TRIM REFERENCE: 2015/1251
AUTHOR: Garry Styles, General Manager
At the meeting on 3 February 2015 Council resolved the following:
RESOLVED - 15/029 Cr K Duffy/Cr J Davis
1 That Council resolves to lodge a merger business case with Cabonne Council and Blayney Shire Council subject to:
a Confirmation of the resolved position of Cabonne Council and Blayney Shire Council to specifically agree to lodge a merger proposal to the NSW Government in June 2015; and
b Confirmation of the resolved position of Cabonne Council and Blayney Shire Council specifically agreeing to sharing of costs to prepare a proposal to merge that has 50% of costs paid by Orange City Council, and remaining costs paid in equal share by Cabonne Council and Blayney Shire Council.
c If Cabonne Council and Blayney Shire Council agree to the cost distribution, prepare a request to the NSW Government for funding for the use of a panel member from the appointed list established by the NSW Government, to prepare a merger business case.
2 If only one of either Cabonne Council or Blayney Shire Council provides their resolutions to submit a merger proposal to the NSW Government along with agreed contribution level, that Council resolves to submit the merger proposal with that Council with a funding split of 60% paid by Orange City Council and 40% by the partnering Council, and seek the available funding from the NSW Government to prepare the business case.
3 If neither Cabonne Council nor Blayney provides a resolution to agree to a merger proposal, that Orange City Council prepares a submission using the template for standing alone and consider as a further option selective boundary adjustments.
4 That Council not support any shared services or similar model.
Reference is also made to previous reports on this topic informing Council’s position to this point including 17 November 2011, 19 March 2013, 25 July 2013, 18 February 2014, 16 September 2014, 3 February 2014 and 17 February 2015.
Councils have a choice of presenting to Government a Fit for the Future proposal in which they stand-alone or put forward a case for merger. The submission is due by 30 June 2015.
Orange City Council resolved to lodge a merger business case with Cabonne Council and Blayney Shire Council. If there was no agreement on this path from either of these Councils then Orange would lodge a stand-alone submission.
Cabonne Council has resolved to:
1 Retain Council independence.
2 Support, as an alternative to merging with OCC and Blayney Shire, the creation of a joint service delivery entity to be jointly owned/controlled by two or more councils and which provides a range of services to those councils.
3 Identify where minor boundary adjustments could improve Council sustainability.
4 Acknowledge the outcomes of the community survey carried out in 2013.
5 Identify and place on public record the non-negotiable terms should a merger with OCC and/or Blayney Shire occur.
6 Authorise the Mayor, Deputy Mayor & General Manager to meet with OCC and other councils to discuss the Fit for the Future proposal.
7 Authorise the funding from an additional vote and undertaking of a cost benefit analysis for:
a establishment of a joint service delivery entity;
b merger with OCC and/or Blayney Shire.
8 Approach OCC and/or Blayney Shire to share the costs of a & b.
9 Authorise the funding from an additional vote for the engagement of consultants to assist with the development and implementation of a communication and engagement strategy to ensure the communities are kept informed and consulted with on any proposed changes to the future governance and operating model of Cabonne Council.
Cabonne and Orange subsequently agreed to undertake investigations into a merger involving Cabonne, Orange and/or Blayney. The undertaking of a joint merger assessment investigation does not require the Council’s to proceed to a formal submission to the State Government.
Blayney Shire Council has resolved to submit a stand-alone submission and possibly revisit a merger case outside the Fit for the Future timeframe set by the NSW Government.
According to the NSW Government “A Fit for the Future Council” is one that is:
· Effectively manages infrastructure and delivers services for communities
· Has the scale and capacity to engage effectively across community, industry and government
Cabonne Council and Orange City Council have received funding for assistance with the consideration of a merger business case from the NSW Government, and Morrison Low was engaged to undertake this work.
A summary of the merger assessment is attached to this report. Given Cabonne’s resolved position, Cabonne is yet to consider their action in response to the merger business case assessment ie whether to exhibit and/or to lodge a merger proposal with the NSW Government.
The development of the merger business case has indicated some savings and potential gains from a merger between Orange and Cabonne, however the business case does not get to a strong conclusion and is a limited assessment in the following areas:
· The model and the Fit for the Future template is a basic assessment of scale and capacity and the future landscape of local government, a key area for Orange City Council’s consideration of a merger.
· The model and the Fit for the Future template assumes historical published data is correct rather than detailed integrity testing of asset data particularly, along with Long Term Financial Plans (LTFP’s) and so on. Special Schedule 7 of the annual statement is unaudited and is relied upon quite extensively in the criteria. This is a key risk in any merger and the model does not provide sufficiently diligent information.
· The Fit for the Future template is a high level general model only which does not consider detailed full data asset systems and contemporary asset management techniques built around intervention levels and residual asset values, which can build in greater accuracy, efficiencies and savings to asset management.
· It is probable that the asset management approaches of Cabonne and Orange varies considerably. Therefore the current high level model does not give a sufficiently accurate representation of future asset sustainability.
· No consideration of water and sewer functions which is a large part of the operations of some Councils and ought to be assessed.
· The timeframe available for the assessment is very tight, necessitating the high level model and template.
It is understood that Cabonne have, to an extent, similar concerns to Orange.
The councils have identified a body of work necessary to complete the analysis to fully inform a decision.
Recently the Independent Pricing and Regulatory Tribunal (IPART) was appointed to undertake the assessment of Fit for Future submissions for Councils and has published a discussion paper strongly asserting the way forward through assessments and its views on what constitutes a ‘fit’ Council, and, the strength with which it views the Independent Local Government Panel (ILGP) findings which suggested a merger between Cabonne, Orange and potentially Blayney within the assessment.
IPART has noted that if the Independent Local Government Review Panel (ILGRP) “recommended a council to stand-alone or undertake structural change, then the council should demonstrate that they first considered making a proposal on this basis. If the ILGRP recommended a merger as the preferred option and the council did not propose one, the council will be assessed as ‘not fit’, unless it presents a sound argument that demonstrates that the proposed approach is superior to the recommended merger”.
IPART have released a consultation paper on “Methodology for Assessment of Council Fit for the Future proposals”, with comment sought until 25 May 2015. A copy of this consultation paper is attached.
Additionally the Fit for the Future landscape is dynamic with some Council’s resolving a preferred position of support for a merger and the State Government also strongly asserting its position in response to media queries. Indicative media articles are attached relevant to Fit for the Future.
Concurrent with the merger assessment, staff have been undertaking a stand-alone assessment so that consultation can occur on both a stand-alone model and a merger model, so that Council can be informed of its options when it resolves Council’s Fit for the Future submission to the NSW Government in June.
In consideration of all the various matters at play in the Fit for the Future landscape, it is held that the business merger case assessment ought to be noted, particularly in regard to the savings and potential benefits identified, and the need for a more thorough analysis before Council could be properly be informed on a decision to merge or not.
It is also suggested that Council ought to exhibit both the stand-alone case and the merger case summary for consultation and for informing Council’s decision in its submission to Fit for the Future.
It would also be appropriate that while Fit for the Future options are on exhibition, that Council seek the support of Cabonne Council and approach the NSW Government advising of concerns over modelling and indicators/template, the need for more thorough assessment and the Councils’ intentions to promptly undertake detailed assessment modelling along with reaffirming a preparedness to diligently look at the merger and seeking to preserve a proportionate share of NSW Government Fit for the Future incentive funding while further analysis takes place.
Link To Delivery/OPerational Plan
The recommendation in this report relates to the Delivery/Operational Plan strategy “1.3 Our City - Ensure a robust framework that supports the community’s and Council’s current and evolving activities, services and functions”.
While there are significant financial considerations around the matter the exhibiting and lodging of the submission can be managed within existing budgets.
Policy and Governance Implications
1 That Council exhibit for 28 days the stand alone case as detailed in the Fit for the Future self-assessment tool.
2 That Council exhibit for 28 days a summary of the merger business case assessment as attached to this report.
3 That Orange City Council offer to Cabonne Council the necessary information regarding a merger to complete the Office of Local Government merger template and seek the necessary reciprocal information from Cabonne so that the completed merger template information is available to both Councils to consider prior to the deadline for the Fit for the Future submissions.
4 That Council approach the NSW Government, advising of the need for more detailed analysis and plans to undertake the more thorough assessment and requesting that the State Government preserve a proportionate share of Fit for the Future incentive funding while further analysis takes place.
5 That Council seek the support of Cabonne Council in approaching the NSW Government as per recommendation 4 above and also in undertaking the outlined further analysis.
The merger business case assessment for Orange and Cabonne has been undertaken by Morrison Low, one of the Technical Advisory Panel members appointed by the NSW Government. The merger business case under Fit for the Future is referred to as Template 1.
The assessment covered scale, capacity, operating performance, own source revenue, debt service cover, asset maintenance, asset renewal, infrastructure backlog and real operating expenditure.
Under the Morrison Low assessment, of the seven benchmarks listed above, Orange City Council meets all seven as does Cabonne and the merged entity.
A summary of the merger business case is attached for exhibition.
The development of the merger business case has indicated some savings and potential gains for a merger however it is limited in its level of analysis and risk assessment.
The model relies on published data only rather than an assessment or integrity testing of asset information and systems or detailed analysis of Long Term Financial Plans. Additionally, some of the published data relied upon is unaudited coming from special Schedule 7 of the financial statements. This builds in a significant risk to any merger, and regrettably without such diligent information Council is not properly informed on the decision to merge or not.
Equally, the model and indicators used are at a high level, based on assumptions, and general indicators which ignore full data, calibrated and detailed asset management systems. This approach is to allow comparison between all Councils, including those which do not have full asset systems. In this regard some of the indicators ignore Orange City Council’s detailed asset system and contemporary industry asset management techniques, particularly around intervention levels and residual asset values where Council estimates efficiencies of the order of up to 25%-30% compared to less detailed assessments. This has been acknowledged by the consultant in their findings. Council’s independent auditor, Intentus, has provided feedback on this element of the Fit for the Future assessment, supporting Council’s concerns.
It is intended to suggest to the NSW Government that detailed asset system information ought to be able to be considered within the template response to Fit for the Future, while the documents are on exhibition, particularly given that significant gains in asset management, efficiency and efficacy can be made through detailed systems.
The analysis/template provides little guidance on scale and capacity and the concept of “what best practice local government will look like in 25 years”, one of the base tenets of the review of Local Government in NSW.
In terms of scale and capacity Morrison Low has noted that there is “no clear indication of what scale is outside Sydney where a threshold of 250,000 (by 2031) seems to exist” and capacity is “entirely subjective” and “many councils already exhibit a number of the key aspects of capacity”.
While this is a difficult concept to quantify, it is one of the key reasons for Orange City Council to consider a merger. Were the future to be a greater aggregation of councils in a landscape where State and Federal Governments engage on a regional basis for both input and funding, with greater tension on available grant funding, efficiencies, outcomes and responsibilities, then the region, including Orange should it remain the same, would be operating at a significant comparative disadvantage compared to other regional centres. This element is really key for consideration of a merger and needs much more development to inform a decision.
The assessment excludes consideration of the Council’s water and sewer business which for Orange City Council is a substantial business with in the order of $0.5B of assets under management.
The assessment of a merger between the Orange City Council water and sewer business with Cabonne is a complex matter where Cabonne has some services provided through Central Tablelands Water, some town services provided by Cabonne and some villages without services. From a risk management perspective a proper review of this element is clearly needed.
The merger business case was unable to consider the inclusion of Blayney within the model given Blayney Council’s resolution not to participate. The ILGRP had recommended Blayney as an option within the merger. IPART in its methodology for assessment has stated: “Group E councils were identified as having other potential merger options to consolidate major regional centres, and for some councils, the ILGRP preferred option is a merger. Where this is not the case and the option includes to stand-alone in a JO or to merge, the merger option should be explored.”
It may well be that the inclusion of Blayney would lead to greater savings and greater scale and capacity, however this has not been analysed in the assessment although the consultant’s report does provide commentary.
Morrison Low noted that: “As a general principle our research and analysis from other multiple council mergers suggests economies of scale and benefit increase when the number of merger partners increase.”
Finally the timeframes were quite short, compounded by the timing of the decision by the councils to look at a merger case. This does not however obviate the need for Council to be properly informed. Similarly as mentioned earlier, there are concerns around some elements of the assessment which demand further work for Council to be properly informed.
The consultant has had to work within the constraints and limitations to deliver to the extent possible an assessment of a merger. The assessment summary provides a useful first step analysis, showing some savings and potential gains, however it is held that further work and analysis is required for Council to be properly informed. In this regard it is suggested that the merger business case summary be exhibited and that contact be made with the NSW Government advising of the need for further detailed analysis to properly inform a decision, given a sound due diligence approach.
Orange City Council has used the NSW Government’s Fit for the Future stand-alone self-assessment tool to report a result on operating performance, own source revenue, debt service cover, asset maintenance, asset renewal, infrastructure backlog and real operating expenditure. The standalone case under Fit for the Future is referred to as Template 2.
This assessment found that Council is ‘Fit for the Future’ as a stand-alone Council. Of the seven benchmarks, as a stand-alone Council, Orange achieves six. The Asset Renewal benchmark is the only indicator not achieved, however given the comprehensive work completed by Council through its Asset Management Strategy, and detailed Asset Management Plans, it is demonstrated that the rate that Council is currently renewing its assets is sufficient to meet both the current and future needs of our community sustainably.
It is to be noted that the stand-alone assessment of the Asset Renewal benchmark, has produced a differing result to that assessed as Orange’s “base case” in the merger assessment. This difference is due to level of detail that each case considered with the consultants for the merger case able to acknowledge Council’s asset approach in their findings.
Concerns are similarly expressed with some of the template criteria in this model as with the above mentioned merger model in relation to asset renewal ratios which are based on a high level model which does not consider full data, calibrated and detailed asset management systems. This approach is to allow comparison between all Councils, including those which do not have full asset systems. In this regard some of the indicators ignore Orange City Council’s detailed asset system and contemporary industry asset management techniques, particularly around intervention levels and residual asset values.
This approach has been canvassed with Council’s independent auditor, Intentus, with the following observation:
“The infrastructure asset ratios are based upon the (unaudited) data in Special Schedule 7 that is generally accepted as being highly subjective and subject to significant fluctuation. And the depreciation expense reported from Note 9 which is based on financial reporting requirements that are inconsistent with the realities of asset management. Primarily the requirement for Note 9 is that infrastructure is required to be valued on depreciated replacement cost ie as if the asset had to be built from nothing. The depreciation charge is then based upon that valuation. This is inconsistent with the asset management information which takes the realistic premise, “we have the existing asset in its current condition, what do we need to spend in order to keep it in that condition (or better) into the future?” The answers to the two questions are very different numbers.”
As with the merger case, the stand-alone case doesn’t consider Council’s water and sewer business which for Orange City Council is a substantial business with in the order of $0.5B of assets under management. The consideration of water and sewer in the stand-alone assessment is less significant than in the merger case, however, given the size of the operation the water and sewer business does contribute to the ‘fitness’ and scale of the future operation of Council.
A copy of Template 2, Stand Alone is attached.
Exhibition and Reporting
Councils that are considering a Template 1 Merger Proposal will need to explain how they have discussed the potential benefits and costs of the proposal with their community and considered their concerns. There is a minimum 28 day public exhibition period required for merger proposals.
Councils considering a Template 2 stand-alone proposal also need to consult their community and while not requiring public exhibition it is sensible in the circumstances to exhibit both options.
Accordingly, as per the recommendation in this report Orange City Council is proposing to exhibit both the merger business case summary and the stand-alone Template 2 assessment for 28 days. The consultation will also include a community information session and an on-line forum.
Following this exhibition period a further report will come back to Council for a final resolution on the matter before the Orange City Council submission is made to the NSW Government prior to June 30.
Council’s consideration of the matter further will also be contingent on how our merger proposal partner proceeds with the merger proposal. As previously mentioned Cabonne has not yet decided whether to proceed to exhibit the merger proposal or to make a submission to the NSW Government in relation to a Template 1 Merger Proposal.
In this regard at this point in time Orange City Council is unable to access Cabonne’s information to complete the Merger Template for exhibition and accordingly the only useful document available to seek consultation over in relation to what a merger would look like is the summary document attached to this report.
Accordingly, as contained in the recommendation, it would be useful if both Cabonne and Orange could provide the information to complete the Office of Local Government template and merger case while the Fit for the Future options are on exhibition to help inform a decision in late June. Similarly it would be useful if both Councils could get on with the extra body of work identified to properly inform a decision.
In relation to Orange City Council’s Template 2, stand-alone, Council is able to complete the template and accordingly this is attached to this report for exhibition.
1 Consultation Paper - Methodology for Assessment of Council Fit for the Future Proposals - April 2015, D15/13167⇩
2 Relevant Media Articles, D15/14173⇩
3 Merger Assessment Summary, D15/14282⇩
4 Template 2 Stand Alone Assessment, D15/14286⇩
5.9 Fit For The Future
Attachment 1 Consultation Paper - Methodology for Assessment of Council Fit for the Future Proposals - April 2015