13 Local Government

Introduction

This Chapter provides information on:

• the development and role of the local government sector in the Tasmanian economy;
• the financial relationship local government has with both the State Government and the Commonwealth Government;
• the implications of current economic reform initiatives for local government;
• the financial position of local government in general; and
• the local government key performance indicator project currently under development.

Development of the Local Government Sector

Local government originated in the early years of European settlement in Tasmania and existed in a variety of forms including municipal districts, cities, rural municipalities, town boards and road trusts, until the Local Government Act 1906 provided for their replacement with municipalities which administered all local government functions. A total of 52 municipalities (including the cities of Hobart and Launceston) were formed.

Under the Local Government Act 1962 (1962 Act) another four cities were proclaimed: Glenorchy, Devonport, Clarence and Burnie. By this time there were 46 local government authorities (LGAs) in total. The 1962 Act was very prescriptive about how local government could function.

In 1992, the then State Government and local government agreed to a reform and modernisation program that involved reviewing:

• local government boundaries in Tasmania;
• the 1962 Act;
• council management, administration and procedures, with a view to meeting the contemporary needs of a changing local government structure; and
• the roles and functions of local government and the revenue bases required to fund them.

In April 1993, the number of LGAs in Tasmania was reduced from 46 to 29.

An independent review of roles and functions between the State and local levels of government commenced early in 1994 and was completed in July 1996. It recommended, among other things:

• simplifying the financial relationship between the State Government and local government to improve the financial autonomy and independence of local government, make transparent the level of government that is responsible for taxation and expenditure decisions and allow for more economically efficient decision making by the two levels of government through the use of market-based prices and charges;
• that as a long-term objective, all water and sewerage bulk supply, treatment and reticulation services should be provided by three integrated regional enterprises owned by local government and operated under expert independent Boards, but with the State Government retaining regulatory responsibility; and
• that three formally constituted regional bodies be established to develop strategies for promoting waste management practices which meet contemporary standards in the most effective manner. These bodies should represent the entire region and include a mix of local government and external expertise. Final accountability will remain with the councils that form the regional body.

Regarding the reform of State and local government financial relations, the Government wrote to the Local Government Association of Tasmania (LGAT) on 14 April 1999 suggesting that subsequent work on State and local government financial reforms be held in abeyance pending the outcome of national taxation reform. Now that the 1 July 2000 national taxation reform milestone has been met, it is appropriate that the project to reform State and local government financial relations recommence. At the Premier's Local Government Council meeting on 1 March 2001, it was agreed that the project to reform State and local government financial relations would be included on the Council's work program for 2001, given that the project is a matter that affects local government as a whole.

Role in the Economy

Local government produces public services that are generally suited to delivery at the community or local/regional level. Functions of councils are prescribed under section 20 of the Local Government Act. Broadly, these aim to:

• provide for the health, safety and welfare of the community;
• facilitate and encourage proper planning and development;
• represent and promote the interests of the community;
• provide for peace, order and good government; and
• formulate, implement and monitor policies, plans and programs for the provision of appropriate services and facilities to meet the present and future needs of the community.

• rates, fees, fines and charges;
• Commonwealth Government and State Government grants; and
• borrowing.

In 1998-99, sales of goods and services, including water, sewerage and garbage components of rates, were the major local government revenue sources, accounting for 41.6 per cent of total GFS revenue. Tax revenues (the general rate component) constituted 35.1 per cent of total GFS revenue. Current grants and subsidies made up 14.8 per cent of total revenue. It should be noted that total grants and subsidies made up 17.4 per cent of total GFS revenue in 1998-99. By comparison, the majority of State Government revenue stems from Commonwealth transfers.

Chart 13.1 shows the sources of revenue of the State and local levels of government in Tasmania during 1998-99.

Chart 13.1: State and Local Government Revenue Sources, 1998-99

Source: Government Finance Statistics, Australia 1998-99, ABS Cat No 5512.0.

It is important for the promotion of economic growth that both the State and local levels of government participate, through genuine improvements in efficiency, in reducing the costs that they impose on business and the community. Local government can assist economic reform by keeping the burden of rates and charges to the minimum level necessary. This can be achieved by local government continuing to improve the efficiency of its service delivery and by focusing expenditure on core activities.

Local government financial management is also important with regard to external monitoring of the State Government's financial position. Rating agencies and the Australian Loan Council include local government in their assessments of State Government finances. The opinions of rating agencies have a direct impact on the cost of servicing the State's debt. The State Government must also manage the annual financial performance of the State public sector (including local government borrowing) within the constraints set by the Australian Loan Council. These constraints seek to ensure that the demands placed on financial markets by the public sector, including local government, are at a level that will not significantly impact on the availability of capital to the private sector. The constraints also ensure that the various jurisdictions within the public sector are adopting appropriate long-term fiscal strategies.

Relationship with Other Levels of Government

There is a relatively complex financial relationship between local government, the State Government and the Commonwealth Government. The complexity in this relationship arises both from the nature of the institutional arrangements in Australia referred to in Chapter 7, and because of the blurred division of the respective roles and responsibilities of the three levels of government, despite the constitutional division of powers. Whilst respective taxing powers are relatively well differentiated, the exact role of local government as distinct from other levels of government is not always clear. As with the situation between the Commonwealth and State, this leads to some duplication and overlap and an array of financial transfers between governments.

The financial transfers involving local government can be categorised as follows:

• grants from the Commonwealth Government;
• grants from the State Government;
• State Government subsidies of local government costs;
• local government exemptions from State taxes and charges and State exemptions from council general rates;
• levies and charges paid by councils to the State Government; and
• charges paid by councils for the use of State Government services.

The Commonwealth Government provides both general purpose and specific purpose funding for local government. General purpose assistance has been paid to LGAs since 1974-75. General purpose funding comprises base grants and identified local road funds (ILRFs), both of which are distributed in accordance with the Commonwealth's Local Government (Financial Assistance) Act 1995. Although local road funds are still identified as a separate component, councils have total discretion over how they are used.

The Local Government (Financial Assistance) Act is currently being reviewed for the Commonwealth by the Commonwealth Grants Commission. On 19 June 2000, the Minister for Regional Services, Territories and Local Government announced the terms of reference for the Review. The Review is to examine and report on:

• the effectiveness of the current arrangements under the Local Government (Financial Assistance) Act to achieve the purposes of the Act and the goals in providing the grants that are referred to in section 3 of the Act;
• the appropriateness of the current National Principles and, in particular, the retention of or variations of the minimum grant for the general purpose component in section 6 of the Act; and
• the consistency with the National Principles of the methodology and policies used by each of the State and Territory Grants Commissions in distributing funds to councils.

• the effectiveness of the arrangements under this Act in relation to ensuring that the allocation of funds for local government purposes is made on a full horizontal equalisation basis;
• the impact of the Act on the raising of revenue by local governing bodies and on the assistance provided by the States to local governing bodies;
• the implications of any changes in the functions or responsibilities of local government bodies; and
• the eligibility for assistance under this Act of bodies declared by the Minister under section 4 to be local government bodies.

Prior to 2000-01, escalation in the national pool of local government financial assistance was partly determined by underlying movements in Financial Assistance Grants (FAGs) to the states and territories. With the reform of Commonwealth-State financial arrangements stemming from the introduction of the Commonwealth's A New Tax System, FAGs were abolished from 1 July 2000, and replaced by revenues collected from the goods and services tax. This brought to an end the nexus between State and local government grants and, accordingly, it became necessary to amend the Local Government (Financial Assistance) Act to recognise this fact.

From 2000-01 onwards, the national quantum of local government general purpose financial assistance will be linked to annual changes in both the Australian population and the consumer price index, so that the pool is maintained in 'real per capita' terms. The final year for which the previous arrangements existed, which was 1999-00, becomes the base for determining the size of the local government grant pool in each subsequent year. These arrangements will, in effect, leave local government no worse off financially in terms of general purpose Commonwealth funding than had the previous arrangements continued. In fact, real per capita maintenance of Commonwealth general purpose grants to local government is now guaranteed under legislation, whereas this was not previously the case.

The Commonwealth's Local Government (Financial Assistance) Act specifies that the distribution of the base grant (ie not including road funds) between states and territories will be on a per capita basis. ILRFs are not distributed between states and territories on a per capita basis, but rather on the basis of historical shares between states and territories as defined in the Commonwealth's Australian Land Transport Development Act 1988. In total, Tasmania receives 3.3 per cent of the total general purpose payments made available nationally to local government by the Commonwealth. Total Commonwealth general purpose payments to Tasmania's LGAs are estimated to be $44.1 million in 2000-01, a real terms decrease of 1.7 per cent over the total payments for 1999-00 of $42.5 million.

Estimated total Commonwealth general purpose payments in 2000-01 to local government in each state and territory for base grants and ILRFs are shown in the following table.

The Commonwealth has determined that there will be a positive adjustment as the estimated inflation figure of 2.95 per cent used to determine last year's pool was lower than the actual level of inflation of 3.09 per cent. The adjustment is added to the 2000-01 quarterly payments, based on the distribution of the 1999-00 grants. This means that the cash actually paid to Tasmanian councils in 2000-01 will be the estimated 2000-01 entitlement of $44.0 million plus a positive adjustment to the 1999-00 grants of $73 387, which is a total of $44.1 million. Over time, Tasmania's share of these grants is expected to decline due to a declining share of national population.

Each LGA's share of funds is allocated on the recommendation of the Tasmanian State Grants Commission. The base grant distribution is determined according to the fiscal equalisation principle. This principle aims to provide each LGA with the capacity to be able to fund a level and standard of service not appreciably different from the State average, provided that an average revenue raising effort is made. The allocation of ILRFs between LGAs is based on the relative expenditure need of each municipality in order to preserve its road assets.

Table 13.2 details the Commonwealth general purpose grants made to individual Tasmanian councils in 1999-00 and the recommended grants for 2000-01 that have been approved by the Commonwealth. The totals in Table 13.1 for 2000-01 vary from the Tasmanian figures presented in Table 13.2 because they represent the cash payments to be made in 2000-01.

The Tasmanian State Grants Commission is currently considering a distribution of grants to local government for 2001-02.

In addition to general purpose grants, the Commonwealth provides some specific purpose grants to local government. These grants are largely provided for aged and disabled persons' homes, children's services and aboriginal advancement.

Partnership Agreements

The State Government is committed to the development of Partnership Agreements as a key mechanism for strengthening working relations with local government. The State Government recognises that committed progressive local communities and sound local economies are fundamental to the social and economic development of the State. Hence the process for developing Partnership Agreements takes into account consultative mechanisms at the local level, encourages local input to community and economic development decisions and promotes shared responsibilities for improved targeting of service delivery.

A Partnership Agreement is a document that outlines the ways in which the State Government and a council or group of councils can find innovative ways of working together to improve the social, economic and environmental situation within a community by reaching mutually agreed goals. A Partnership Agreement can be formed around a particular issue, or may cover a range of different issues.

Partnership Agreements provide an opportunity to examine government service delivery arrangements and for the State and councils to jointly identify measures to improve their design and/or delivery. A key aspect is to ensure that there are effective service delivery arrangements to meet the reasonable needs of all residents including, where appropriate, options to improve coordination of joint State-local service delivery arrangements or to address gaps and overlaps in service delivery. Where State Government services can be more effectively and efficiently delivered at the local government level, agreement will be reached on appropriate funding arrangements, and any amendment of existing service delivery arrangements will be the subject of contractual arrangements between the parties to ensure appropriate accountability and transparency of implementation.

Results from the Partnership Agreements are measurable through agreed timeframes and outcomes. Each Partnership Agreement concluded with local government is accompanied by an action plan identifying council and State Government agency responsibilities. An inter-agency coordination group has been established to monitor progress in implementing Partnership Agreement commitments of the State Government.

Cabinet meetings regularly conducted around the State actively support the Partnership Agreements between State and local government. These Cabinet meetings form an additional strategy to draw upon key ideas for growth in local communities.

Objectives

The aim is that Partnership Agreements be developed in a cooperative manner based on the identification of shared objectives and ways in which both levels of government can work towards effectively meeting these objectives. The Government's objectives for the Partnership Agreements were outlined in its Framework for Developing State-Local Government Partnership Agreements, released in December 1998.

In summary these objectives are to:

• identify opportunities to work in partnership with local government to progress agreed social, economic and environmental outcomes for local government areas; and
• ensure effective service delivery arrangements including, where appropriate, options to improve coordination and joint service delivery arrangements or address gaps and overlaps in service delivery.

• economic growth;
• social justice; and
• community development.

Background

The pilot phase of the program was launched in December 1998 commencing with the negotiation of a bilateral Partnership Agreement with the Circular Head Council, which was signed on 1 June 1999. The pilot phase concluded with the signing of a bilateral Partnership Agreement with the Launceston City Council on 10 December 1999.

In December 1999, the State Government agreed to revised arrangements arising from the assessment of the pilot phase of the program. The process for developing Partnership Agreements has been amended to:

• include provision for the Premier (or a Minister nominated to oversee negotiations) to participate in discussion with council(s);
• include provision for the relevant Minister to participate in peak negotiating meetings to oversee negotiations and maintain consultations with elected local government members and State Cabinet;
• include arrangements for the State Government to identify key issues and strategic objectives for proposed Partnership Agreements. The Premier's Office, Ministerial advisers, Heads of Agencies or senior nominees and relevant agency personnel assist in identifying outcomes and the preparation of a draft negotiating brief for Cabinet endorsement; and
• include provision for councils to use their strategic planning process to identify issues for inclusion in negotiations.

The two bilateral Partnership Agreements, which have been finalised since the pilot program, are the Partnership Agreement with the Glenorchy Council, which was signed on 19 October 2000, and the Partnership Agreement with Flinders Council, which was signed on 20 October 2000.

The State Government is in the final stages of negotiating the first regional Partnership Agreement with the Northern Tasmanian Municipal Organisation. Future Agreements include bilateral Partnership Agreements with the Derwent Valley and Break O'Day Councils and a regional Partnership Agreement with the Cradle Coast Authority.

Premier's Local Government Council

The Premier's Local Government Council was established in 2000 as a forum for high-level discussions with councils on issues of statewide significance. The Council comprises the Premier or his nominee and the nine elected representatives who make up the General Management Committee of the LGAT. An Officials Committee made up of State and local government officers supports the Council. A statewide Partnership Agreement, which is negotiated through the Council, involves all councils and the State Government and is signed by the President of the LGAT on behalf of the councils. The Premier's Local Government Council has developed two statewide Partnership Agreements, a Framework for Planning Schemes and a Waste Management Partnership Agreement. The Council's agenda for 2001-02 will include consultation and communication arrangements and a project to reform State and local government financial relations (which is discussed in the next section).

Financial Reform of the Local Government Sector

There is currently a complex set of financial arrangements between State and local government, many of which could be considered a product of history, rather than as a result of deliberate public policy decisions in the context of State-local financial relations more generally. These include:

• levies and charges on local government to fund services provided by the State in which local government has limited, if any, input;
• various fees and charging arrangements which are not commercially based and are therefore considered to distort decision making; and
• various taxation exemptions, concessions, specific purpose grants and subsidies which reduce accountability and distort decision making.

The issue of reforming financial relations between the State and local government has been considered on a number of occasions in the recent past. The latest and, arguably, most comprehensive investigation of this issue concluded in 1996, with a report, entitled Roles and Responsibilities of State and Local Government prepared by the Tasmanian Roles and Functions Review Committee.

The Tasmanian Roles and Functions Review Committee recommended a number of reforms to financial relations between the two levels of government, including that:

• both levels of government should be subject to the tax system of each other (reciprocal taxation);
• subsidies and concessions between the two levels of government should be removed;
• there should be a better alignment between the levels of government having service delivery and revenue raising responsibilities; and
• cost reflective and market based fee for service arrangements should apply.

Similarly, the application of State taxes to local government would result in councils facing the same market based and commercial decisions faced by all other entities and this will enhance efficient resource management.

Reciprocal taxation arrangements will also serve to improve the transparency and accountability of inter-governmental taxation and place such arrangements on a sustainable long-term footing. Removal of hidden subsidies will also ensure that the true impact of decisions can be assessed.

Work on State and local government financial reform commenced in 1997 and has been held in abeyance since April 1999, pending the implementation of the Commonwealth's national taxation reform from 1 July 2000. At that time it was considered prudent to allow local government to deal with the implementation of the goods and services tax without the added complexity of any measures arising from changes to State-local financial arrangements. It was also unclear at the time the extent to which any national moves to implement reciprocal taxation arrangements might overlap with efforts at the state level to pursue such reform. However, it is now appropriate that the project to reform State and local government financial relations recommence. At the Premier's Local Government Council meeting on 1 March 2001, it was agreed that the project to reform State and local government financial relations would be included on the Council's work program for 2001, given that the project is a matter that affects local government as a whole.

On 24 October 2000, a survey was forwarded to State Government agencies, Government Business Enterprises (GBEs), State-owned Companies (SOCs), statutory authorities and all local government councils in anticipation of the Premier's Local Government Council's agenda being extended to include the project. The results of this survey will be used as the basis for determining the impact of any proposed reform measures.

As the State and local government financial matters are technical in nature and require significant and detailed input, the Premier's Local Government Council will be assisted by a working group to complete the tasks. The LGAT has arranged a small number of council representatives to serve with State Government officials on the working group. The working group will prepare discussion papers, with progress reports and matters requiring decisions or direction to be referred to the Premier's Local Government Council.

The following is a brief description of the nature of the existing State-local financial arrangements.

State Subsidies on Local Government Costs

The State Government subsidises council costs by providing recurrent subsidies on the annual cost of water and sewerage schemes and by reimbursing pensioner concessions on property rates. In 1999-00, State water subsidies amounted to $42 430, sewerage subsidies amounted to $356 440 and the cost of pensioner rates remissions amounted to $12.0 million.

State Taxation Exemptions

Local government is exempt from the payment of State Government taxes.

Local Government Rates Exemptions

State Government agencies, statutory authorities and a number of GBEs are currently exempt from local government rates on property holdings, although service rates for water and sewerage are generally paid.

State Levies and Charges on Local Government

The State Government receives contributions from local councils towards the cost of providing library, fire protection and planning services.

The Tasmanian Government provides public library services and seeks a contribution from local government towards this cost. In all other States, local government provides the service and receives a contribution from the State Government towards the cost. A contribution to library services is made annually by each municipality. It is equivalent to 0.35 cents per dollar of the adjusted assessed annual value of all leviable land, less a prescribed amount (collection fee) which is a maximum of 1.5 per cent of the gross assessed contribution. In 1999-00, the library contribution was $6.1 million, which represented about 42 per cent of total expenditure on library services by the State. The funds collected from the library levy are paid to the Consolidated Fund. The State is precluded by statute from imposing direct charges on library users. The levy partially recovers the cost of library services from the wider community.

The State is responsible for the provision of fire services through the Tasmanian State Fire Commission in accordance with the Fire Service Act 1979. However, before 1979, the responsibility for fire protection was shared between two statutory bodies and 22 individual fire brigade boards. In 1999-00, the State Fire Commission received $17.8 million from a levy imposed on local government, which was equivalent to approximately 56 per cent of the Commission's expenditure. This levy is based on the assessed annual value of rateable property. Councils may retain an administration (collection) charge not exceeding four per cent of the gross value of the levy and are permitted to recover the levy from individual property owners provided that the component of rates attributable to the contribution is separately identified. The funds collected from the fire service levy are paid direct to the State Fire Commission.

The State Government has involvement in the operation of local government through the Local Government Division of the Department of Premier and Cabinet and through the Department of Primary Industries, Water and Environment which both have policy, regulatory and advisory roles. Local government contributes to the cost of providing these services through a planning and local government levy equal to 0.15 cents per dollar of the total adjusted assessed annual value of all rateable (non-exempt) land in their municipality. In 1999-00, the local government contribution was $2.6 million.

State Grants

The State Government provides recurrent assistance to local government for specific purposes under the following arrangements:

• direct principal and interest subsidies under the Public Bodies Assistance Act 1971 on borrowings for approved purposes, such as for new infrastructure or the redevelopment of existing facilities. However, no new loans have been made under this Act since July 1989;
• in 1999-00, the Department of Infrastructure, Energy and Resources distributed grants to councils totalling $1.6 million sourced from State Government heavy vehicle motor taxes (the 'National Road Transport Commission (NRTC) funds');
• in 1999-00 the Launceston City Council received $895 684 from the Department of State Development for the Queen Victoria Museum and Art Gallery;
• in 1999-00 the Department of Premier and Cabinet disbursed $91 716 to councils under the Premier's Sundry Grants program; and
• in 1999-00 the Burnie City Council and the Devonport City Council received $40 000 each for the operation of their respective travel centres. Furthermore, the Department of Health and Human Services contributed $1.7 million towards the operating cost of multi-purpose health centres and nursing homes in four rural municipalities.

At the April 1995 Council of Australian Governments (COAG) meeting, a National Competition Policy (NCP) for Australia was agreed. This policy, which is embodied in three inter-governmental agreements, has implications for all levels of government, including local government.

One of the three inter-governmental agreements, the Competition Principles Agreement (CPA), outlined five key principles relating to:

• the prices oversight of public sector trading activities with monopoly, or near monopoly, characteristics;
• competitive neutrality between the public and private sectors;
• the structural reform of public monopolies;
• the processes for reviewing legislation which restricts competition; and
• a legislated right for the provision of third party access to significant infrastructure facilities.

In addition, the Conduct Code Agreement (CCA) required the State Government to introduce legislation to ensure the wider application of the restrictive trade practices provisions of Part IV of the Commonwealth's Trade Practices Act 1974 (TPA), to encompass all private and public sector business activities, including local government business activities. This was effected through the Competition Policy Reform (Tasmania) Act 1996.

In June 1996, as required under the CPA, the former Government submitted to the National Competition Council (NCC) a policy statement entitled Application of National Competition Policy to Local Government (Application Statement). This Statement was prepared by the then State Government, in consultation with local government, and provided a broad policy statement on how it was intended that the five competition principles, where appropriate, would be applied to local government. The Government, in conjunction with local government, will be reviewing the Application Statement during 2001-02.

In addition to the reforms required under the CPA, NCP requires jurisdictions to consider reform in the areas of water, electricity, transport and gas. These requirements are detailed in the Agreement to Implement the National Competition Policy and Related Reforms.

The NCP Agreements have now been operational for over five years. Two of the Agreements, the CPA and the CCA, contain provisions for a review of their operation and terms after five years. The other Agreement, the Agreement to Implement the National Competition Policy and Related Reforms, does not contain a specific review provision.

Accordingly, a review of the CPA and the CCA has been undertaken by the parties to the Agreements. At the 3 November 2000 meeting of COAG, Heads of Government agreed to several measures to clarify and fine-tune implementation arrangements for NCP. These included that:

• the onus of proof, in assessing whether restrictions on competition should remain, be applied more flexibly;
• the NCC determine its forward work program in consultation with COAG Senior Officials;
• COAG Senior Officials continue to clarify and specify NCP reform commitments and assessment benchmarks for the NCC;
• the deadline for completing the NCP legislation review and reform program be extended from 31 December 2000 to 30 June 2002; and
• the NCP Inter-governmental Agreements be amended to provide further guidance to the NCC on how to assess whether jurisdictions have complied with their legislation review commitments.

Progress to date in relation to the application of competitive neutrality, legislation review, monopoly prices oversight and water reform to local government is outlined below.

Competitive Neutrality

In accordance with the Application Statement, all councils have assessed their significant business activities to which full cost attribution (FCA) would apply. This was done during 1996. These lists were reviewed by a peer group (established by the LGAT).

Realising the advantages that competitive neutrality could deliver in increasing the efficiency of council operations, 18 of the 29 councils decided to apply FCA to all of their business activities. The majority of the remaining councils chose to apply FCA to their public trading enterprises (largely water and sewerage services) and road maintenance.

Further discussions, which commenced in mid-1998, led to an updated agreement on the application of NCP to local government in Tasmania. The revised Agreement incorporated a new implementation timetable and was approved by the LGAT General Management Committee in July 1998.

In accordance with the Application Statement, councils were required to:

• identify relevant business activities which were considered significant business activities;
• undertake public benefit assessments of the corporatisation of those business activities which are classified as Public Trading Enterprises (PTEs) under the ABS Government Financial Statistics Classification, as outlined in the Application Statement (generally water and sewerage); and
• corporatise those PTEs where a public benefit assessment indicates that the benefits outweigh the costs of doing so or apply full cost attribution to all other significant business activities.

All councils found that corporatisation of their PTEs would not be in the public benefit, mainly due to the small size of Tasmanian councils and therefore of their business activities. These results were submitted to a peer review group consisting of LGAT and council representatives. The peer review group endorsed the results of the public benefit assessments and provided a recommendation to the Treasurer to this effect in November 1999. The Treasurer endorsed the public benefit assessment and the outcome of the peer review assessment on 3 December 1999.

It should be noted, however, that the joint bulk water authorities, the Hobart Regional Water Authority (HRWA), the Esk Water Authority (EWA) and the North West Water Authority (NWWA), were corporatised under the Local Government Act, independently of this process.

Councils are continuing to apply FCA to their business activities in a form appropriate to their size. Importantly, the Local Government Act was amended in 1999 to require councils to disclose the full cost of operating their significant business activities in their annual reports. In this regard, councils are required to disclose the operating, competitive neutrality, and capital costs attributable to their significant business activities.

To comply with the competitive neutrality principles, the Local Government Division (LGD) of the Department of Premier and Cabinet has developed a Community Service Obligation (CSO) Policy and Guidelines framework for councils. This policy is consistent with the policy applying to the State Government's GBEs.

The main objectives of the CSO Policy are:

• to ensure that a council's social and other objectives are achieved without impacting on the commercial performance of its significant business activities;
• to improve the transparency, equity and efficiency of CSO service delivery; and
• to be consistent with NCP requirements.

Competitive Neutrality Complaints Mechanism

The Application Statement required the establishment of a competitive neutrality complaints mechanism. Accordingly, a competitive neutrality complaints mechanism was established under the Government Prices Oversight Regulations 1998. Under the regulations, a person who believes that he or she has been adversely affected by a contravention of the competitive neutrality principles may lodge a complaint with the Government Prices Oversight Commission (GPOC) which has responsibility for investigating all alleged breaches of the competitive neutrality principles in the State.

During 2000-01, two complaints were lodged with GPOC relating to alleged breaches of the competitive neutrality principles by local government authorities. The complaints were in relation to the operation of Clarence Swim Centre leased out by the Clarence City Council and the operation of Launceston City Council trading as Total Workforce.

At the request of the Treasurer, the Department of Treasury and Finance is undertaking a review of the FCA Guidelines to provide additional guidance in regard to pricing. The result of this will be clearer guidelines for councils on the application of FCA.

More information on the competitive neutrality complaints mechanism is provided in the GPOC Annual Report and the National Competition Policy Progress Report: May 2001.

Prices Oversight

The Application Statement stated that local government monopoly or near monopoly providers were to be brought under the prices oversight jurisdiction of GPOC. The Government Prices Oversight Amendment Act 1997 extended the coverage of the Government Prices Oversight Act 1995 to include local government monopoly or near monopoly services.

In addition, in accordance with the Agreement to Implement the National Competition Policy and Related Reforms, Tasmania is required to implement the COAG Strategic Framework for the Efficient and Sustainable Reform of the Australian Water Industry (Strategic Framework). The Strategic Framework requires metropolitan bulk water suppliers to charge on a volumetric basis to recover all costs. Metropolitan bulk water suppliers are to also earn a positive real rate of return on the written-down replacement cost of their assets.

Against this background, GPOC was required to undertake an investigation into the pricing policies associated with the provision of bulk water by the HRWA, the EWA and the NWRWA in 1998. As a result, GPOC recommended maximum prices (in the form of maximum revenues and pricing principles) to be charged by each of the State's three bulk water authorities for a three year period commencing from 1 July 1999. The Government endorsed GPOC's pricing principles for bulk water which are to apply until November 2001. GPOC has recently commenced the next investigation into the pricing policies of these authorities for prices commencing in April 2002.

Legislation Review

The LGD has implemented procedures for the review of all proposed or existing by-laws to ensure that any restrictions on competition are fully justified in the public benefit. The By-Law Making Procedures Manual was released in August 1997 and represents the by-law section of the Government's Legislation Review Program (LRP). All by-laws proposed since that date have been required to comply with the new procedures.

All by-laws made under the 1962 Act remained in force under the current Local Government Act (to the extent that they were consistent with the new Local Government Act) for a period of five years, and were due to expire on 17 January 1999.

A number of Councils have been progressively reviewing their by-laws and a number of by-laws have been repealed. As a result, there has been a continued decline in the overall number of by-laws. However, a significant number of councils were not prepared for the statutory expiry of all these by-laws on 17 January 1999. In December 1998, the Government therefore introduced the Local Government (Savings and Transitional) Amendment Act 1998 to extend the expiry date until 31 March 1999. This resulted in the automatic expiry at the end of March 1999 of approximately 500 by-laws made under the 1962 Act.

All the 115 new by-laws gazetted under the current Local Government Act since the commencement of that Act in January 1994 have been subjected to the legislation review processes. Councils are now carefully considering the subject matter that they wish to deal with through by-laws, such that new by-laws are generally made to deal solely with matters of broad governance rather than relating to commercial operations. Tasmanian councils have repealed their obsolete by-laws and replaced them, where appropriate, with by-laws that focus on governance arrangements and comply with NCP principles.

Amendments to the Local Government Act in 1999 resulted in the further application of NCP principles to local government by-laws, with the requirement that any new by-laws with a significant impact on the community be subject to a Regulatory Impact Statement. This amendment formalised the procedure already required in the By-Law Making Procedures Manual.

Water Reform

As part of the Tasmanian water reform process, the HRWB was transferred in 1997 from State Government to local government ownership and established under the Local Government Act as a joint authority. In addition, the State Government's North Esk Regional and West Tamar Water Supply Schemes were also transferred to local government and, together with Launceston City Council's water supply scheme, re-established in 1997 under the Local Government Act as a joint authority entitled the Esk Water Authority.

The NWRWA was the last bulk water authority to be transferred to local government, being transferred on 10 August 1999 and now operates as Cradle Coast Water.

These joint authorities were established in accordance with the NCP corporatisation model and are subject to full taxation equivalent, dividend and loan guarantee fee regimes.

Among other things, the Strategic Framework requires the implementation of two-part (volumetric) pricing for urban water schemes where it is shown to be cost effective. In Tasmania, all urban retail water services are provided by local government. Accordingly, in 1999 councils undertook a significant amount of work in assessing whether two-part tariffs are cost effective for their urban water supply schemes.

To commence this assessment, in June 1999 GPOC set out a methodology for local councils to assess the cost effectiveness of introducing two-part tariffs for their urban water services in its report entitled The Cost Effectiveness of Local Councils Implementing Two Part Pricing for Urban Water Services.

Local councils were required to show that they had correctly applied the guidelines to assess whether two-part pricing was cost effective for their urban water service schemes. The submissions provided by councils were subsequently reviewed by an independent review panel comprising State and local government representatives and a representative of the LGAT.

A report on the assessments was provided to the Tasmanian Government in December 1999.

The report showed that two-part tariffs had already been or would be implemented in 24 of the 90 water schemes studied. In these cases, the implementation of two-part pricing for urban water delivers many benefits to councils and the broader community. Correct pricing sends the appropriate price signals to customers to promote water use that is economically efficient and environmentally responsible.

On 22 December 1999, the Local Government Amendment (Operational Plans) Regulations 1999 were proclaimed. The regulations require the annual reporting by councils on the application of the cost recovery and water pricing principles in their operational plans. The Local Government Act requires that operational plans are made publicly available for comment prior to being put to the relevant council for resolution. These regulations therefore require councils to demonstrate that they are planning to recover all costs from their water schemes.

Tasmania has been assessed by the NCC as having met all its NCP water reform commitments to date. The NCC has acknowledged Tasmania's progress in this area and recognised Tasmania's genuine commitment to implementing two-part pricing where cost effective.

For a full discussion of progress with NCP implementation in Tasmania, refer to the paper National Competition Policy Progress Report: May 2001 issued by the Tasmanian Government.

Financial Performance

Local Government Sector Financial Aggregates

The Australian Bureau of Statistics (ABS) has revised the series Government Finance Statistics, Australia 1998-99, ABS Cat No 5512.0 and Government Finance Statistics, Tasmania 1998-99, ABS Cat No 5501.6. The ABS advises that the most fundamental changes in these publications are the adoption of an accrual accounting basis and the use of a revised presentation format. This has resulted in significant revisions to Government Finance Statistics (GFS) data reported in this Chapter in Budget Paper No 1 Budget Overview 2000-01.

The Tasmanian local government sector returned a net operating balance of $1.0 million in 1998-99. The net operating balance is calculated as GFS revenue less GFS expenses. Launceston City Council returned the highest net operating balance of $7.2 million, while Hobart City Council recorded the lowest, deficit of $9.3 million. The difference between the two councils reflects Launceston City Council's higher capital grants revenue of $7.2 million and a lower depreciation expense of $14.8 million compared to Hobart City Council's $500 000 in capital grants revenue and $21.2 million depreciation.

Local government own-source revenue in 1998-99 totalled $362 million, of which $149 million or 41.2 per cent was from taxation revenue (the general rate component), $177 million was from the sale of goods and services, which includes the water, sewerage and garbage components of rates, accounting for 48.9 per cent of own source revenue and other income of $36 million was the final component, which was equivalent to 9.9 per cent of own-source revenue.

Total grants and subsidies made up 17.4 per cent of total GFS revenue. The largest expense area was housing and community amenities at 34.7 per cent of total GFS expenses, while interest comprises only 3.5 per cent of the total, reflecting the low debt level of the local government sector.

After a surplus of $14 million in 1997-98, the local government sector returned a surplus of $2 million in 1998-99 reflecting purchases of non-financial assets. As shown in Chart 13.2, the local government sector surplus for 1998-99 has returned to a level that is similar to the level experienced in 1995-96 (in 2001-02 dollars). This was before the transfer of the HRWB to the southern councils on 1 January 1997 and before an abnormal increase in capital outlays in 1996-97 due to major construction projects by the Hobart City Council, namely the Hobart Aquatic Centre and the Sandy Bay sewerage treatment project.

Chart 13.2: Local Government Surplus(+)/Deficit(-) (in 2001-02 dollars) - Tasmania, 1991-92 to 1998-99

Sources: Government Finance Statistics, Australia 1998-99, ABS Cat No 5512.0 and Consumer Price Index, Tasmania, Treasury and Finance Statistics.

Furthermore, Tasmanian local government sector net debt was also significantly affected by the transfer of the HRWB and the increase in capital expenditure between 30 June 1996 and 30 June 1997. This is shown in Chart 13.3.

Chart 13.3: Local Government Net Debt (in 2001-02 dollars) -Tasmania, 1992 to 1999

Sources: Government Finance Statistics, Australia 1998-99, ABS Cat No 5512.0 and Consumer Price Index, Tasmania, Treasury and Finance Statistics.

Table 13.3 details the net worth of each Tasmanian council as at 30 June 1999. The net worth is a measure of the full balance sheet financial position of each council. The local government sector balance sheet shows a new worth of $3 661.3 million as at 30 June 1999. Total local government net worth was made up of assets totalling $3 939.6 million, of which 95.2 per cent was land and fixed assets, less $278.3 million in liabilities.

The ABS cautions users to take care when interpreting the measure of net worth per head of resident population, as it can be influenced by the extent to which councils have recognised and valued their fixed assets, particularly road funding and construction. For example, councils with a heavy investment in roads relative to their population are likely to show a high net worth per head of resident population.

Comparison with Other States and the Northern Territory

Table 13.4 compares various indicators for the local government sector in all states and the Northern Territory for 1998-99.

LGAs within Tasmania have different expenditure priorities. These priorities are the result of the physical characteristics of the local government area and/or differing characteristics and needs of residents. Differences also stem from the policy approaches of individual councils. This is also the case when the Tasmanian local government sector, in aggregate, is compared to the aggregates of other states and the Northern Territory. In addition, the allocation of responsibilities and functions undertaken by the State and local government sectors varies considerably between jurisdictions.

Table 13.5 compares the relative proportion of each expenditure category to the total expenditure within each state and the Northern Territory. Again, care should be taken in comparing the relative importance of categories of expenditure between jurisdictions, as spending priorities will differ between jurisdictions as well as the allocation of funding responsibility between state and local governments.

Table 13.6 shows the relative debt as at 30 June 1999 and debt servicing levels for 1998-99 of local government sectors in all states and the Northern Territory.

Table 13.6 shows that in 1998-99 the Tasmanian local government sector's debt servicing burden was the second highest among the states and the Northern Territory.

Key Performance Indicators

The Key Performance Indicator (KPI) project aims to provide all Tasmanian councils with a range of indicators to measure their organisational performance. It will enable councils to benchmark their operations and monitor their performance over time. Until now there has not been an industry-wide framework for measuring and comparing council performance.

The KPI project was initially funded by the Commonwealth Government and has been developed jointly by the State Government, the LGAT and Local Government Managers Australia. A committee has been established to manage the implementation of the KPIs. The committee consists of State and local government representatives with assistance where required from the Australian Bureau of Statistics. The indicators have now been established and the project is at the stage of analysing the council data to ensure that the selected indicators are providing meaningful information. Councils are providing their information to the KPI committee on a voluntary basis.

The KPIs for the 1999-00 financial year will be published before 30 June 2001. The KPI committee intends to publish the KPIs for the 2000-01 financial year by the end of 2001. It is intended that the KPIs will also be published in the Tasmanian Budget Papers for 2002-03.