Review of Financial Assistance Grants Methodology Discussion Paper

 

Discussion Paper

Contents

Background
Implications of the new Commonwealth tax reforms on Local Government Financial Assistance Grants
Review process
Consultation
Discussion paper format
National principles for General Purpose and Identified Roads Grants
Terms of Reference
Discussion of the individual terms of reference
Horizontal equalisation
Method of assessment
Definitions of relevant expenditure categories
Definitions of relevant revenue categories
Definition of relevant populations
Scaling back and phase in methods
Effort neutrality
Minimum grant
Other grant support
Aboriginal and Torres Strait Islanders
Identified Roads Component
Issues relating to economic reform
Grants Commission processes
Making a submission
Appendix 1 - Council submissions
Appendix 2 - The asset preservation model
References





 Background

Following a request from the Minister, the Northern Territory Grants Commission (NTGC) is undertaking a comprehensive and detailed review of the methodology used to distribute Commonwealth general purpose and identified roads financial assistance grants, and of the processes of the Commission.

The last comprehensive review of the NTGC methodology was conducted in 1991, with a partial review undertaken in 1996. As part of the 1998/99 distribution, 1996 Census data was used to refresh a number of the data items which have not been updated since the 1986 Census.





 Implications of the new Commonwealth tax reforms on Local Government Financial Assistance Grants

The NTGC is aware of concerns about the relevance of conducting a comprehensive review at the same time as the changes to Commonwealth-State tax relations are underway.

At the time of writing this discussion paper, the best indication is that the arrangements for Commonwealth local government funding will, in effect, not change under the new arrangements. The total amount of local government funding will be maintained in real per capita terms and be quarantined in some way from the rest of the GST fund distribution to the States and Territories, who will be required to distribute the money on the same basis as at present. These arrangements are likely to remain in place for the forseeable future.

The situation will be clarified further in March or April when a Commonwealth-State taxation agreement will be finalised.

Based on this information, there is no reason to hold up the review of the NTGC methodology, and no reason to assume that the Commonwealth principles for fund distribution will change.

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 Review process

The review be undertaken over an 18 month period and utilise the expertise in the Department of Housing and Local Government and consultants where necessary. Extensive consultation with stakeholders and the wider community will be a fundamental part of the review.

Following a presentation to the Local Government Association of the Northern Territory (LGANT) Annual General Meeting in September 1998, the terms of reference for the review were compiled, taking into account submissions received from Councils and LGANT. Details of submissions received are in Appendix 1.

The NTGC and LGANT have assisted with the production of this discussion paper and the NTGC will meet to formulate recommendations following community consultations.





 Consultation

Following the publication of this discussion paper there will be extensive community consultation. The proposed timetable is as follows:

Consultation on issues Due Date
Presentation of discussion paper to LGANT meeting 24 February 1999
Regional workshops in Darwin, Alice Springs, Katherine and East Arnhem March/April
Discussion paper concerning cross cultural issues end March
Discussion paper about road funding early April
Submissions from councils mid May 1999
Draft report mid October 1999
Consultation on draft report end November 1999
Final report February 2000
 
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 Discussion paper format

This discussion paper is designed to stimulate debate and submissions by councils on the issues that the NT Grants Commission is reviewing. This paper sets out the context for the review and its terms of reference as follows:
  • the national principles for allocating grants as determined by the Commonwealth Government;
  • the terms of reference of the review; and
  • issues raised by each term of reference.

Appendixes detail:
  • a summary of submissions received from councils regarding the terms of reference for the review
  • information on the WA Asset preservation model for roads.
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 National principles for General Purpose and Identified Roads Grants

The Commonwealth Government provides Financial Assistance Grants to State and Territory governments for distribution to local governing bodies within their jurisdictions.

The national pool of funds is based on a historical level of funding, indexed generally according to CPI and population growth. The distribution of the general purpose funds between the States and Territories is on a per capita basis, with no account taken of relative need. The identified roads component is distributed on a historical shares basis.

The purpose of the funding, according to the Commonwealth legislation, is to improve:
  • the financial capacity of local governing bodies;
  • the capacity of local governing bodies to provide their residents with an equitable level of services;
  • the certainty of funding for local governing bodies;
  • the efficiency and effectiveness of local governing bodies; and
  • the provision, by local governing bodies, of services to Aboriginal and Torres Strait Islander communities.
Clearly the purposes of improving financial capacity of all councils and at the same time improving equity within a limited pool of funds can be in conflict.

The rules for distributing the funds within their jurisdictions are determined by the State and Northern Territory Grants Commissions, but they must conform to a series of general guidelines, known as the National Principles.

For general purpose grants, there are five principles which, according to the 1996-97 Report on the Operation of the Local Government (Financial Assistance) Act 1995, are:

1. Horizontal equalisation
General purpose grants will be allocated to local governing bodies, as far as practicable, on a full horizontal equalisation basis as defined by the Act. This is a basis that ensures that each local governing body in the State/Territory is able to function, by reasonable effort, at a standard not lower than the average standard of other local governing bodies in the State/Territory.
It takes account of the differences in the expenditure required by those local governing bodies in the performance of their functions and in the capacity of those local governing bodies to raise revenue.
This principle reflects the second purpose, to provide an equitable level of services, and in reality is the major driver of the distribution methods.

2. Effort neutrality
An effort or policy neutral approach will be used in assessing the expenditure requirements and revenue raising capacity of each local governing body. This means as far as practicable, that policies of individual local governing bodies in terms of expenditure and revenue effort will not affect grant determination.
This principle reflects, to some extent, the third purpose, certainty, but in reality is more of a mechanical method for implementing the first principle. It also doesn’t actively support the fourth purpose, that of efficiency and effectiveness.

3. Minimum grant
The minimum general grant allocation for a local governing body in a year will not be less than the amount to which the local governing body would be entitled if 30 per cent of the total amount of general purpose grants to which the State/Territory is entitled under Section 9 of the Act in respect of the year were allocated among local governing bodies on a per capita basis.
This principle reflects the first and third purposes, financial capacity and certainty. It is in direct conflict with the first principle and means that full equalisation is not possible.

4. Other grant support
Other relevant grant support provided to local governing bodies to meet any of the expenditure needs assessed should be taken into account using an inclusion approach.
This principle somewhat reflects the second purpose - equity.

5. Aboriginal and Torres Strait Islanders
Financial assistance shall be allocated to councils in a way which recognises the needs of Aboriginal peoples and Torres Strait Islanders within their boundaries.
This principle primarily reflects the fifth purpose, but also the second - equity.


The principle for distributing the identified roads grant is:
The identified road component of the financial assistance grants should be allocated to local governing bodies as far as practicable on the basis of the relative needs of each local governing body for roads expenditure and to preserve its road assets. In assessing road needs, relevant considerations include length, type and usage of roads in each local governing area.
This principle reflects road maintenance requirements, but only indirectly takes account of construction needs and costs. It links to the second purpose.

The NTGC is aware that the application of the national principles to the distribution of funds raises some difficult issues in the Northern Territory, given the low population base and consequent low level of funding. There is also some uncertainty about the future of the principles under the new Commonwealth Tax System.
However, current indications are that the principles will remain in place at least in the short term and so should form the basis of the current methodology review.

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 Terms of Reference

1. To examine the implications of the principle of horizontal equalisation as it applies to the methodology, with particular reference to:
  • the most appropriate method of assessment (std budget vs direct assessment);
  • the definitions of relevant expenditure and (own source) revenue categories;
  • the definition and application of ‘disabilities’ or ‘cost adjusters’;
  • definition of relevant populations; and
  • the methods used for scaling back final grants and phase in of changes.

2. To examine the implications of the principle of effort neutrality as it applies to the methodology, with particular reference to:
  • methods for measuring expenditure; and
  • methods for measuring revenue.

3. To examine the implications of the principle of the minimum grant with particular reference to:
  • methods for determining those councils to receive the minimum grant; and
  • implications of the application of minimum grants for equalisation.

4. To determine what grant support should be included as "relevant", with particular reference to:
  • NT Government Operational Subsidies; and
  • other grants, including CDEP .

5. To examine methods of capturing the additional costs of local government service delivery in a cross cultural environment.

6. To examine the methodology for distribution of the identified roads component with particular reference to:
  • examination of asset preservation models;
  • consideration of total roads funding needs; and
  • incorporation of roads usage / strategic roads factors.

7. To examine relevant issues relating to economic reform including
  • methods of allowing for the additional costs of distributed service delivery;
  • ensuring equitable distribution of funds within amalgamated councils;
  • implications of the proposed Goods and Services Tax; and
  • implications of other Commonwealth tax policies.

8. To examine the processes of the NTGC with particular reference to:
  • methods for consulting with stakeholders;
  • methods for collecting information; and
  • methods for methodology review.
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 Discussion of the individual terms of reference

1. Horizontal equalisation

The first principle is a major driver of the methodology. There is a major contradiction between the Commonwealth distribution of funds to States and Territories on a per capita basis and the requirement that within each State or Territory that funds be distributed on an equalisation basis. The result is that the level of council financial capacity varies considerably between States and Territories.

However, for the purpose of distributing funds within the Northern Territory, the major consideration must be equalisation to the currently provided average Territory level of services. The level of services provided in other States is not a consideration in the application of horizontal equalisation within the NT.

If the population is fairly evenly distributed, a natural consequence of using the average level of services is that about 50% of the population will be above the average and 50% below. If the population is more concentrated in the "richer" councils, then there will be more than 50% of the population above the average level.

Horizontal equalisation means that all councils should have the capacity to provide services equal to the current Territory average. A simple analogy is to consider two people with different amounts of money. If one has more than the other, then they must give the poorer person sufficient money to make the amounts equal.
This is what equalisation attempts to achieve between councils and means that if the distribution of funds is achieving equalisation within the state or Territory, then at least 50% of the population (that which lives in the "richest" council areas) would be receiving the minimum. The 30% rule ensures that the "richer" councils are allowed to keep a certain amount - the minimum grant -
even if that means that the "poorer" councils do not receive sufficient money to achieve the average funding level.

The way that horizontal equalisation is implemented is basically through the definition of an average level of services and revenue, and the calculation of the average costs as compared to the theoretical individual council costs. The gap is then the amount of funding required. The actual methods for determining the averages and the theoretical costs, and their effectiveness in
achieving equalisation, vary considerably between the States and Territories.

The main issues raised in the Terms of Reference are:
  • the most appropriate method of assessment (balanced budget vs direct assessment)
  • the definitions of relevant expenditure and (own source) revenue categories
  • the definition and application of ‘disabilities’ or ‘cost adjusters’
  • definition of relevant populations
  • the methods used for scaling back final grants and phase in of changes

Method of assessment (balanced budget vs direct assessment)

The overall approach used would appear at first glance to be a technical issue of little relevance to the review. However, the method chosen can influence quite dramatically the results obtained and it is important to understand the implications of, and ways to minimise any bias introduced by, choosing one method over another.

To achieve horizontal equalisation, there are two different overall approaches generally used to assess the funding requirement of a council - the balanced budget approach and direct assessment approach. Most states, including the Northern Territory, use the balanced budget approach. Only South Australia and New South Wales use direct assessment.

The two methods will only produce the same result if the total standard expenditure equals the total standard revenue. In most States and in the NT this is not the case, because assessed revenue is usually just based on rating capacity and does not take into account other sources of revenue.
In fact, in the NT at present, the assessed standard revenue equals approximately half the assessed standard expenditure.

As shown in Morton (1996, page 38), this means that switching to the direct assessment approach would produce very different results to those currently achieved. A direct assessment approach would effectively discount the assessed expenditure by half compared to the balanced budget approach.
This would advantage those councils with the largest expenditure needs, which are generally the larger councils. The other side of the coin is that the current method advantages the smaller councils.

There is a way to ensure that there is no difference in the outcome depending on the method chosen. If another category is introduced into the standard budget, which ensures that the standard expenditure equals the standard revenue, the differences disappear.
Bubb (1998, page 5) calls this a residual budget result term, and it is basically the difference between assessed standard expenditure and revenue. Another way is to just assess more revenue sources and so reduce the gap.

If the NTGC keeps the balanced budget approach as it is, smaller councils will be better off than larger councils. This advantage will disappear if the direct assessment approach is introduced or if the difference between expenditure and revenue is minimised (by introducing a residual budget term or assessing more revenue sources).
The problem with the direct assessment approach and the residual budget result term is that they would involve a lot more theoretical work, and we may be better using our resources to fix some more important aspects of the methodology.

If it can be guaranteed that there is no difference in the final outcome depending on the approach taken, there would be no reason to move away from the balanced budget approach. An easy way to minimise the difference is to ensure that the difference between assessed Territory-wide expenditure and revenue is less.
This can be achieved by assessing more revenue sources than we do at the moment. This is probably the easiest thing for the NTGC to do.

Method of assessment issues:

Are they other good reasons why the NTGC should not retain the balanced budget approach?

Is it enough to ensure that the difference between expenditure and revenue is less than it is at the moment?

Definitions of relevant expenditure categories

In the Territory we currently have 68 councils, of which 85% are predominantly traditional Aboriginal councils, with only 20% of the population. The huge variations in terms of size, environment, scope and stage of development make the task of equalisation extremely difficult.

The NTGC uses the balanced budget approach - taking the Territory total outlays in the chosen expenditure categories - to achieve equalisation. This basically means we are assuming that we want all councils to be able to provide the same types of services, with only minor variations in levels. The basic pattern or distribution across the categories should be the same.

The established municipal councils have hugely different priorities to the remote councils operating in a cross cultural environment and struggling to maintain a minimum level of service delivery. Obviously, different priorities leads to different expenditure patterns.
For example, according to the ABS, the municipal councils spend about one third of their budgets on recreational services - the others only 14%. The current standard budget used by the NTGC reflects an expenditure of 25%.

The reason that we need to be sure that the expenditure categories and weightings are correct is because the cost adjusters are quite different for the different expenditure categories. This means that when we apply the methodology, we can achieve very different results depending on the standard budget used.

To test this a very simple model was developed using one municipal (Darwin) and two of the larger remote councils (Nguiu and Lajamanu). The theoretical grants were calculated based on a municipal style standard budget and one which reflects the other councils’ expenditure patterns.
For the two remote councils in model, the "others" budget gave 2% & 6% more funding than the "municipals" budget.

In recognition of different community priorities, South Australia currently quarantines funds for the Aboriginal communities and applies different principles to the distribution of funds. While that is relatively readily achievable in an environment where Aboriginal communities account for a small proportion of the total, it clearly would be a significant decision to make for the Territory.

One of the problems would be deciding how to split up the pool of money. One way might be to define minimum service levels, cost them and provide funding to the remote communities to enable them to deliver these services. The remainder of the pool could then be split amongst the larger councils on an equalisation basis, similar to the way we do it now.
This would obviously be a huge change from the way things are done now and the NTGC would like to hear views on whether such an approach would be useful.

A further issue is that of the categories used for the budget we adopt. The national variation in the number and type of categories used is very large - from six in the Northern Territory to 21 in New South Wales.

The six categories currently used by the NTGC are amenity, general administration, human services, libraries, recreation and transport. Only current expenditure is included in the consideration of the total budget. This number is considerably less than was used during the 80’s.
The main reason for contracting the categories is the lack of reliable detailed data for local government expenditure.

The Australian Bureau of Statistics (ABS), in conjunction with the Department of Housing and Local Government (DHLG) has commenced producing detailed local government finance which includes information for all councils, not just the municipal councils as in the past.
This information will be published annually in the publication Local Government Finance (ABS 5502.7), but the data is not very up-to-date - for example the 1998 publication only has data up to 1995/96.

The only other source of data is individual financial statements, from which it would involve a considerable effort to compile the required data. It would be hard to justify the extra expense of compiling the data when the ABS publishes almost identical data. Therefore, it is important that the expenditure categories used by the NTGC be at least compatible with, if not the same as,
those used by the ABS. The categories used by the ABS are - general public services, public order and safety, health, social security and welfare, housing and community amenities, recreation and culture, transport and communications, other economic affairs and other purposes - a total of nine categories.

Finally, the NTGC currently only considers current expenditure in the consideration of expenditure requirements. Other Grants Commissions do make allowance for capital expenditure in recognition, in part, of the different stages of development of councils. In 1995/96 in the Territory, municipal councils capital expenditure constituted approximately 10% of their total outlays,
compared to 24% for other councils. There is also considerable variation within the different types of councils.

Expenditure categories issues:

Should the NTGC use different budgets for different categories of councils?

If it did, how would it determine how to split the pool of money between different categories?

Is there another way to ensure an equitable outcome for all types of councils?

Should the NTGC categories be compatible with those used by the ABS in the publication Local Government Finance?

Is the focus on current expenditure sufficient, or should allowance be made for capital expenditures?

Are the current six expenditure categories (amenity, general administration, human services, libraries, recreation and transport) adequate?

Definitions of relevant revenue categories

In the Northern Territory, revenue raising capacity is measured indirectly through personal incomes, which has been shown to be quite a good way of assessing residential rating capacity. Also included in the revenue assessment is half of the operational subsidy received by non-municipal councils.

Other grants commissions take a much more detailed approach to measuring revenue raising capacity, taking into account rates revenue from all sources (for example residential, commercial, industrial, agricultural and mining), government grants, as well as other sources of income (for example investment earnings, parking fees and fines, aerodromes etc).

One problem with using average personal incomes is that we have to use the Census data which is somewhat unreliable, only available in broad income ranges and is only available every five years. In response to the unreliability of data for smaller councils, the NTGC uses an average for all of the councils in this category. By doing this, the richer communities in the group are better off than the poorer, which is in conflict with the equalisation principles.

One of the main reasons that average personal incomes are used in the Territory is because of the difficulties with Aboriginal land tenure issues that mean that rates have not been able to be levied on land and there is no valuation register from which to assess the rating capacity. Both of these issues need not necessarily prevent the estimation of residential rating capacity as it would be possible to estimate the rating capacity of remote communities, but this would involve a significant data gathering effort initially. It is questionable whether the benefits of the change would outweigh the short term costs.

Another problem with using personal incomes as an indication of residential rating capacity is that it assumes that richer people have more valuable properties and poorer people live on less valuable properties. This means that when a council has a large number of asset rich, but income poor residents, such as happens with an older population, or a farming community, there is a very valuable rating base which is not properly captured by the assessment. Due to the younger age of residents and the largely urban population in the Territory, this has not been a major problem to date However, the NTGC would like to hear of any instances where such a situation is occurring at the moment.

It may also be possible to modify the assessment of residential rating capacity to include not just personal income as measured at the Census, but other relevant information such as the socio-economic index produced by the ABS from Census data. The NTGC would be interested in any opinions on relevant information it could use.

The other main problem is that the current method doesn’t capture all the income raising capacity of councils at the moment. If we miss out major sources of income that are only available to some councils, then we are disadvantaging the other councils. For example, in major centres, commercial rates can constitute a large part of total revenue (for example about 15% of Darwin City Council’s total revenue is due to commercial and industrial rates). Also, the Operational Subsidy is only payable to non-municipal councils, but only 50% of it is accounted for. Community Government Councils which charge rates and also receive Operational Subsidy money are therefore much better off than municipal councils.

One of the difficulties in identifying other sources is that some sources of funding are "tied" to specific expenditures - for example capital grants are usually required to be spent on a particular project and so are not part of council’s discretionary funds. However, the special purpose grants are often in reality for functions that council would need to conduct anyway and so have the effect of freeing up discretionary funds for other purposes. One particular example of this sort of income is CDEP funding, but there may be others.

This all means that the NTGC also needs to consider the inclusion of other sources of income. Two sources which are of particular interest are commercial and industrial rates and CDEP income, but there may be others that the NTGC should be aware of.

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Revenue categories issues:

Are there good reasons why the NTGC should change its assessment method for residential rates to one based on valuations in line with other Grants Commissions?

Are there any situations currently in the Territory where the use of personal incomes does not give a good indication of rating capacity?

Is there other relevant information that the NTGC could combine with incomes to assess residential rating capacity?

Which other sources of income should also be assessed?

Definition of relevant populations

Accurate definition of the relevant population is extremely important since this is the major driver of grant determination.

Residents constitute the bulk of the relevant population, and this is the group counted by the ABS in the "estimated resident population" or ERP of an area. However, there are other people for whom local government services are provided by councils. This larger group of people is called the "service population". Some of the extra people in the "service population" of a council include tourists and day trippers, visitors, workers who commute, itinerants, and in remote centres, outstation populations which receive full or partial council services.

It is very difficult to accurately estimate the service population. The ABS is currently undertaking a pilot program to attempt to measure service populations in WA. This research was commissioned by the Local Government Ministers’ Conference and should be available to the review in April 1999. The Western Australian Grants Commission (WAGC) estimates the service population for use in some expenditure categories. Using the service population means that some people are counted twice in the population figures used by the WAGC.

Another way to reflect the additional burden due to these extra people on council services is through disability factors which reflect the additional cost of service provision due to non-resident populations.

The NTGC currently defines relevant population as the three year average ERP data supplemented by tourist numbers and outstations serviced. In municipal areas, the effect of Aboriginal visitors is indirectly captured through the "Aboriginality" disability factor.

This approach raises a number of issues. Averaging over three years is used to iron out short term fluctuations in remote areas, but does disadvantage rapidly growing centres such as Palmerston. Population growth is currently reflected in a disability factor, which may or may not accurately reflect the additional costs.

To ensure that there is no double-counting of the population, only interstate and overseas visitors who stay at least one night are counted. There is no provision for counting day trippers and intrastate visitors, partly due to measurement difficulties.

It may be that the current inclusions in relevant population are sufficient and that other relevant populations should be reflected through disability factors. In that case, methods to measure the relative "disability" would need to be available to the NTGC.

Relevant population issues:

What should be included in the relevant population (residents, tourists, workers etc)?

If additional categories are included, how can they be measured?

Which population should the NTGC attempt to measure and include in the population figure and which should be reflected through disability factors?

Are the current disability factors accurately reflecting the additional costs due to other population factors?

How would additional disability factors be measured?

Scaling back and phase in methods

Due to the small amount of funds provided by the Commonwealth, assessed grants must be scaled back to "fit" the bucket available. In the Territory, this means a 75% reduction, and currently this is applied across the board, with no account taken of the council’s capacity to make up the shortfall.

For example, Palmerston has about three times the assessed per capita revenue raising capacity of a council like Milingimbi, but they both receive only 25% of their assessed needs. This appears to contradict the principle of equalisation.

There are two ways to minimise this problem. One is to use a different method to scale back the final grants, which takes into account the assessed revenue raising capacity. This is the approach adopted by South Australia in their latest review.

The other way is to make sure that the difference between the assessed deficit and the pool of funds is not too great. One of the reasons the assessed deficit is so high is due to using "disabilities" or cost adjusters which are between 1 and 1.5 or 2. This means that the expenditures are always made larger. Another approach is to make the cost adjusters vary between 0.5 and 1.5, and this approach helps to minimise the scaling back problem. This was also adopted by South Australia in their review.

There do not appear to be many technical difficulties with introducing these two changes. Therefore, the NTGC is looking at changing the methodology to make cost adjusters vary between 0.5 and 1.5 and adopt a differential scaling back process which takes account of relative revenue raising capacity, and would be interested to hear council views on these issues.

Due to changes in methodology, population and so on, FAG grants to councils can vary considerably from year to year. Councils need to have some certainty about the amount of FAG funding that they will receive so that they can, at the very least, plan for the following year. The way that the NTGC currently ensures certainty is through a "loss assist" process, which ensures that no council receives less than 95% of the previous year’s funding.

There a number of problems with this approach. The first is that it cannot accommodate large funding shifts for councils. For example, the table below shows the amount of loss assist received by councils in the 1998/99 distribution. The large differences are largely due to the removal of the responsibility for strategic roads from some councils. If loss assist is retained it will take 11 years to bring councils back to their actual assessed funding levels.

Council
loss assist received as % of final grant received
Peppimenarti
54
Umbakumba
48
Pine Creek
46
Watiyawanu
43
Walungurru
28
Nganmarriyanga
26
Yirrkala
25
Kunbarllanjaja
20
Papunya
17
Ramingining
16
Jabiru
13
Numbulwar
8
Yuendumu
5
Borroloola
5
Maningrida
4
Kardu Numida
2
Willowra
2

There are alternatives to "loss assist". Some grants commissions make sure that councils neither lose or gain more than 5%, which is more equitable than the NTGC current method, but does not address the problem of large variations.

Some grants commissions, such as Western Australia, use a factored back three year "rolling" average of assessed equalisation requirements to determine the final grant. That is, the 1998/99 grant is 50% of the average of the assessed equalisation requirements for 96/97, 97/98 and 98/99. The WAGC also uses some "loss assist" to ensure no council loses more than 20% of their final grants. This has the effect of smoothing out variations, but it means that a council is never actually receiving its assessed funding.

Another way is to phase in major changes, such as from this review or from strategic roads changes, over a specified period and maintain the loss/gain factor following the phase in. This is quite complex to implement, but takes into account large changes directly and still ensures a measure of certainty.

There may be other methods of which the NTGC is not aware and which achieve an equitable result. This is an important aspect of the methodology and the NTGC would be interested to hear council views on this issue.

Scaling back and phase in issues:

Is there a good reason why cost adjusters should not vary between 0.5 and 1.5?

Is there a good reason not to adopt a differential scaling back process?

What is the best and most equitable way to ensure funding certainty for councils?

What is the best way to introduce major changes to council funding assessments?

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2. Effort neutrality

The way that effort neutrality is implemented is in the calculation of theoretical "standardised" expenditures and estimated revenues that are unrelated to the policy decisions of individual councils. These theoretical amounts are then used to determine the share of the pool. Obviously, when we are considering theoretical amounts, there are a number of methods of measurement. In the Territory, one of the major problems is the availability of appropriate data to enable estimation.

Expenditure is currently assessed by the Territory wide standard budget, due to a lack of available data. In that it is based on actual expenditures, to some extent this approach must contradict the principle of effort neutrality.

Other grants commissions adopt more complex approaches based on regression equations and different assessments for different groupings of councils. For example, WA estimates the administration standard using three different methods depending on the size of the centre. Queensland assesses services expenditure according to an equation for non-Aboriginal councils and as 500 times the population for other councils. These methods of estimating the standard use an equation which was arrived at by analysing the existing expenditures. This approach relies on having accurate data for all of the councils for each expenditure category.

It is very doubtful that the data available in the Territory at the moment for all but municipal councils would be accurate enough for this approach to give sensible results. However, if a separate approach is adopted for smaller councils, such as in Queensland, then it would be possible to do a better job for at least the municipal councils.

Similar issues exist for the assessment of standard revenue, although the current method used does assess more closely the theoretical residential rating capacity of a council.

Adopting a regression based approach would give better results but would require the collection of accurate data, which is really only possible for municipal councils at the moment. It would also require the estimation of the regression equations, which does not present a technical problem. It would mean that we would have to devise different methods for assessing standard expenditure and revenue, based on the type of council considered, which does not present a theoretical problem, but would involve careful work to ensure that it produces an equitable and reasonable result.

Effort neutrality issues:

Should the NTGC investigate using different methods for large and other councils?

Should a regression approach be adopted where accurate data exists?

Should different approaches be used for different expenditure and revenue categories?

If so, what are the characteristics that determine whether a different approach is adopted?

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3. Minimum grant

This principle is very simple to implement and the fact that it is implemented but not influential in the current funding distribution methodology highlights the weaknesses of the current method. It is anticipated that, as happened in the recent SA review of the methodology, the more careful adherence to the principles of horizontal equalisation will mean that councils representing at least 50% of the population will move towards the minimum grant as a result of the review.

In most other States and Territories, the capital cities receive the minimum grant of approximately $13.70 per capita. This means that more funds are freed up for the other councils in the state, which is one of the contributing factors to why smaller councils interstate receive more than Territory councils of similar size.

However, a move towards minimum grants would result in large changes in the funding distribution for some councils. Ways to ensure that this is achieved without undue disruption to council services would need to be examined.

This is an issue which obviously needs careful consideration and the NTGC would like to hear council views.

Minimum grant issues:

Should the current situation be continued, where no councils receive the minimum grant?

What are the options available for phasing in of a more careful adherence to the principles of fiscal equalisation?


4. Other grant support

The principle specifies that other relevant grant support should be taken into account. The inclusion of grants for a specific purpose, eg Libraries Grants, is straight forward. However, there is no doubt that the availability of differing levels of Operational Subsidies and other sources of funding (eg CDEP) greatly influences a council’s financial capacity.

If these grants and subsidies are not included in the assessment of standard revenue, then the NTGC is seeking information on which grants and subsidies should be taken into account in assessing the standard expenditure.

Other grant support issues:

Which grants and subsidies should be taken into account in assessing the standard expenditure?


5. Aboriginal and Torres Strait Islanders

The correct application of this principle is extremely important in the Territory, where Aboriginal councils are a large proportion of the total. However, to ensure that the principle is properly applied, the special circumstances of Aboriginal councils must be properly identified.

A number of issues have already been identified, but there remains the issue of correctly assessing any additional costs due to delivering local government services in a cross cultural environment.

Currently, the methodology seeks to capture the additional costs through the inclusion of the proportion of the population which is Aboriginal, as well as taking into account remoteness/isolation and relative socio-economic status. This is a fairly crude method of capturing the additional costs and has been subject to examination by the Commonwealth Grants Commission as part of their current review.

There can be little argument that there are additional costs in servicing "traditional" Aborigines over other Aborigines, which suggests that there is a significant impact of the cross cultural environment on the costs of local government service delivery.

A separate discussion paper will be produced on this issue in March, following the publication of the Commonwealth Grants Commission findings. Council comments on the additional costs incurred to deliver services to Aboriginal residents and visitors will be sought during April and May.

Aboriginal and Torres Strait Islander issues:

What are the additional costs to council incurred due to Aboriginal residents and visitors?

What are the additional costs involved in operating in a cross cultural environment?

How can these costs be measured and reflected in the methodology?


6. Identified Roads Component

The distribution of the identified roads component is much simpler than the method used for the general purpose grants. The current methodology only recognises the length and nature of the road networks.

It also concentrates on maintenance rather than total roads expenditure needs, such as new construction requirements and the need to raise the standard of roads in some councils.

Also, the principle talks about funding to preserve road assets, and this aspect of the principle is being increasingly recognised in asset preservation models adopted interstate. For example, see Appendix 2 for details of the Western Australian Asset Preservation Model.

Finally, the principle allows for the consideration of "usage of roads" in the determination of funding.

The problem with using a different method is that it would involve a large amount of work to collect the necessary information and to set up the method for implementing a change. While it is unlikely that this would be possible in the short term, the NTGC could consider including a comprehensive review in its forward work program if there were sufficient good reasons to do so.

The NTGC would be interested to hear of any major shortcomings in the current method and ways that these could be allowed for in the current methodology. For example, should allowance be made for resealing programs in some councils? Do the current disability factors accurately reflect additional costs incurred by councils?

Identified Roads component issues:

Should the NTGC be moving towards adopting an asset preservation model?

Are there improvements that could be made to the current method?

Is there a way, within the current method, of better taking into account total roads funding needs?

Is there a way to incorporate roads usage and/or strategic roads?

Do the disability factors accurately take into account extra costs incurred?

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7. Issues relating to economic reform

The context within which the funds are distributed is currently undergoing radical reform. This changing environment raises a number of other issues which impact on the distribution of funds.

A major issue is the reform to Commonwealth tax arrangements, and in particular relationships between different levels of government. One of the changes that will occur under new "Reciprocal Taxation" rules is that different levels of government will be able to levy taxes on each other, for example the imposition of sales tax on state and local governments by the Commonwealth. The ability to tax other levels of government can have wide ranging implications, for example it removes one of the major impediments to the imposition of land based taxes on Aboriginal freehold land. The NTGC is interested in hearing of any issues which impact on local government expenditure and revenue needs.

The package of reforms introduced by the Northern Territory Government in Local Government - The Next Step will have implications for the distribution of FAG funds. Some of the implications of the new councils that will result from the reforms are:
  • how to incorporate the extra costs of distributed service delivery
  • how to ensure funds are distributed equitably within the new council structures
  • removal of diseconomies of scale from the methodology
The NTGC would like to know if councils feel there are other implications, and whether those already identified are significant.

Issues relating to economic reform:

Are there particular issues relating to Commonwealth tax policies that the NTGC should be aware of?

How should the new council structures be reflected in the methodology?

What is the best method for reflecting the additional costs of distributed service delivery in the new councils?

Should there be safeguards built into the methodology to ensure that existing councils are not financially disadvantaged when they become a part of new councils?

Since diseconomies of scale should cease to exist, should these be removed from the methodology?


8. Grants Commission processes

Because the review will involve extensive community consultation, it is a good opportunity to receive feedback about the way the NTGC operates.

Commission visits are an important part of the NTGC work program. All of the grants commissions around Australia have similar visiting schedules. The main reason to visit councils is that "Commission judgement" is an important factor in final grant determination and their judgement is better informed if they keep aware of the situations on the communities.

A three cycle seems to work quite well for most States, but some only visit councils every 5 years, which is the same period as the methodology reviews. If there is sufficient scope for council input through regional forums and written submissions, it may be practical to lengthen the time between visits. The NTGC would be interested to hear council views on the value of visits as opposed to regional forums.

There are currently a number of opportunities for councils to make submissions to the NTGC each year, apart from during the visits. Very few submissions are actually made. The NTGC would be interested in hearing whether the councils are aware of the current opportunities and whether they are thought to be sufficient.

The data returns are the main chance for councils to influence their funding outcome. The NTGC would be interested to know whether councils have suggestions as to how to improve the data returns.

The methodology is reviewed on a periodic basis. The NTGC is seeking input as to whether this should this be more formalised, as in other states. For example, many states conduct reviews every five years, and Western Australia is continually reviewing their methodology. Given the reliance on Census data in the methodology, should the NTGC plan to review the methodology at the same time as the Census data is available?

The NTGC is concerned about the level of understanding of the methodology in the Territory. The booklet How Financial Assistance Grants are Worked out in the Northern Territory was produced to try to explain the methodology. The NTGC would like to hear council views on how to improve understanding of the methodology.

Issues relating to Grants Commission processes:

Is a three year cycle the most appropriate for Commission visits?

Is the process for making submissions to the NTGC adequate?

Is the current method of periodic reviews of the methodology acceptable?

What is the best way to improve the understanding of NTGC methodology?

What is the best way for the NTGC to consult with councils?

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 Making a submission

If you have comments on any of the issues identified in this discussion paper, please provide a written submission before 21 May to

Prue Phillips-Brown
Local Government Policy and Planning
GPO Box 4621
Darwin 0801

phone 8999 8420
fax 8999 8403
email prue.phillipsbrown@nt.gov.au

There will also be opportunities for discussion of the issues at regional forums during March and April.


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 Appendix 1 - Council Submissions for the setting ofthe Terms of Reference

The NTGC received 6 submissions for issues to be included in the terms of reference of the review. These submissions, as well as details of how they were incorporated into the Terms of Reference are detailed in the table below.
Received from Issue raised Where incorporated
Tennant Creek Town Council Impact of Fringe Benefit Tax on the costs of attracting qualified staff to remote areas. Addressed under 7, which relates to the implications of economic reform.
Katherine Town Council
  • Definition of relevant populations.
  • Definition and application of disabilities / cost adjusters.
  • Measuring revenue raising capacity.
All addressed under 1, which relates to equalisation.
Mataranka Community Government Council
  • Definition of relevant populations (esp tourists, camps).
  • Rates raising capacity.
Both addressed under 1, which relates to equalisation.
Darwin City Council
  • Impact of non-rateable properties.
  • Impact of NT local government reform and taxation reform.
  • Addressed under 1, which relates to equalisation.
  • Addressed under 7, which relates to economic reform.
Palmerston Town Council
  • Definition of relevant population including tourists, visitors, commuters, averages, growth etc
  • Impact of transient populations
Addressed under 1, which relates to equalisation.
LGANT
  • Assessment of the applicability of the Commonwealth Principles
  • Impact of Local Government reforms in the NT
  • Implications of Commonwealth tax reform
  • Relationship between FAG and NT Operational Subsidy
All addressed under 7, which relates to economic reform.



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 Appendix 2 - The Asset Preservation Model

Distribution of Commonwealth Identified Road Funds to Local Government - The Western Australian "Asset Preservation Model"

Paper presented by Linton Reynolds to the National Local Government Grants Commission Conference, Broadwater Resort, Busselton, Australia, October 20 - 22, 1998

SYNOPSIS

This paper complements an earlier one by the same author that covered road funding for local government roads from all sources.

It briefly examines why road funding is such an important issue in Western Australia, and then reviews methods used to distribute Federal road funds to Local Government since the 1950s.

The current method – an Asset Preservation Model (APM) is described in some detail, followed by future refinements needed in the view of the author to retain its credibility. It concludes with views of the model from regular users of it.

INTRODUCTION

Over recent years, the distribution of road funds in Western Australia has caused considerable excitement. In part this is related to the reality that some (even many) rural Councils are still primarily Roads Boards, dependant to a large degree on outside sources of funding. The maintenance of an efficient road system serving the rural properties is still, for them, a significant if not primary reason for their existence.

Should amalgamation discussions involve any of these smaller rural Councils, the belief that the larger body will not have the level of knowledge of local roads needed to make appropriate decisions is as much a force to be overcome as is the loss of prestige and local identity that individuals fear. Recent moves towards using a regional structure to distribute some of the State sourced road funding are assisting to overcome these fears in some regions. However, in others this anxiety still seems to be impeding good decision making at that level.

Many Councils still receive a greater level of grant from the identified road funding pool and the transport standard within Financial Assistance Grants (FAGs) than they do from the non roads sections of FAGs. In the 1997/98-grant year, 34 Councils received more from identified road funding than FAGs, with another 20 - 25 others set to join them if the transport standard within the FAGs equation was included in a straight calculation of road, and non road grants.

Therefore for more than 50 of the 142 Western Australian Councils, roads are the most important driver in any funding equation. Only two of these Councils are minimum grant Councils, where the FAGs element of any equation is artificially compressed, and therefore a distorted view is presented.

The following table illustrates how important road statistics are within the Commission's overall funding equations. For some councils, total grant income from the Commission is greater than the income that they receive from rates. Therefore, any loss in grants would need to be made up by substantial rate increases, or a much lower level of services (inevitably roads) would be able to be provided.

Council FAGs FAGs, less Transport Standard % of total grant Identified Road Funds Road Funds Plus Transport Standard % of total grant Grant comp. with rates

(%)
Williams
90,716
72,573
28.2
166,330
184,473
71.8
37.7
Lake Grace
414,827
331,862
30.7
664,983
747,948
69.3
36.9
Victoria Plains
168,380
134,704
31.8
255,152
288,828
68.2
57.9
Kent
239,206
191,365
32.4
352,071
399,912
67.6
79.6
Yilgarn
508,139
406,511
33.7
696,868
798,496
66.3
72.0
Boyup Brook
304,093
243,274
35.9
374,484
435,303
64.1
81.2
Mount Marshall
444,890
355,912
36.3
536,446
625,424
63.7
144.4
Chapman Valley*
246,281
197,025
36.6
291,832
341,088
63.4
77.8
Dalwallinu
561,151
448,921
36.7
660,832
773,062
63.3
91.5
Esperance
1,470,437
1,176,350
39.2
1,532,292
1,826,379
60.8
64.8
Gnowangerup*
332,842
266,273
40.4
342,224
408,792
59.6
49.1
Beverley*
293,021
234,417
41.6
270,344
328,948
58.4
66.7
Narrogin (S)*
260,323
208,258
41.8
238,277
290,342
58.2
143.8
York
399,051
319,241
42.9
344,315
424,125
57.1
59.6
Cuballing
261,334
209,067
46.4
189,125
241,391
53.6
136.5
Shark Bay
508,518
406,814
59.2
178,172
279,876
40.8
230.9
Upper Gascoyne
560,201
448,161
51.5
362,365
474,405
48.5
546.8
Notes:

* Funds provided for Special Projects - i.e. bridge works are not included.

Grants data used is from the 97/98 year, while the most recent rates data is from 96/97.

It should also be noted that the APM is used to calculate a proportion of the State road funding grants that is distributed to councils compounding the above importance of road statistics.

For many councils, (perhaps a majority in Western Australia) a fair, equitable, open and transparent method of distributing Commonwealth road funds was more than important, it was essential.

HISTORY OF PREVIOUS FUNDING METHODS

Direct Federal funding to Local Government is relatively new. It is therefore useful to consider the Commission's current method for distributing road funds with those methods used previously.

Pre 1958, Commonwealth funding for State and Local Government roads was given to the State roads agency - the then Main Roads Department, with only one condition attached - that 40% of the total was to be spent on roads other than State roads (i.e. local government roads). The Commissioner for Main Roads then allocated these funds out to Councils as he saw fit. Like today, Western Australia was facing a major development surge, and the then Commissioner ensured that the bulk of these funds were used on important secondary roads. Many of these roads have subsequently "grown up" and been classified as State roads. Funds were also allocated to school bus routes; there was a small amount of general grants to each individual Council; and an increasing proportion over time was allocated to councils for specific projects.

Prior to 1959, Local Governments were responsible for vehicle licencing, and they were allowed to keep all fees raised, except in the metro region where they could retain only 50% of the license fees collected. In 1958 the Commonwealth introduced an arrangement that required States to match Commonwealth road funds in future with funds from their own sources. The State at that time did not raise road funds directly from road users, so in order to receive its full entitlement of Commonwealth funds, it had to find a way of raising some revenue attributable to road users.

The outcome was that from 1959 vehicle license fees were increased at the local level, and all Councils paid the money raised in excess of their 1959 levels ("the 1959 base") into a Central Road Trust Fund. This fund was then used by the State to match, and therefore qualify for Federal road funding allocations. Main Roads then returned to each Council $1.75 of Federal funding for every $1.00 of these increased vehicle license fees that the Council had remitted. The matching problem was resolved, and Local Governments in Western Australia were far, far better off. The State of course kept a small administration fee.

Councils therefore received road funding that was dependent on the number of vehicles that were registered locally. Metropolitan Councils continued to be the exception, with 50% of funds being diverted to partially offset the costs of public transport.

By 1968 Local Government roads were receiving enough money from Federal sources for many of them to reduce their own efforts. This lead to the then Commonwealth Bureau of Roads reporting that Local Government in WA was not meeting its proper share of road funding. They threatened to reduce WA’s level of Federal funding if this continued.

The new funding arrangement agreed to in 1968 saw Local Governments agreeing to relinquish their rights to vehicle license fees, in exchange for a Statutory Grants Scheme which guaranteed an amount equal to what they had received in 1968.

Federal Grants to Councils after 1968 therefore continued to be related to license fee collections prior to 1968. Councils were allocated these funds to meet the costs of road projects chosen at their discretion. The requirement for the State Minister’s approval was seen to be a formality only.

In 1974 urban Councils transferred these powers to a committee made up of representatives of Local Government, Main Roads, Transperth, and the Department of Transport. This committee was in some ways a forerunner to the current Metropolitan Regional Road Group upon which in more recent times, nine rural Regional Road Groups have been modeled.

The Statutory Grants Scheme was in place from 1968 until 1989, when the current model of funding based on the maintenance of existing road infrastructure began to evolve.

The original (1989) Asset Preservation Model (APM) was derived from a theoretical model developed by the Australian Road Research Board (ARRB). This model recognised the different needs of both urban and rural roads, and took into account the annual and recurrent maintenance costs as well as the cost of reconstruction at the end of the road's useful life.

In the 1990s, the WA Local Government Grants Commission has become responsible for distributing Federal road funds. To manage this, the Commission in early 1992 established a committee representing all Local Government associations, Main Roads Western Australia (MRWA), the Department of Local Government and the Grants Commission to conduct a major review of the Asset Preservation Model. The committee was advised by a technical group, which included experienced road engineers.

While an APM requires much more detail than other previously used methods of distributing funds, it was endorsed as the most appropriate method. In particular it was seen as appropriate that it had the facility to equalise road standards over time through the use of minimum standards. This assists Councils that have not been able to develop their road networks to the same degree as more affluent Councils. More about this later.

Concurrently the separate funding mechanism used to distribute Federal funding for arterial roads was abolished, and therefore all roads gazetted and the responsibility of the Local Government were included within the APM. This also coincided with a total reclassification exercise conducted by MRWA and Local Government representatives. The outcome was that responsibility for maintaining a large number of roads changed either to or from either a Local Government or the MRWA and this resulted in changes to each Council's measured asset preservation need.

Studies conducted at the time the APM was being reviewed showed that expenditure on asset replacement would need to increase by 350% in the 1990s and 700% in the first ten years of the new millenium if the road network is to remain at 1980s standards. Therefore distribution of funding based on a well-weighted APM was seen to be very appropriate.

PROCESS USED TO REVIEW EARLY ASSET PRESERVATION MODEL

Recognising that changing the method of allocating road funds was as much a political process as it was a technical one, the Commission undertook a dual process. Up until this time, funds were first of all split into allocations to each of the three local government associations according to an old formula, and then allocated to individual councils.

The work done by a Technical Advisory Committee (with metro and country Engineers represented) was endorsed at each step by a Steering Committee Chaired by the Commission Chairman Humphery Park. The Steering Committee resolved the principles that ought to be used, and they were then given feedback by the Technical committee on how they might be measured, and what effect that would have on funds distribution.

To ensure widespread acceptance of the new distribution model, the model was workshopped in 7 or 8 country locations as well as in the Perth metropolitan region. As each of the three associations of local government was represented on the Steering Committee, the model was also formally taken back to those bodies for endorsement by them. This was not without its moments, as one of the associations, which had enjoyed a funding advantage under previous methods, was to lose that advantage under the new arrangements.

The political compromise was to phase the changes in over three and a half years, after which the formal split between associations would then disappear, replaced by a genuine allocation to councils in their own right, rather than as a result of their membership of one association or the other.

The review recommended that the existing process of taking funds off the top for access roads to remote Aboriginal communities and for bridge works should continue.

THE MODEL IN MORE DETAIL

Overview

After setting aside 7% of identified road funds for bridges and access roads to remote Aboriginal communities, the Asset Preservation Model is used to distribute the remaining 93%. It is also the key driver in the Transport Standard of the Financial Assistance Grants. The APM is designed to assess the average annual cost to council of maintaining its road network, and takes into account:
  • annual and recurrent maintenance costs, and
  • reconstruction at the end of the road's useful life.

The APM recognises the different needs of different roads, and the different levels of development of those roads. To account for the different levels of use, roads are divided into two main categories
  • roads within built up areas, and
  • roads outside built up areas.
A higher maintenance cost is attributed to roads in built up areas as they generally will carry higher traffic volumes; have a larger number of intersections; require kerbing; may require asphalt surface to control noise or due to traffic volume; require underground drainage; involve higher costs associated with services relocation during reconstruction; and have higher costs associated with traffic control during road works.

A built up area is defined to be a residential locality (which has lots with areas less than 0.45 ha) and commercial and industrial areas that meet all of the following criteria:
  • at least half the blocks are developed
  • existing roads have a minimum standard of a gravel road for old subdivisions, or a sealed road for new subdivisions

A road connecting two built up areas will be classed as a road in a built up area where the connecting road is less than 300m in length.

Within built up areas, one minimum standard has been set for the entire state based on the metropolitan network. Essentially it allows for roads within built up areas to be maintained as if they were constructed with the following characteristics:
  • 7.4 metre wide seal
  • kerbed both sides; and
  • with longitudinal piped drainage.

Outside built up areas, roads can be:
  • unformed;
  • formed;
  • gravel; or
  • sealed.

The cost of maintaining each category of road is used in conjunction with minimum standards to determine the maintenance costs associated with maintaining the network. This can be at its current level, or at a slightly higher level, which would bring the council's road network up to the standard enjoyed by other councils in their grouping. Where councils have a network below the average, they are given an allowance in the formulae to allow them to maintain it at this minimum level. Where their network is above the minimum, they receive funding to keep it at its existing level. This maintenance at above minimum levels is currently under review by the Commission.

Costs are reviewed and updated regularly with councils placed into 21 groups for costing purposes, and with some 40 individual councils polled every two years for cost movements. By having 21 cost groupings, the relative disadvantage of one group of councils compared with another group can be measured. Factors affecting costs can be the distance that material is carted, the price of bituminous product at point of delivery, availability of base material, the need to establish bush camps, etc.

Disability factors also apply to the APM which are designed to reflect differences within the above regions such as the effect of salt on pavement life.

Statistics Used in Calculations

The Asset Preservation Model makes use of the Main Roads Western Australia (MRWA) record of the road network across WA. Original models were relatively crude, but the PC-UIS system, developed by MRWA and made freely available to Local Governments in 1991, has seen significant improvements in the accuracy of road data. The message that road funding is dependent on accurate, up to date data has been extensively publicised by the Grants Commission in recent years, resulting in a substantial upgrading of road inventories which are validated by the Commission's Consultant Engineer on an annual basis.

To encourage Local Governments to improve their pavement management, MRWA together with the Institute of Municipal Engineers developed a pavement management system that is based on PC-UIS. Named ROMAN, it evaluates a wide range of road data to provide indicative maintenance schedules for the road network and to provide a forecast of the funds needed, and the order in which roads should be tackled. 90% of Local Governments in WA use the ROMAN pavement management system, which has recently been upgraded to operate in the PC Windows environment.

These councils not only have an accurate record of how much road and what type of road they have, but also in what condition it is currently, and when it will need maintenance work.

This fortunate juxtaposition between;
  • the Commission's need for accurate road data for funding purposes;
  • WAMA's interest in promoting improved pavement management to their members;
  • MRWA's statutory need to provide information on local government roads to their Minister; and
  • the Institute of Municipal Engineers' desire to give their colleagues a better instrument for recommending expenditure allocations, and predicting future needs to their councils,

means that WA currently has an integrated set of road data, well understood by all involved, and accurate and transparent enough for major funding decisions to be based on it.

Roads Provided by Developers

During the development of the APM this issue was targeted by country councils, along with traffic management devices as being inappropriate for inclusion in the formula. As the model estimated the cost of maintaining a road after it was built, it was decided that it was irrelevant how the road got there, only how its maintenance would be funded in the future.

Traffic Management was politically a more difficult issue given that many of the country representatives believed the types they saw in the metro area were unnecessary. The definition adopted was to include all low cost work associated with improving safety, traffic flow, and residential amenity. At a seminar of local government engineers it was suggested that regression analysis was the most appropriate way to obtain an expenditure standard for traffic management. Not surprisingly, in a survey of urban council road accident statistics measured by MRWA, it was found that a very high correlation existed between a local government’s expenditure on traffic management and both accidents, and the length of built up roads. Outside built up areas, an estimate was arrived at that took into account expenditure on improving road safety by converting "Y" intersections into safer "T" intersections and like measure.

Road Costs

In most FAGs equations, location, or distance from large towns offering the complete range of services is important. So it is in road building. Therefore for the formulas to have any credibility they had to pick up the actual costs of building a road in each area, and to be able to compare it with the cost in another part of the State. The resulting 21 groupings were determined by using the Commission's disability factors such as location, climate and terrain, and a report "Environmental Regions of Australia" which divides the State on the basis of climate, landform, lithology, soils, etc.

Disabilities

As in our calculation of standards within FAGs, we have disabilities that allow us to fine tune the results obtained from splitting the State into 21 cost groupings. These allow for differences brought about by issues such as:
  • Cost of Materials. The distance that road building materials is carted has a significant impact on road construction and maintenance costs. While some local governments in the south west corner of the State may only have to transport gravel 5 or so km, some local governments in more remote area may have to cart it upwards of 230 km. The cost of this material also varied, and this also is factored into our equations.
  • Pavement Thickness for Sealed Roads. The soil type available and the loads that are expected to be carried by a road help to determine the thickness of the pavement. Californian Bearing Ratios (CBRs) taking rainfall, drainage, and soil type into account are used to determine the appropriate paving thickness to for inclusion in our equations.
  • Terrain. Information on terrain , obtained from a report "Physical Attributes of Local Government Areas" gives us the percentage of each area that is flat, undulating or hilly. A disability factor of up to 0.3 for hilly areas can be applied to the cost of formation during the reconstruction of sealed roads.
  • Salt. In recent years we have recognised that salt has an effect on the life expectancy of a road surface - particularly sealed roads, which become brittle and break up ahead of time. A recent question posed to the Commission, but not yet resolved is if we will take into account areas where due to the lack of alternative sources, they have to use salt water in the binding of their roads.

Bridges

Funds are allocated for bridges in two ways. First of all, 1/3 of the 7% of total identified road funds is set aside each year to match, on a 2:1 basis, those funds provided by MRWA for major repair and replacement work on bridges on local government roads. These projects are funded on the basis of recommendations from MRWA's Bridge Maintenance staff each year.

In addition an allowance is given, calculated on the area of either concrete and/or wooden bridges in a local government's care. This also extends to concrete river crossings in the form of fords.

Access Roads to Remote Aboriginal Communities

Where local governments have accepted the care and responsibility for maintaining these roads they are included in the base data collection. Some in more remote area are still not "gazetted" as public roads, and therefore do not appear on road inventories.

In addition, recognising the parlous state of many of these roads, additional funding is made available, aimed at maintaining, and slowly upgrading these roads. This is done through the allocation of 2/3 of the 7% taken of the top of the initial allocation of identified road funds. The Commission works with ATSIC and other key stakeholders to identify projects for funding each year.

Work Standards

The largest impact on an asset preservation formulae is the cost of reconstructing and resealing of sealed roads, the regravelling of gravel roads and the reforming, often on a different alignment of formed roads. Therefore we needed to establish how well roads were built, and how long on average they should be expected to last.

The duration between reseals of sealed roads in country areas of the state, in particular the Pilbara and Kimberleys was less than for the metro area. While part of this difference was climatic, it also recognised the shortage, in times gone by, of qualified engineers in these areas.

It was finally decided that a residential road in metro Perth would have a life expectancy of 55 years, while one in the bush might last 45 years. Given the age of most Western Australian roads, this element of the equations is yet to be tested fully.

Minimum Standards

In an effort to overcome criticism that other APMs favoured those local governments with highly developed road networks, it was decided that the use of minimum standards would, over time, allow less developed local governments to catch up.

In built up areas, it was decided to adopt one standard, Statewide. Basically that is that 100% of roads will receive allowances as if sealed 7.4m wide, some 90% of them being asphalted, 98% kerbed, and over 60% of them with longitudinal drainage.

With regards roads outside built up areas, in the absence of traffic volume data for all roads, the State was divided into regions. Each region has local governments of similar character, and at a similar stage of development. Minimum standards were then set for each region. Those who had a road network above the minimum received an allowance for what they actually have. Those below the minimum, receive the minimum allowance.

Transport Standard

The Transport Standard used in the Expenditure side of the WA FAGs balanced budget approach includes the APM together with street lighting, footpaths, laneways, and aerodromes. (Of interest the aerodromes are treated as equivalent areas of road, with minimum standards applying.) For most local governments, the APM is the dominant feature of this 20% of their expenditure calculation.

FUTURE REFINEMENTS REQUIRED

The late 1990s have seen very significant increases in heavy haulage on local roads in Western Australia, in ever increasing truck sizes. The APM needs to change to better reflect some of this road wear more accurately. To do so, any changed formulae needs to discriminate between increased traffic counts arising from:
  • overall, general increase in traffic on an ongoing basis
  • increases that are short term and seasonal in nature - fertilizer in spring and grain in early summer
  • spot increases associated with the harvesting of blocks of timber grown for woodchips, or a short term mine related freight movement (ie mineral sands)

ADVANTAGES OF USING THIS MODEL

The Commission visits some 40 local governments each year where it hears vigorous debate about its FAG formulae, but encounters only wide acceptance of the APM.

This is perhaps best illustrated by the following comments from those who use it most:
  • "complicated, but rational and easily understood"
  • "its complexity takes into account the different needs of local governments across Western Australia"
  • "its use of minimum standards improves equity and introduces a degree of equalisation"
  • "data used is also useful for good road management and collected by most for that purpose in any case"
  • "it is widely accepted by the full range of local governments from inner Perth to the remote Kimberley"
  • "an important spin off is the improved road management which has resulted in better use of a finite dollar resource"

REFERENCE:

WA Local Government Grants Commission (1993). Review of the Asset Preservation Model. The Commission. Perth.

Linton Reynolds
Member, Local Government Grants Commission
GPO Box R1250 Perth 6001 WA
Email: Reyco@opera.iinet.net.au

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 References

Bubb, Phillip. 1998. The Design of Horizontal Equalisation Models, paper presented to the National Local Government Grants Commission Conference, October, Busselton, WA.

Morton Consulting Services Pty Ltd. 1996. Assessment of Revenue Raising Capacity of Local Government, Research project funded by the Local Government Ministers’ Conference Activity Fund, mimeo, May, Canberra.

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