Given they typically have to plan for 25-year periods, foresight and vision are a must for all asset managers. IPWEA has recently developed guidelines to help them create an effective and clear, long-term financial plan.

By John Comie

 
Entities like local governments and water supply authorities generate services from assets. They are very ‘asset intensive’, meaning they have many assets relative to their annual operating income. These assets are, on average, very long-lived but they do wear out and periodically need to be rehabilitated, renewed and replaced.

Organisations with a large stock of long-lived assets will find they will sometimes need to spend far more on asset management than usual.

In such situations, a long-term financial plan can help ensure the organisation has the capacity to renew assets when it is cost-effective and appropriate to do so. It enables an entity to accommodate the ‘lumpiness’ of renewal funding needs – providing service levels are affordable on a long-run basis.

People often get bogged down trying to include too much detail and forecast things that are uncertain or unknowable. A long-term financial plan should be viewed as a roadmap that simply helps inform revenue-raising and service level decisions while optimally managing assets and maintaining or, where necessary, enhancing financial sustainability.

It also enables people to see the implications of straying from this pathway.
A long-term financial plan also helps in assessing affordability of service levels.

Affordability is not the same as available cash, or cash generated within a period. Instead an entity should focus on the underlying or trend-operating result over the medium term.

If the average operating revenue (net of capital and other one-off revenues) over time is sufficient to offset operating expenses (including depreciation), then it is likely that existing service levels are affordable on an ongoing basis. Even then, an entity may need to borrow funds at peak asset renewal times. It will be able to repay such borrowings in periods of below average asset renewals.

Local governments in all Australian jurisdictions are now required to prepare asset management plans and long-term financial plans. They help decision makers to:

• determine affordable, preferred service levels;
• assess the capacity to borrow funds when necessary and ascertain optimal borrowing arrangements;
• ensure monies are available to maintain and renew assets at times and in ways that minimise whole of life cost of service from assets; and
• have appropriate regard to intergenerational equity in their revenue raising and service level decisions.

IPWEA, in partnership with the Australian Centre for Excellence of Local Government (ACELG), has recently released Practice Note No 6, Long-term Financial Planning. It is a guide to assist local governments and other asset intensive organisations with preparing a long-term financial plan.

It encourages a simple, but strategic approach to assist with funding and financing decisions.

The document was prepared in consultation with countrywide representatives of both local governments and those agencies responsible for administering local government systems. Furthermore, IPWEA and ACELG have prepared a simple, Microsoft Excel-based, long-term financial planning model. It can be readily customised to meet the preferred reporting formats of individual entities or specific requirements applying in particular jurisdictions. However, the guidance set out in Practice Note No 6 remains equally applicable, regardless of whether the prepared model is used or not.

During April and May, IPWEA conducted one-day training courses on long-term financial planning based on the content of Practice Note No 6 in various regional locations throughout New South Wales. Feedback from both finance and asset management staff who attended was extremely positive. So far, all of the attendees of both regional and metro workshops have indicated that the course met their expectations and that they would recommend it to others.

Some sessions were booked out, so in response to demand, further sessions will be held in NSW and other states later in 2012.

Further training

IPWEA will offer two-day workshops in September and October this year to complement the training course. The first day will serve as a prerequisite for the practical, hands-on activities of the second day. Attendees will apply what they’ve learnt on the Excel LTFP model.

It will be optional to attend day two of the workshop and it is also available to those in NSW who attended the one-day series in April and May this year.

What to bring

Participants should bring:

• a laptop computer
• their asset management plans and other strategic planning documents;
• their current budget; and
• their previous year’s financial statements.

This information would be used to prepare or update a long-term financial plan using the IPWEA model and based on affordable service levels. The workshops will be suitable for both asset managers and, importantly, finance managers.

For more information, please contact admin@ipwea.org.au or visit www.ipwea.org.au/LTFP

You can download a free digital copy of the Practice Note, or order a hard copy for $55, from www.ipwea.org.au/LTFP

The IPWEA Excel-based model – and instructions on its use – can also be downloaded free of charge.
  

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