OF AUSTRALIA

Local Government Study

6 July, 2007

Dear Productivity Commission

Productivity Commission Study into Local Government Revenue Capacity

The lnsurance Council of Australia is pleased to provide the following submission into the
commissioned study on local government revenue capacity.

Statutory Funding of Fire Services

The Productivity Commission Issues Paper seeks submissions on how existing statutory
constraints on local government impact on the performance of local government. The Insurance
Council particularly wants to draw to the attention of the Commission the impact of the fire
service funding models in NSW and Victoria and in particular how these models serve to
constrain local government financial capacity. 1

The relevant legislation with respect to fire services funding that impacts on local government in
New South Wales and Victoria is as follows:

New South Wales

Division 2, Section 50 of the NSWFire Brigades Act 1989 wherein local government is
required to meet 12.3% of the NSW Fire Brigade budget

Division 5, Section -lo9 of the NSW Rural Fires Act 7997 wherein local government is
required to meet 13.3% of the NSW Rural Fire Services budget

Victoria

Section 37 of the Metropolitan Fire Brigades Act 1958 wherein local government is
required to meet 72.5% of ,the Victorian Metropolitan Fire Brigade budget.

1
NB:The insurance industry currently contributes 73.7% of the funding for the NSW fire services (Metropolitan and
Rural); 75% of the funding in MetropolitanVictoria and 77.5% of the funding for the Victorian Country Fire Authority.
The Insurance Council has previously submitted to government and decision makers in NSW and Victoria that funding
of the fire sewices is in need of reform including ensuring that the funding of the fire services is placed on a more
efficient, equitable and transparent basis. For further information see The lnsurance Council of Australia: "The Non
Insured: Who, Why and Trends" (May, 2007)

Insurance Council of Australia Limited ABN 50 005 617 31 8

Statutory fire contributions imposed by legislation serve to leave a significant impost on local
authorities, which is in turn exacerbated at a time of escalating budgets within the fire brigades.
The table overleaf outlines the extent to which the NSW Fire Authorities have seen their budgets
increase over the past ten years.

NSW Fire Authority Outlays

.
, :
I: , , ,. , ,.:;, . .
'

,,,la.
,: ' is
. ,:>, :;
?
.
.. . :.:;$;,
; ,
'
,
:. *:$./'<::.:.'
.
, <%
.:
, ib:xq,. .. 1 .#T
Bt~gade~,&lz.,.,,i#:
;:.;!$;N$w;,~Q~~~

.#
. ..
:: ,:
J,

',,
. ,.
~e~qflce.,,
.,!I,;;.,
, , ,, .. . ,z,;;pF :
, ,. ,,v:v..
,!;?;:
,:. 5
..,!:
,! ,
,

,, .$,:;:.?:..
..::;iypb8
! '%,:.,..;;:,-'>,.;
:':. :,
: . ,'..,,,
J;;;.:;,
..,>8...:
I. . ...r-
.d:"
<;'<?:.'-
Q&$&~~$G)
,." . .
!
!j,::,
. ,.,y\ ......;
,;,:.:,
"~I
,, :. ',:.$::
,.> : , , . O , * l q ~ , ( $
,,:,
.;
,.: ~ )
... :;.!.:$.:3$!,,
,
,':;;
...'
:d$:2:,,
5:v.i. '
..:L
.-, . :
' ' ';.&;:
..' . ( .
. !<,, ;
... ,
.. .; .., .*.:..
7:;:
.:',
, .*::i ;.I$ ,
' , ::!..'.
,
I ,,,, :
..I.
,
f .>.I.'
.,;i;,:. , ' . ' .
,>
.::,.,' . . . ;, ...,::,:
I ' ' . . I , . ., ....
:
,
:
.. .:..
.$
,, ,
;.:'
Yr Ending

I 2006
June
2007

2005
2004
2003
2002
2001
2000
1999
1998
Average %
change
Source: NS W Budget Papers, Various

As the table demonstrates, funding for the NSW fire authorities in total has doubled between
1998 and 2007. As a result, the statutory fire contributions from NSW Councils has increased
from $45.3 million in I997198 to $95.1 million in 2006107 - an average annual growth rate of 9%.

The Insurance Council submits that the statutory contribution model adopted by the NSW and
Victorian governments to fund the fire authorities is conducive to poor budget oversight and
fiscal supervision of the fire authorities. In particular, in NSW and Victoria where the fire
authorities are able to fund the bulk of their operations "offiine"', the expenditure review that
arises from competing and contestable resource requirements within State government is
necessarily diminished. Fire authorities are able to secure enhancements to both operating and
capital conditions without reference to overall State fiscal circumstances and accordingly, the
natural rationing process that may arise for other State government outlays does not present
itself for the fire authorities.

2
NSW and Victorian fire authorities fund the majority of their operations from statutory contributions from licensed
insurers and local government.
S:: INSURANCE
::::COUNCIL
OF AUSTRALIA

Under the current statutory contribution system, incentive for effective budgetary management is
reduced. Fire authorities are able to make enhancements to their operations (both recurrent and
capital) and effectively shift the cost burden of these enhancements to other exogenous
statutory funders - namely local government and insurers. Funding of the entity is ultimately
disconnected from both the fire brigade management and the owners of the fire brigades
themselves (ie the respective State governments). Diseconomies are further exacerbated by the
inability of the statutory funders to exercise any control or supervision over the outlays
-
themselves leaving them to effectively fund the enhancements without an ability to review,
control or ration their appropriateness.

The fire funding systems in Victoria and NSW were subject to review in 2003 and 2004
respecti~ely.~ However, in the case of the Victorian review the statutory contributions from local
government was not considered as part of the re vie^.^ The NSW Public Accounts Review
highlighted the inequity of the local government contributions.

The lnsurance Council submits that the statutory contribution model for funding the fire services
is outdated and in need of urgent reform. In particular, the lnsurance Council submits it would
improve local government capacity fundamentally if the burden of having to fund statutory fire
contributions was to be removed as part of an overall fire funding reform. The lnsurance Council
also believes that there are present more appropriate models under which the fire brigades can
be funded, namely the approach adopted in Western Australia-The lnsurance Council
recommends to the Productivity Commission that it consider the overall funding models of the
NSW and Victorian fire authorities as part of the constraint on local authorities in these
jurisdictions.

Risk Mitigation in Local Government

The lnsurance Council is of the view that local government is an important partner in managing
risk with the insurance sector. In particular, the lnsurance Council submits that the capacity for
local government to fund and support capital expenditures in risk mitigation works is essential.
For example, the ability of local government to improve the conditions of roads is important in
mitigating the risk of personal injury and property damage arising out of motor vehicle incidents.
Similarly, the ability of local government to support risk mitigation works such as flood levies is
important in combating the risk of property damage for businesses and households.

The lnsurance Council is keen to ensure that solid capacity exists within local government to
fund and undertake mitigation works. To this extent, the need to ensure that local government
budgets are primarily geared towards capital outlays as opposed to recurrent outlays is
supported. To the extent that the limited resources of local government are being utilised to
support recurrent spending at the cost of a capital program, the task of effective risk mitigation is
diluted.

See NSW Public Accounts Committee (2004) "Review of Fire Services Funding & Victorian Department of Treasury
& Finance (2003) "A Review of Victorian Fire Service Funding Arrangements".
4
See Victorian Department of Treasury & Finance (2003),ibid, at page 20
See NSW Public Accounts Committee (2004),opcit, at page 67
 2:: INSURANCE
::E: COUNCIL
OF AUSTRALIA

The lnsurance Council notes that local government has available to it funding under the National
Disaster Mitigation Program for the purposes of supporting risk mitigation works. According to
the Commonwealth Budget Papers, funding under this program amounted to $22.5 m in 2006/07
and is estimated to be $43.6 m in 07/08, after which the program is to be reviewed. The
program funds mitigation works on the basis of a 113, 1/3, 113 formula between Federal, State
and Local Government.
The lnsurance Council would like to see the program maintained but also improved to allow
works in local government jurisdictions which may lack the capacity to fund their component of
the works. This particularly applies to those regional and rural areas where local government
funding capacity is restricted. However, the lnsurance Council believes that where local
government capital capacity is compromised because of an emphasis on recurrent outlays,
shortfalls in funding should not be met by either the State or Commonwealth in such instances.

Conclusion

Local government and the insurance industry share a common objective in reforming the
contributions model of fire services funding in NSW and Victoria. The lnsurance Council
contends that the Productivity Commission would be well placed in recommending that NSW
and Victoria review their fire services contribution model as it applies to both the local
government and insurance sectors.

Furthermore, both local government and the insurance sector share an interest in ensuring that
appropriate capital expenditure is available for the purposes of risk mitigation. The lnsurance
Council believes it is appropriate that in its deliberations, the Productivity Commission consider
the balance of capital versus recurrent outlays in local government so as to ensure that
resources are available for investments in local risk mitigation.

The lnsurance Council submission draws these issues to the attention of the Commission. If the
Commission requires any further elaboration on the matters raised in this submission, please do
not hesitate to contact me on (02) 9253 5130 or email [email protected].

Am
Ge al Mana er Policy, Economics & Tax Directorate

6
See Commonwealth Budget Paper No 3 "Federal Financial Relafions 2007/08" at pages 64 and 76.