Financial management of contributions

Financial management is key to ensuring the effective and efficient use of contributions and the progressive provision of infrastructure. To be successful it should be undertaken in a whole of council context. Financial management should:

provide certainty that council will deliver on financial commitments in the plan
ensure funds will be available when and where they are needed
assist in the efficient delivery of infrastructure
provide transparency regarding the timing and funding of infrastructure.

This module highlights the key considerations a council must make when managing infrastructure contributions.

Legislative requirements

Infrastructure contributions are a restricted asset that must be held separately from all other council funds.

Financial management
Legislative requirements	Reference
All contribution funds must be held for the purpose for which they were paid and must be applied towards that purpose within a reasonable time. This means contribution funds must be held as a restricted asset, in an externally restricted asset account, rather than as general funds. They can only be used to fund infrastructure under the relevant contributions plan or planning agreement or pooled and applied progressively towards that infrastructure.	7.3 (1) EP&A Act
Any interest earned on contribution funds is also a restricted asset and must be included with those funds.	7.3 (4) EP&A Act

Infrastructure contributions are subject to the same financial management provisions that apply to all other local government income and expenditure

The principles of sound financial management under section 8B of the Local Government Act 1993 should form the basis for all financial management decisions of councils.

Income and expenditure provisions applying to councils include requirements around accounting records, financial reports, auditing, loans, investments, the Integrated Planning and Reporting Framework and the principles of sound financial management.

More detail about these requirements can be found in the:

Local Government Act 1993 – Accounting records, financial reports and auditing
Local Government (General) Regulation 2021 – Management and accountability
Office of Local Government’s supplementary guidance relating to financial management.

Policy positions

Infrastructure contributions create a financial obligation on councils

Identifying infrastructure in a contributions plan and collecting contributions towards that infrastructure places an obligation on a council to provide the infrastructure. Councils should document projected funding obligations, potential risks of funding shortfall and mitigation strategies throughout the plan preparation to ensure transparency in the decision making process.

Before adopting a plan or entering into a planning agreement, councils should be aware of the associated financial obligations and have a plan to monitor and meet those obligations.

Obligations relating to contributions
Obligation	Considerations
Plan development	Infrastructure costs: The estimated infrastructure costs on which the contributions plan or planning agreement are based must be comprehensive and robust. Underestimating costs may result in a funding shortfall. If a shortfall occurs council will be required to fund it from other revenue sources. Apportionment: A council will need to consider how it will fund the portion of infrastructure that is not funded from infrastructure contributions.
Delivering the infrastructure	Works programming: Infrastructure delivery is often programmed to take place over many years. Assumptions may vary significantly throughout the life of a contributions plan or planning agreement and impact cash flow and the timing of delivery. Borrowing: If facilities are to be funded by borrowing, councils should ensure that the contributions will be sufficient to repay any loans.
Ongoing asset management	Operating and maintenance costs: A contributions plan can provide for the capital cost of providing new or upgraded infrastructure but not fund the ongoing operating and maintenance costs (although planning agreements can consider these costs). Councils should consider how these operational and maintenance costs will be managed and funded over time. Depreciation and renewal: There are ongoing financial implications for the infrastructure during its lifecycle after it has been funded through contributions. Councils should consider the ongoing depreciation of the infrastructure and any future costs associated with its potential renewal.

Financial information relating to contributions should be included in long term financial plans

Councils should include financial information relating to contributions in their long term financial plans. This will ensure that income, expenditure and required borrowings are considered in the broader financial context of their operations.

Councils should be able to demonstrate they can meet the financial obligations arising from the plan, including the operation and ongoing maintenance of the infrastructure to be provided.

Councils should develop cash flow models for their contributions plans

Cash flow modelling compares patterns of expenditure against patterns of income. While all contribution plans must include a works schedule, this typically only includes a total cost figure for each item. Cash flow modelling ensures that councils can deliver the infrastructure when and where it is required. This provides certainty and transparency around the timing and delivery of infrastructure.

Councils should use appropriately qualified and experienced staff to perform cash flow modelling or engage an external consultant if necessary. Cash flow models should consider the:

timing for delivery of infrastructure items under the works schedule within the plan
sources of funding to be used for each item
expected patterns of development and growth rates.

Cash flow modelling and project planning can help identify pinch points within the plan where a council may need to borrow to deliver the infrastructure. This can inform the council’s long term financial plan and determine whether the commitments under the plan are financially sustainable.

For section 7.11 plans, cash flow modelling is particularly useful due to their complexity, but the level of detail required will be dependent on the size of the plan.
For section 7.12 plans, cash flow modelling can be useful, however, it may not be necessary in all situations especially when the plans are simple or are collecting small amounts of money over long periods.
For planning agreements, cash flow modelling should be a consideration, especially for agreements collecting monetary contributions.

Best practice guidance

Councils should actively manage the financial risk of their contributions obligations

Infrastructure contributions place obligations on a council and these obligations have associated risks. If the risks are not appropriately managed, a council may be unable to provide the infrastructure they have committed to or may be unable to service the debts taken on to provide the infrastructure. A council’s audit and risk committee may be an appropriate forum for managing contributions risks.

Councils should undertake a risk assessment when developing a contributions plan. A risk assessment should also be done when council enters into a planning agreement, though the risk considerations may be different. Risks cannot be controlled by a council, but their impact on council finances can be managed. Councils should:

develop a detailed works schedule and map the timing of expenditure across the life of the plan
undertake cash flow modelling based on the development projections within the plan to identify potential pinch points in funding that may impact infrastructure delivery
regularly review the contributions plan to ensure that any changes in development rates and patterns, interest rates, costs and other regulatory changes are addressed in the plan
consider the asset management plans and long-term property strategies

Some key risks are identified below, but councils should undertake their own risk identification and management process.

Consideration of risk
Key financial risk	Description
Rate of development	The level of income received under a contributions plan is directly related to the rate of development occurring. Contributions plans are modelled using an expected rate of development. If the rate of development is lower than expected, councils will not receive the contributions when they anticipated. This in turn will impact the money available to deliver infrastructure and service debts.
Interest rates	Interest rates impact both income through the investment of contributions held and the outgoings from servicing the debt. Contributions plans can recoup the cost of interest. However, if the interest rate changes significantly, it may impact financing of the plan.
Cost escalations	Infrastructure costs can escalate due to factors outside a council’s control, such as economic conditions or changes in the construction sector. This can impact the ability for the plan to collect enough contributions to provide the infrastructure. Complex infrastructure items or higher cost items that require collection over longer time frames can be more susceptible to external cost escalation pressures.
Regulatory or environmental changes	Changes to the contributions regulatory framework can impact the contributions that can be levied. Other changes could include changes to council’s own policy and or unintended consequences of other policy changes, such as infrastructure delivery benchmarks impacting the level of service required from councils.

Grants can be used towards infrastructure

Councils can receive grants to help fund items in contributions plans. Councils should be transparent about receiving grants and how they relate to the contributions plan. Grant funding should be accounted for separately from contributions income and expenditure to ensure transparency.

Grant funds can be used to either offset the costs of an infrastructure item in a plan or to embellish the item to a higher standard:

if a grant is used to offset the cost of the item it should offset both a council’s financial commitment for that item and the cost apportioned to development by deducting it from the total cost of the infrastructure item
if a grant is used to fund infrastructure to a higher standard this should be noted in the contributions plan.

Forward funding through borrowing and pooling of funds is encouraged

Councils should consider forward funding infrastructure. This allows councils to provide the infrastructure before enough contributions have been received to fund the item in full. Providing the infrastructure earlier in the development cycle and before costs increase overtime can generally result in a better outcome for the community.

Forward funding infrastructure can include:

borrowing to fund the infrastructure upfront and repaying the debt with contributions income
pooling contributions funds within and between plans to fund higher priority infrastructure earlier.

Although these are useful and relatively low risk options to consider, they do have specific financial management implications. This topic is discussed in the borrowing and forward funding module.

There is no obligation for a council to provide refunds

There is no express obligation for councils to refund infrastructure contributions, even if there are funds remaining after the infrastructure is delivered or if the plan is repealed.

In instances where a developer pays a contribution but the development does not proceed or the consent lapses, council may consider whether it is appropriate to waive the required contributions or grant credit in accordance with the contributions plan. However, this is at the discretion of council.

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