Money, going cheap

19/6/2020

It'’s a good time to borrow money and build the infrastructure we need for Bass Coast.

Frank Schooneveldt

I’VE read Bass Coast's draft budget papers and am extremely impressed by the comprehensive detail provided by the staff of our Bass Coast Shire. Congratulations to everyone concerned.

The Bass Coast Shire financials are in extremely good shape. But are the budget and forward estimates adequate to fund infrastructure needs?

The budget and forward estimates are very conservatively framed, e.g. budgeted average equity over the next five years is $730 million, budgeted average debt over the next five years is $28 million, and the average annual interest bill in servicing the debt is $640,000.

We live in extraordinary times with the lowest interest rates on record and rates that are expected to remain low for the foreseeable future, so it’s a good time to borrow money.

This means we have a huge opportunity to address the infrastructure issues in the Bass Coast: footpaths, roads and drainage, community facilities. It would also create jobs in the shire.

The budget also reveals that a State Government guideline restricting borrowings to 60 per cent of the rate revenue is holding back our shire by not enabling us to borrow sufficient funds. In addition the rate increases are capped at 2 per cent, which is less than the rate of inflation.

The formula used to calculate our borrowings of 60 per cent of our rate revenue is no longer valid, I believe, because of such low interest rates. It needs to be changed to a debt to equity ratio to, say, a maximum of 40 per cent, a usual but still conservative business ratio. This would yield $292 million, a significant increase from the $41 million rates ratio.

Obviously a change such as this is a matter for councils and the State Government and people like Bass MP Jordan Crugnale MP but infrastructure issues are only increasing in urgency and losing ground.

ON DEBT

Bass Coast Shire’s debt is not like household debt.
When we take out a mortgage to buy property, the property is the asset against which the loan is secured.
The term of the loan is set to enable the borrower to repay the loan in the course of their working life, while the borrower maintains sufficient income to service the loan.
When the shire borrows money it does so against an asset which is the productive capacity of the shire’s economy. The shire has the ability to raise income through rates and charges.
Unlike a household mortgage, there is no time limit on the repayment of loans because the shire’s economy has no finite lifespan. The shire will never cease to exist.
The shire’s economy will continue to grow as the population of the shire grows.
The shire can roll over its debt indefinitely and as the shire grows the debt as a percentage of the shire’s economy will fall.
That’s why I say “Think the City of Bass Coast and how we are going to get there.”

Like any other organisation Bass Coast Shire needs to manage its balance sheet and utilise its 12 months rolling cash flow to fund operations.

So, this is how I see that infrastructure issues can start to be sustainably and substantially addressed and local jobs created. I welcome other suggestions.

Frank Schooneveldt is a former finance director of the A G Coombs group, one of Australia’s biggest building services contractors.

Big-spending budget to kickstart economy
June 19, 2020 - Bass Coast’s $92m draft budget includes a record capital works program.

3 Comments

James Glover

20/6/2020 01:56:31 pm

Bass Shire is full of dirt road suburbs like Jam Jerrup. We are always 3-4 years away from getting the bitumen, drains and pavements. Meanwhile we put up with dust in summer, mud in winter and people and dogs sharing the roads with cars. In the good old days road building was a useful source of projects to increase employment during a recession. So how about clearing that backlog of dirt road suburbs that never get sealed because there is no new subdivision levy to pay for them.

Julian Brown

5/7/2020 01:25:24 pm

I disagree that Bass Coast Council's finances are conservatively framed. Council's forecast capital works program has never been bigger. However, many of those projects are underpinned by substantial borrowings. It is true that it is currently cheap to borrow money. I support some level of borrowing, especially in this time of COVID-19, but it is always important to keep an eye on the level of borrowings and debt servicing. Bass Coast usually sits at a medium risk rating when it comes to debt under the Auditor General's criteria and there is potential to run over into high risk if we borrow a lot more. I think about it like this - we have maxed out our credit card and although we have maxed it out, we do have the ability to service it. To borrow more would be like going out and getting two or three or four more credit cards and maxing those out too. Council recently adopted its Drainage Asset Management Plan. I smiled to myself when I read the title. Normally, an asset is something that you can sell or brings in an income. If we went out to market and invited people to purchase a drain, we wouldn't get any takers. We spend money on drainage and we don't get much income from it. Most people would consider this a liability rather than an asset. Council also values the land under council roads. Again, the value of this asset can never be realised because it is never sold. So take care when reading into council assets. I have to address the statement "the shire will never cease to exist". Try telling people of the former Shire of Phillip Island that a council can never cease to exist. Let me give you a hypothetical - imagine if Bass Coast Shire amalgamated with South Gippsland Shire. The two shires have a very different approach to borrowings (South Gippsland has very low borrowings). On the day of amalgamation, the two sets of finances would become one. Bass Coast's debt would also be spread over the residents of South Gippsland. South Gippslanders would be very upset and they would have every right to be. (P.S. there are no plans for amalgamation - this is hypothetical only). Every individual, household, business, community organisation and council has live within its means. When they don't, that's when the trouble starts.

This is a personal opinion

Julian Brown

Frank W Schooneveldt

10/7/2020 04:22:28 pm

Julian,
What are you doing to fix the $600 million infrastructure issues in the Bass Coast?
You have been a councillor for nearly four years now so you should have some answers.
In reading the Bass Coast Shire’s Budget the Councils values are Excellence, passion, Integrity, imagination and courage.
In my personal opinion these values don’t sound like “DOING” values.
My core values are1, Add value in everything you do, 2, Results not excuses, 3, Take responsibility for your actions.
These are doing values and the council needs to implement doing values to get the Bass Coast Shire moving and fix the infrastructure issues in the Bass Coast.
To fix the infrastructure issues in the Bass Coast will require increased rates and charges, increased borrowings and grants.
And Vision.
,
Cheers

Money, going cheap

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