Fit for the Future –
IPART Report
IPART Conclusions on Wyong
• Not Fit – Scale and Capacity higher under Independent
Local Government Review Panel (ILGRP) recommendation
Recap - ILGRP Recommendation:
The potential for an amalgamation warrants further investigation, but if that option
is rejected or deferred indefinitely, then a Joint Organisation should be established
and should assume responsibility for water along with other strategic functions
[emphasis added].
• Fit – All objective financial criteria
• 20 Year NPV benefit of $196 million supporting a merger
• Alternative for Joint Organisation
2
.
How did IPART assess fitness
NSW Government established “Scale and
Capacity” as a threshold criteria…
So if Council did not satisfy “Scale and
Capacity”, it could not be considered “fit”
regardless of how it performed on
remaining criteria
Wyong met and exceeded all objective
financial health benchmarks:
• Sustainability,
• Infrastructure / Service Management,
• Efficiency
3
.
What does Scale and Capacity mean?
• There were no objective criteria to
• It was not possible to pass “Scale
define scale or capacity. No metrics.
and Capacity if the submission did
not agree with the ILGRP
• Advised that ILGRP
recommendation.
recommendation a starting point
for scale and capacity
• Real concepts of “Scale and
Capacity” do not appear to have
been applied consistently across the
State
Potential Indicators of
Scale and Capacity
Cessnock
Singleton
Port
Stephens
Population 2011
52,500
23,500
67,200
30,700
168,300
154,350
Population 2031
66,400
27,350
88,900
36,200
189,050
197,850
Revenue ($'m)
T-Corp Assessement
Fit or Unfit on Scale and
Capacity
4
Byron Shire
Gosford
Wyong
65
32
99
49
168
150
Moderate;
Negative
Outlook
Moderate;
Neutral
Outlook
Moderate;
Neutral
Outlook
Weak;
Negative
Outlook
Moderate;
Neutral
Outlook
Moderate;
Neutral
Outlook
FIT
FIT
FIT
FIT
UNFIT?
UNFIT?
.
How did Wyong perform on
financial measures?
• Sustainability (Operating Performance, Own Source
Revenue, Building and Infrastructure asset renewal ratio)….
Satisfies (FIT)
• Infrastructure and Service Management (Infrastructure
Backlog Ratio, asset maintenance ratio, debt service ratio)….
Satisfies (FIT)
• Efficiency (decrease in real operating expenditure)….
Satisfies (FIT)
5
.
Merger $196 Million 20 Year NPV
• One of the big State Government selling points for a merger is a
Net Present Value (NPV) of Savings of $196 million over 20 years.
• Staff reverse engineered and recreated the Business Case based
on Ernst and Young (EY) assumptions included in the report.
• Allowed us to:
6
-
Understand the assumptions
-
Calculate the inputs to the model (implementation costs,
assumed savings, etc.)
-
Model same methods for other merger options (Lake Mac and
3 way merger)
.
Merger - Ernst and Young
Business Case Assumptions
• Savings of 10-15% of Total Operational Expense of the smaller
Council (s) in the merger.
SAVINGS
• Savings assumed to be realised in full within 5 years…..
(30% in Year 1, 60% in Year 2, 80% in Year 3, 90% in Year 4)
• In the case of Wyong and Gosford, ongoing annual Savings of
between $22 million and $33 million
ONE OFF
COSTS
• Implementation costs assumed to be 3 times the ongoing annual
saving….so in the case of Wyong and Gosford, one off
implementation costs of between $67m and $100m
• 60% of merger costs spent in Year 1, 20% in Year 2, 10% in Year 3,
7% in Year 4 and 3% in Year 5
DISCOUNT
RATE
7
• 7% discount rate
.
Numbers arising from this analysis
Wyong and
Gosford
Merge
Wyong and
Lake
Macquarie
Merge
3 Councils Wyong,
Gosford and
Lake
Macquarie
Merge
5 Year Net Present Value of Cashflows ($'Million)
5.4
4.7
10.1
10 Year Net Present Value of Cashflows ($'Million)
92.2
80.7
172.9
20 Year Net Present Value of Cashflows ($'Million)
196
174
372
Discounted Payback Period (Years)
4.4
4.4
4.4
-66.6
-58.3
-124.9
-99.9
-87.5
-187.4
22.2
19.4
41.6
33.3
29.2
62.5
Cost Benefit Analysis - Metrics
Numbers Underlying Cost Benefit Analysis
Implementation Costs - Minimum ($'Million) - over 5
years
Implementation Costs - Maximum ($'Million) - over
5 years
Ongoing Annual Savings (after 5 year ramp up) at
10% ($'Million)
Ongoing Annual Savings (after 5 year ramp up) at
15% ($'Million)
8
.
Gosford and Wyong Merger
10 Year Cash-Flow profile
9
.
Staff Observations on Business Case
•
Implementation costs for the GCC option of between
$67m and $100m over 5 years (versus the $10m the State
intends to provide to assist).
•
Negative Cash in Year 1 of between $33 million and $50
million.
Discounted payback of 4.4 years (so some service delivery
would need to drop to fund in the first 4 years)
•
Wyong and
Gosford
Merge (7%
Discount
Rate)
Wyong and
Gosford
Merge (10%
Discount
Rate)
5.4
1.5
92.2
73.3
196
146
4.4
4.9
Cost Benefit Analysis 5 Year Net Present Value
of Cashflows ($'Million)
10 Year Net Present
Value of Cashflows
($'Million)
20 Year Net Present
Value of Cashflows
($'Million)
Discounted Payback
•
•
Five year NPV is marginal.
Is 7% an appropriate discount rate given the risk? A
higher discount rate of 10% (to cater for risk) provides a
lower NPV
•
10-15% assumed saving off one council cost base
appears optimistic.
Realising 30% of this in year 1 and 60% of this in year 2
even more optimistic.
•
10
.
Options / ILGRP Fallback
Joint Organisation – Potential Scope
Joint Organisation should be established and should assume responsibility for water
along with other strategic functions
Based on other JO pilots and previous experience with Central Coast Water
Corporation (CCWC) and Joint Services Business (JSB)…..
• Corporate Functions (Finance, IT, HR, Legal and Governance, Plant and Fleet)
• JSB included Plant and Fleet
• Joint planning has been included in scope of other Joint Organisations
• ILGRP specifically notes “responsibility for water”
Potential “Cons”
• May not Satisfy OLG as first preference for a merger.
Potential “Pros”
• Retain separate Councils/Councillors to cater for local issues.
• Wyong identity and strategy retained
• Can submit up to 3 merger proposals
11
.
Ground Rules and Other Information
•
•
•
•
12
Both/All Councils need to agree on a voluntary merger (or JO) to
secure incentive funding.
Government needs to agree with the merger proposal
Proposals must be submitted by 18 November 2015.
Can submit up to 3 merger proposals
•
Boundary adjustments would only be considered if part of a
voluntary merger. Not OK if only expanding.
•
The transition process (including involvement of Councillors and
impacts on senior staff) has not been confirmed under either a
voluntary or forced merger.
•
Award staff protected for 3 years from commencement of merger.
.
Incentives for voluntary merger
•
•
“Newcastle and Surrounds” classified as “metro”
Waiting for confirmation this includes the Central Coast.
Assuming we are Metro…
•
$10 million from “stronger communities” fund ($15 million if 3
Councils)…. plus
$10 million merger implementation grant.
•
Assistance with consultants to start implementation.
•
•
Confirmed “streamlined” SRV process.
Other previously noted benefits (e.g. increased planning power)
not confirmed
•
13
.
Mechanisms for State Government
to “force” an amalgamation
•
The Government has not explicitly mentioned forcing amalgamations,
but the language implies they are prepared to force mergers if
voluntary mergers are not undertaken.
No information has been forthcoming on the State Government’s intended
avenue for forcing amalgamations, but options include:
• Change Legislation (requiring to go through both houses of parliament)
• Referral to Boundaries Commission.
• Suspend Councils and appoint an Administrator
Legal Counsel analysis suggests that all avenues would require a Public
Inquiry but that forced amalgamations are within the powers of the State
Government
14
.
Legislative tools already available
Under the Local Government Act, there are processes that needs to be
undertaken depending on the path the Government chooses to take.
These processes have not yet commenced. However, our analysis suggests there
are existing Legislative tools to enable the State Government to:
•
•
•
•
15
Progress voluntary amalgamations
Force amalgamations between Councils.
Suspend Councils and appoint administrators.
In more limited circumstances the State Government has the power to
dismiss Councils.
.