Victorian Auditor-General’s report
14 September 2011
 
Business Planning for Major Capital Works and Recurrent Services in Local Government 

Audit summary
Background
Victoria’s 79 councils collectively spend around $7.6 billion on capital works and recurrent services each year, and manage over $60 billion of community assets and infrastructure such as libraries, halls, leisure facilities, parks, roads, and bridges that people use every day.
Councils therefore are custodians of significant public funds, and it is important that the public has assurance that this expenditure is effectively planned, budgeted and managed so that it meets community needs both now and into the future.
In 2003 the Local Government Act 1989 (the Act) was amended, introducing significant change. This included electoral reforms to ensure more democratic representation, governance changes to improve transparency and probity, and more accountable financial management and public reporting.
Following the 2003 legislative reforms a key change was the introduction of a new planning framework for local government. The framework aims to achieve more effective strategic planning for municipalities through greater public input to the development of council plans and budgets, and greater accountability by councils through more transparent performance reporting. 
These changes complement previous amendments to the Act in 1999 that introduced the Best Value Principles that encourage councils to engage with their communities more, and to make their services more affordable for and responsive to their communities.
Both the Act and the 2006 Inter-Governmental Agreement Establishing Principles Guiding Inter-governmental Relations on Local Government Matters (the Agreement) commit councils to exercising sound financial management, to strengthen the quality of their planning and budgeting, and to consider the longer-term effects of their decisions. 
As councils have had eight years to implement the 2003 legislative reforms, it is timely to review whether their planning and budgeting for assets and services have improved.
This audit examined Glen Eira City Council, City of Whittlesea, South Gippsland Shire Council and Hepburn Shire Council as a representative selection of councils to determine whether they had effectively integrated their planning and budgeting, considered the long-term sustainability of selected investments and produced accurate and reliable budgets and forecasts.
Conclusion
The 2003 amendments to the Act introduced major reforms designed to strengthen councils’ planning, financial management and accountability. It is clear, however, that the intent of these reforms has not been realised.
Focusing on acquitting their minimum statutory obligations, councils have developed plans and budgets without paying sufficient attention to whether they are either effectively integrated or whether they contain useful and appropriate information that supports effective decision-making.
Until they integrate and improve the quality of their planning and budgeting, councils will find it difficult to justify annual rate increases and effectively negotiate for equitable grant and other funding arrangements.
While Glen Eira generally manages its planning and budgeting well, considerable improvement is still required by the other three councils examined before they can provide adequate assurance to ratepayers they are spending their funds appropriately and effectively. 
The absence of robust strategic, operational and financial plans supporting annual budget decisions at these councils means they cannot demonstrate that they are effectively managing their costs or that their expenditure decisions are sound. 
Findings
Adequacy of planning and budgeting
Glen Eira’s strategic, operational and financial plans were generally sound, but there was substantial room for improvement in the other three councils examined.
Strategic and operational objectives were not clearly specified, nor were they supported by soundly developed strategies, actions and performance indicators. Operational plans also lacked sufficient detail on the service levels, resources and responsibilities required for achieving objectives. 
These councils also did not adequately link their plans, nor did their corporate and divisional business plans align clearly with, and demonstrably support, the objectives and strategies in their council plans. 
Longer-term financial plans, four-year strategic resource plans and annual budgets were largely consistent and aligned. However, expenditure and asset investment decisions were driven primarily by a focus on improving financial ratios, rather than by priorities emanating from service and asset planning.
While all councils had long-term financial plans going out 10–15 years, there was little assurance they were soundly based because they were not adequately supported by equivalent strategic and/or service and asset management plans. Further, none of the councils examined could demonstrate they adequately consulted their communities on the financial and other consequences of their aspirations when initially developing their council plans.
Glen Eira mitigated this through its ongoing program of community consultation informing its annual Best Value reviews, service delivery decisions and business cases for capital projects, but this was not so at the other councils.
About $1.6 billion, or 60 per cent of the total value of assets at the three councils were not supported by a sound asset management plan. While Glen Eira’s asset management framework was generally sound, significant deficiencies were evident at the other councils. None had up-to-date asset management policies, strategies and plans covering all their major classes of assets. Further, this issue had previously been raised for Whittlesea in our 2002 audit, Management of Roads by Local Government, and for South Gippsland in our 2005 audit, Results of Special Reviews and Other Investigations. It was not evident that these earlier audit findings had been addressed. 
Recognising the need to improve their planning and budgeting both Whittlesea and South Gippsland have started implementing changes to their practices. Similarly, Hepburn advised that it intends to act on this audit to address weaknesses identified.
Whittlesea adopted a new planning framework in March 2011 which superseded a more simplistic version in place since 2009.  The new framework aims to establish a clear link between the council plan, corporate plan and annual report. South Gippsland also adopted a new integrated planning framework in April 2011, and has since initiated action to achieve greater alignment between its 2011–12 annual budget and the priorities identified in its council plan. Further, Whittlesea, South Gippsland and Hepburn have also recently taken steps to improve their asset management practices.
Local Government Victoria (LGV) in the Department of Planning and Community Development has a role to support best practice and continuous development in local government governance, performance and service delivery. LGV has developed several good practice guidelines to assist councils improve their strategic planning, asset management and performance reporting. However, the consistency of the shortcomings observed across the councils examined indicates that LGV needs to provide more definitive support for councils to improve the quality of their planning and to better link this to their budgeting decisions.
Soundness of investment decisions
Whittlesea, South Gippsland and Hepburn could not demonstrate that councillors received enough information to assess if their proposed investment decisions were sound, or if they were providing community services at an appropriate cost and quality.
Glen Eira’s capital works investments were generally supported by sound business cases but the other councils examined could not demonstrate the merits and long-term viability of their capital works projects. Business cases were not developed, and there was little evidence they had considered life cycle costs, the cost-effectiveness of alternative options, or how the project connected with the council plan and wider asset management strategy.
There was also little evidence that these councils regularly reviewed their services in accordance with the Best Value Principles to inform future spending decisions. Thus, there is little assurance their ongoing expenditures are supported by an adequate understanding of community need or the effectiveness and efficiency of their services.
Whittlesea has a number of initiatives underway designed to improve its investments in capital works and recurrent services. A new major projects department is being established with responsibility for coordinating the capital works program and implementing a project management framework initiated in 2007. Business cases will also be required to support all capital works undertaken from 2011, and all departments will be required to demonstrate compliance with the Best Value Principles in developing their 2011–12 business unit plans.
Recommendations
Number	Recommendation	Page	
1.	Councils should:
·	consult with, and engage, their communities on their ability and willingness to pay for desired services and assets when developing their initial council plans 
·	better integrate their planning and budgeting practices to support sound decision-making
·	develop strategic and supporting divisional business plans for all major services, with measurable objectives clearly aligned to their council plans
·	review their asset management frameworks to assure their asset policies, strategies and plans are up-to-date, cover all major asset classes, and adequately inform future investment decisions.	18	
2.	Local Government Victoria should:
·	systematically review the adequacy of council planning and budgeting and, in consultation with stakeholders, provide better targeted support and assistance to councils to address identified weaknesses
·	monitor the impact of these support initiatives to inform its future continuous development efforts.	18	
3.	Councils should:
·	develop business cases for proposed investments in major capital works to demonstrate they are soundly based and that they support the achievement of the council’s service delivery objectives
·	rigorously analyse service need, value-for-money, cost, and financial sustainability against defined standards consistent with the Best Value Principles to inform investments in recurrent services.	26	
Submissions and comments received
In addition to progressive engagement during the course of the audit, in accordance with section 16(3) of the Audit Act 1994 a copy of this report, or relevant extracts from the report, was provided to the Department of Planning and Community Development, Glen Eira City Council, City of Whittlesea, South Gippsland Shire Council and Hepburn Shire Council with a request for submissions or comments.
The Glen Eira City Council acknowledged the request and elected not to make a submission. Submissions were received from the Department of Planning and Community Development, City of Whittlesea, South Gippsland Shire Council and Hepburn Shire Council.
Agency views have been considered in reaching our audit conclusions and are represented to the extent relevant and warranted in preparing this report. Their full section 16(3) submissions and comments however, are included in Appendix A.