Borrowing, pooling contributions and forward funding infrastructure
This guidance addresses internal sources of finance within councils such as borrowing from general revenue, pooling contributions, and external sources of borrowing where funds are sourced from financial institutions.
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Infrastructure is often needed before councils have collected enough contributions to fund it. It can also be cheaper to deliver infrastructure earlier before the price of materials or land increases overtime. Borrowing and forward funding allows councils to provide the infrastructure before they have received the contributions to fund the item in full.
Borrowing refers to any form of debt incurred where there is an obligation to repay the funds to the source they came from. This guidance addresses:
- internal sources of finance within councils such as borrowing from general revenue or pooling contributions within and between plans
- external sources of borrowing where funds are sourced from NSW Treasury Corporation (TCorp) or another financial institution.
Legislative requirements
Forward funding infrastructure is not mandatory, but it can be a useful tool. Councils can forward fund infrastructure through borrowing or pooling contributions funds.
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Councils can recoup the cost of forward funded infrastructure identified in a contributions plan. |
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Councils can pool contributions funds and apply them progressively to facilitate the provision of infrastructure. |
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Councils should endeavour to pool contributions to progressively provide infrastructure identified in contributions plans. |
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Councils should ensure they are satisfied that pooling will not prevent them from delivering, within a reasonable time, the infrastructure for which the contribution was originally collected. |
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Contributions plans should detail the council’s priorities when delivering infrastructure using pooled funds by references to the works schedule of the plan |
Any external borrowing is subject to general local government requirements
Although the contributions system is implemented under the EP&A Act, any external borrowings related to the contributions plan are subject to the same requirements as other council borrowings and are governed by the Local Government Act and associated regulations. They are also subject to guidance and circulars issued by the Office of Local Government.
Policy positions
Councils should consider borrowing and forward funding to deliver infrastructure
Contributions plans identify infrastructure that is required for development to occur as well as infrastructure that can be delivered alongside growth. This means that councils incur expenditure ahead of when contributions are received. Councils should consider borrowing in some situations, such as when:
- Infrastructure will enable development, and this development will ultimately contribute to the cost of the infrastructure. This often applies to stormwater and traffic management infrastructure.
- Infrastructure is needed by a specific time, as identified in the schedule of works, but the council has not yet received enough contributions to fund the item.
- Council needs to fund the land or works ‘out of sequence’ with the works schedule, such as when the council must acquire land under the hardship provisions of the Land Acquisition (Just Terms Compensation) Act 1991.
- Council has adequately determined that forward funding larger infrastructure items earlier in the development lifecycle has the potential to decrease the overall contributions needed. Forward funding locks in a lower cost for these items than if they were delivered later in the lifecycle once contributions had been collected. This can be particularly useful for items such as land, which have continued to significantly increase in price over the past years.
Councils can recoup the cost of forward funding infrastructure identified in a contributions plan, including the cost of borrowing. Interest costs associated with borrowing for infrastructure in a contributions plan can be collected through the plan. Recoupment costs in a contributions plan can only be indexed by with the Consumer Price Index.
Council should determine an acceptable amount of borrowing
The amount of acceptable borrowing will differ between councils and can be influenced by:
- rates of growth and community demand for infrastructure as identified in the contributions plan
- existing and projected future operating costs relative to revenue as shown in the long-term financial plan
- the council’s willingness and capacity to raise additional revenue if required
- the council’s ability to service the debt and the cost associated with this.
Councils must report all external borrowings as part of their annual financial statements, including borrowing used for the provision of infrastructure.
Councils should consider the impacts of borrowing on their debt servicing ratio
Any borrowing for the forward funding of infrastructure is included in the council’s debt servicing ratio. This ratio is not currently offset by contributions received because contributions are held as a restricted asset. Councils should be aware that external borrowings for infrastructure can impact their ability to borrow for other operational matters.
Infrastructure can be forward funded from internal or external sources
Pooling funds between and within contributions plans and from planning agreements
Pooling funds between and within contributions plans and from planning agreements
Pooling contributions involves borrowing within and between contributions plans or accounts to fund infrastructure identified in a plan. It is a good way to fund infrastructure without having to wait for contributions to build up before an item is delivered.
Pooling enables contributions to be treated as a single bucket of money from which infrastructure can be funded. It represents a low risk and efficient funding approach for a council. Pooling funds allows councils to spend contributions as needed and demonstrates the council’s commitment to the ongoing infrastructure delivery. Pooling is a form of internal borrowing between or within plans. Funds pooled within plans must be accounted for and later repaid to the original plan to allow the infrastructure to be delivered in a reasonable time.
For section 7.11 and section 7.12 plans, contributions pooling is permitted, though council should also specify how they will pool in the plan to provide greater clarity and transparency. Councils should also have well defined works schedules that identifies infrastructure delivery priorities and should assess their ability to deliver on the other infrastructure within a reasonable time.
Forward funding from internal sources
Forward funding from internal sources
Internal borrowing is when a council uses general revenue to fund infrastructure and later repays this when it receives contributions. Councils cannot borrow from contributions funds, which are a restricted asset, to pay for anything that is not identified in a contributions plan.
Internal borrowing is typically managed through a council’s operational plan and budget process. Councils that use internal borrowing to forward fund infrastructure should:
- ensure the infrastructure is identified by the works schedule within the contributions plan
- keep accurate records of the internal borrowings
- incorporate this borrowing into the council’s long-term financial plan.
NSW Treasury Corporation finance
NSW Treasury Corporation finance
NSW Treasury Corporation (TCorp) offers a cost-effective funding alternative for eligible councils. Loan facilities are available for approved purposes which form part of a council’s annual capital expenditure program, which can include local infrastructure.
TCorp applies their credit criteria to assess the capacity of a council to service its obligations over the life of the loan. This assessment may consider individual council circumstances relevant to its ability to service the loan. Guidelines on the provision of such loans are available from TCorp.
TCorp’s lending criteria make some allowance for councils seeking to forward fund infrastructure identified in a contributions plan. Funds collected through the contributions plan, along with any capital grants applied to the relevant infrastructure project, may be included in calculating a council’s liquidity capacity.
Bank loans
Bank loans
Bank loans are offered by commercial banking institutions and are usually for a period of up to 10 years at commercial interest rates. Council seeking to use a bank loan should approach their finance team.
Cash flow analysis can help forecast when external borrowing may be required
Councils should do a cash flow analysis to forecast patterns of income and expenditure over the life of a plan. This can then identify pinch points in funding, for example where the pooling of funds isn’t sufficient and when borrowing might be required.
Councils should also note that if infrastructure is forward funded in advance of demand on site, they bear the cost of maintaining that infrastructure until the anticipated community arrives and pays rates. Councils should aim to strike a balance so that infrastructure is constructed just before the projected community arrives.
Borrowing must be included in a council’s reporting requirements
Councils must report on contributions income and expenditure including details of pooled and borrowed contributions.
Councils are not required to report internal borrowings in the note to the annual financial statements, as they are reported in the general expenditure components of these statements. However, councils should monitor these borrowings when accounting for contributions. When contributions are received for items that have been paid for using internally borrowed funds, these contributions are essentially the repayment of an internal loan.
Councils must report external borrowings for contribution plans as part of their overall borrowings within the annual financial statements.
Councils should closely monitor the risks and benefits of forward funding
Borrowing can be both a source of risk and a means of managing risks within a contributions plan. Councils should consider both the risk and the benefits when deciding whether to use borrowings as a means of funding the provision of infrastructure.
An unexpected increase in the costs of providing infrastructure is one of the key risks associated with contributions plans. It can lead to a shortfall in contributions. Councils can borrow to purchase land and construct infrastructure earlier, saving money through early delivery. This also increases certainty, as the amount spent becomes the actual cost to be included in the contributions plan.
Funds borrowed to forward fund infrastructure are repaid by income received through contributions plans as development occurs. This is reliant on the certainty of the full development potential occurring and income being received to repay borrowings. Councils should consider the risk of development occurring quicker or slower than anticipated, or at a higher or lower density, as this will impact the overall contributions received.
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