Don’t be seduced by dirty talk on debt, governments warned

Wipe our Debt

Getting the government to borrow more money is definitely on the nose in federal politics.

But local councils actually need to go further into debt to deliver for their communities, a new expert report from leading sectoral researchers and backed by engineers has found.

As the rhetoric surrounding the imperative for governments and communities to start ‘living within their means’ reaches fever pitch, the Australian Centre of Excellence for Local Government (ACELG) has poked a hole in the Federal Treasurer’s bubble by urging councils to take a level headed look at accessing debt and external finance as a way to clear yawning infrastructure backlogs.

It’s a debate that most council professionals across Australia are likely to welcome as they attempt to maintain roads, bridges and key community assets against a backdrop of increased cost-shifting and heightened ratepayer expectations.

Banks and institutional investors generally regard governments (at least in Australia) as a pretty safe bet in terms of credit risk because it is fundamentally difficult for them to go out of business.

To push its point, the ACELG has released Debt is Not a Dirty Word: The Role and Use of Debt in Local Government a report prepared by expert John Comrie and supported by consortium partner, the Institute of Public Works Engineering Australasia (IPWEA).

“Something has to shift – it’s simply not possible for many councils to make significant improvements in their financial, asset management and service delivery performance without a change in approach, said ACELG Director and Associate Professor Roberta Ryan.

“John Comrie is a recognised thought leader on local government finance and other sector themes, and his research has brought the issue into sharp focus.”

Mr Comrie’s views on leveraging councils’ good financial standing are not financial rocket science.

“The local government sector in all Australian jurisdictions has extraordinarily low levels of debt relative to the security and the level of its income base and the nature of its service responsibilities. On average councils have more money in the bank than they have debt,” Mr Comrie said in the report.

A fundamental problem that governments need to tackle directly is unless a new source of external funding for infrastructure miraculously appears – like substantial grants from state or federal governments – it becomes simply financially impossible to both renew their assets and infrastructure without overcharging ratepayers.

“Under-use of debt will therefore result in inter-generational inequity in service provision and charging decisions, and/or an inability to accommodate needs and preferences for new capital works and asset renewal,” Mr Comrie’s report says.

The report also argues that in local government “debt levels should not be ‘as low as possible’ in an absolute sense but should instead be as low as possible relative to what is needed by a council in order to provide affordable, preferred service levels on an ongoing basis whilst maintaining inter-generationally-equitable rating and charging decisions.”

Infrastructure stakeholders, whose businesses and ability to deliver can suffer badly because of lumpy and erratic funding flows, are backing the ACELG report.

Chris Champion, the chief executive of the Institute of Public Works and Engineering Australasia said that has organisation had worked closely in developing the paper “as our members are keenly aware of the factors that can impact upon well-developed and financially sustainable strategic, asset management and long-term financial plans”.

“IPWEA supports the conclusions of this research and will work with ACELG in informing local government decision makers about its potential value, particularly in addressing asset renewal backlogs.”

However Mr Comrie is also candid about the need for education and a cultural shift to come to a more mature understanding of the positive role debt can play.

“Many people are likely to be uncomfortable with the idea of local governments taking on more debt and changing their traditional borrowing and treasury management practices despite the objective merits of doing so,” the Debt is Not a Dirty Word report says. “For change to occur it will be necessary to tread carefully in order to build confidence and understanding.”

The report suggests that an initial step needs to be that local government associations and local government regulatory agencies and government peak bodies get together to “explore the merit of collaborative activity to consider reforms to promote better use of debt by local governments.”

The banking and superannuation sectors are expected to welcome the report.

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