 budget (see attachment A).

4.5.1. The purpose of the ALGCP is to support expanded investment in infrastructure by local government authorities through targeted loan interest rebates.

4.6. Assistance for eligible projects will be provided through:

· the provision of loan interest rebates in the form of a grant for the eligible period of each loan, with a five year maximum rebate; and

· access to borrowing to finance projects under the Program through the Tasmanian Public Finance Corporation.

4.7. The period of the rebate will be the amount of time for which the project has been brought forward, capped at a maximum of five years. For example a project scheduled for June 2020 which under the Program is being undertaken in June 2018 will receive a subsidy for a two year period to June 2020.

4.8. Funding to a maximum of $60M is available through the Program and is available on a first-come first-served basis.

4.9. The Program commenced on 1 June 2017 and will close on 31 August 2017.

4.10. To be eligible for assistance under the ALGCP it needs to be demonstrated that each nominated project:

· is in addition to the Council’s approved borrowing program for the current year;

· is part of the Council’s future infrastructure plans and is able to be brought forward to enable construction to commence by 30 June 2018;

· will provide Tasmanian employment opportunities;

· is procured through appropriate processes that deliver value-for-money outcomes; and

· is to be financed through an approved loan from the Tasmanian Public Finance Corporation.

4.11. While applications will be assessed by the above eligibility criteria it is not necessary that projects satisfy all of the criteria where construction can commence by 30 June 2018.

4.12. The Program is managed and administered by the Department of Treasury and Finance with the provision of assistance determined by the Treasurer having regard to the commence date of construction, the quantum of applications received and the contribution the projects will make to employment growth and economic activity in the State.

4.13. In light of the roll out of the ALGCP officers have considered some of the significant capital works projects to see if they may be eligible for the funding. Details of these projects are provided below.

Doone Kennedy Hobart Aquatic Centre Redevelopment

4.14. The overall redevelopment of the Doone Kennedy Hobart Aquatic Centre (DKHAC) has an identified cost of $22M and has two clear components:

4.14.1. The first component of the works focusses on improvements to access, change rooms, increase to gym and fitness rooms, the café and staff areas. The estimated cost of these works is $12M and this funding is included in the City’s ten year capital works program. Work on this stage has commenced.

4.14.2. The second component of the proposed upgrade of the Centre includes the provision of a new waterslide, children’s play area, new warm water pool, new wellness centre, school group change area, improved car parking, a new dry diving space, renewal of pool deck tiles and other improvements to the building. These works have an estimated cost of $10M and are currently unfunded.

4.15. Applications have been lodged on two occasions under the Federal Government Building Better Regions Fund Infrastructure Projects Stream seeking the $10M funding. Unfortunately on both occasion the applications have been unsuccessful.

4.16. Given the inability of the DKHAC to fund loan repayments and the Council’s current program of works and borrowings, stage 2 of the DKHAC redevelopment is not considered to be a suitable project to nominate for the ALGCP. The funding provided under the Program is in the form of a loan and not a grant.

4.17. DKHAC will continue to proactively seek grant funding to progress with stage 2 of the DKHAC redevelopment.

Brooker Bridge

4.18. Given the latest design work, and cost estimates, it is possible that additional funding of up to $2M, over the original estimate, may be required for the Brooker Bridge project.

4.19. The ALGCP rebate is applicable for the amount of time by which a project has been brought forward up to a maximum of five years. As the Brooker Bridge project is a carry forward from the 2016/17 capital works program it is most unlikely to qualify for any rebate and is not considered to be a suitable project to nominate.

4.20. Once the design work is complete and costs confirmed a further report will be provided to Council seeking consideration of amendments to the capital works program to complete this project.

Pinnacle Road Guardrails

4.21. The project for the Pinnacle Road guardrails spans the full ten years of the capital works program and is funded through the asset replacement budget.

4.22. Officers have considered that this project could be eligible for the ALGCP rebate with the request limited to years 2 to 6 of the project for $2.5M.

5. Proposal and Implementation

5.1. Given the financial implications and modelling provided at section 7 and the impact on rates, cash balances and the increase to borrowings it is recommended that the Council does not nominate any projects from the capital works program for the State Government Accelerated Local Government Program.

6. Strategic Planning and Policy Considerations

6.1. The following goals from the Capital City Strategic Plan 2015-2025 are relevant in considering this matter.

Goal 2 – Urban Management, Strategic Objective 2.2, namely:

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

Goal 2 – Strong, Safe and Healthy Communities, Strategic Objective 4.2, namely:

4.2 – City facilities, infrastructure and open spaces support healthy lifestyles.

7. Financial Implications

7.1. Funding Source and Impact on Current Year Operating Result

7.1.1. The Council approved the 2017/8 Budget and updated Long Term Financial Management Plan on 18 July 2017. As has been highlighted a number of times now, Council’s desire to deliver an expanded capital works program has a significant effect on Council’s forecast financial position. Whilst remaining financially sustainable, in summary the forecasts show:

7.1.1.1. The reduction of cash balances to around the equivalent of two months cashflow. It is not considered desirable to reduce balances further;

7.1.1.2. Entering into a significant borrowings program;

7.1.1.3. Forecast rate increases of 3% for the next seven years;

7.1.1.4. The 2018/19 budget is already premised on the delivery of a net $1M in savings; and

7.1.1.5. Council’s net financial liabilities ratio (a measurement of debt), due to the borrowings program, reaching 48.6% - and thus marginally inside the 50% benchmark considered by the Auditor-General as representing low risk.

7.2. This position therefore represents the starting point, before any consideration of further capital works over and above the approved program, and additional borrowings.

7.3. The ALGCP program, provides access to borrowing and loan interest rates, it is not a grant. Accordingly, the servicing and repayment of any loan will have impacts on the Council’s financial position, notwithstanding some portion of the interest on the loan is refundable by way of a rebate under the Program. Particular attention needs to be paid to the decrease in cash balances, given that balances are already forecast to decrease to minimum acceptable levels. The larger the loan contemplated, the larger the impact on Council’s financials.

7.4. Accordingly, given Council’s current forecasts, the impact of the possible bringing forward of the above projects and the funding of them with loans (albeit with some portion of the interest expense being rebated), and the consequential actions required to restore Council’s forecasts to the current levels – on the basis that current cash forecasts are considered the minimum desirable, has been modelled.

7.5. A possible $10M loan for DKHAC, modelled over a 15 year loan term, has the following effects:

7.5.1. Forecast cash balances decrease to unacceptably low levels, particularly in 5-10 years;

7.5.2. Forecast operating surpluses decrease – due to interest expense and increased depreciation – but remain acceptable;

7.5.3. Forecast new debt increases to $95M;

7.5.4. The net financial liabilities ratio increases to 55% - and thus into the medium risk range as per the Auditor-General’s criteria. It remains in this range for six years.

This scenario is not recommended.

7.6. In order to restore the cash balances to acceptable levels, two scenarios have been modelled. One is to utilise further borrowings to restore cash balances to acceptable levels, and the other is rates increases. Modelling shows, in broad terms, the following would be required:

7.6.1. Additional borrowings of around $10M, mostly in the period 5-10 years from now. This would lead to total new borrowings of $105M.

This results in cash forecasts being restored, operating surpluses being acceptable, and the net financial lability ratio peaking at 55% and remaining in excess of 50% for six years.

7.6.2. Rates increases. As noted above at 7.1.1.3, rate increases are currently forecast at 3% for the next seven years. Rates would need to be further increased to around 3.5% in years 4-7.

This results in cash forecasts being restored, operating surpluses acceptable, and the net financial lability ratio peaking at 54% and remaining in the medium risk range for only three years.

7.6.3. Council, given community concerns and other rising costs of living, has understandably shown a desire to limit rate increases as much as possible.

7.7. In summary, the financial outcome can be boiled down to:

7.7.1. The expenditure of an additional $10M of ratepayer money (over and above the existing allocation of $12M);

7.7.2. The need to then borrow further monies, or increase rates, to restore the minimum desirable cash balances;

7.7.3. The incurring of additional interest cost:

7.7.3.1. Under the increased rates scenario, approximately $4.3M of additional interest cost, with approximately $2.1M of that rebated back (assuming a 15 year loan term and current interest rates); or

7.7.3.2. Under the further loan scenario, approximately $9M of additional interest cost with approximately $2.1M of that rebated back.

7.8. If Council was of a mind to consider the $2M for the Brooker Bridge only (if it qualifies – see 4.19), clearly the financial implications are less. Cash balances would still need to be restored to minimum levels, and would require approximately:

7.8.1. Rate increases: 3% for four years (ie unchanged), then 3.2% for three years (ie: 0.2% additional to current forecasts); or

7.8.2. A further loan of $3M – making total forecast new borrowings of $90M.

7.9. If Council was of a mind to consider the $2.5M for the Pinnacle Road guardrail only, it would have very similar outcomes to the Brooker Bridge. Cash balances would still need to be restored to minimum levels, and would require approximately:

7.9.1. Rate increases: 3% for three years (ie unchanged), then 3.2% for four years (ie: 0.2% additional to current forecasts); or

7.9.2. A further loan of $3M – making total forecast new borrowings of $90.5M.

8. Legal, Risk and Legislative Considerations

8.1. Covered in financial implications.

9. Delegation

9.1. This matter is delegated to the Council.

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.

Heather Salisbury

Acting General Manager

Date: 18 August 2017

File Reference: F17/101861; 16/297

Attachment a: Local Government Accelerated Capital Program ⇩

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