February 2023
It’s clear that climate change is rapidly changing the risk environment for public assets, and that is putting pressure on the mechanisms we have in place to fund maintenance and replacement of community assets such as roads, bridges, sports fields, and public parks.
The Local Government sector only takes in 3.4% of taxes totalling $18.9b, but is responsible for delivery of $38.8b in service delivery. Councils’ own-funding sources therefore represents only 49% of their expenditure, which means Councils are reliant on State and Federal grant programs to be able to sustainably deliver community services.
This ‘vertical fiscal imbalance’ means that Local Governments have inadequate resources to fund or maintain infrastructure assets from own-source revenue. Rates income and borrowings for infrastructure is therefore often supplemented by a complex and often ad hoc system of State and Federal grants, which averages 14% of total revenue across the sector, but is up to 50% for some Councils. In total, the replacement cost of public assets managed by Local Governments is $342b, and these assets are increasingly at risk due to climate change.
In addition, Councils are reliant on the national ‘self-insurance’ program known as the Disaster Recovery Funding Arrangements (DRFA), which is an antiquated system in need of major reform.
Numerous inquiries going back to the early 2010’s have indicated that the way we fund response to natural disasters is less than optimal, though successive governments have done little to reform it. Climate change will put the system under more pressure - perverse incentives inherent in the DRFA model will increasingly be felt through higher asset reconstruction costs, slower recovery from natural disasters, and an increased burden of economic disruption caused by natural disasters, all compounded by more frequent than necessary asset failures.
The Federal Government has recently announced an independent review, which will take a fresh look at national disaster response and funding mechanisms for public assets. Let’s hope the outcome will be a new funding program that is fit for purpose in this era of increasing natural disaster risk.
I'll be reaching out to my Council and State Government clients and colleagues to understand the collective position:
Here’s a few of my thoughts, having worked in this policy area for over 10 years:
For more information, please contact Adam Matthews.